Central banks are exploring digital currencies

Horizons Newsletter – week 15 // 2022

Across the world, central banks are exploring a new digital form of fiat money called central bank digital currency or CBDC. In this Horizons, we attempt to explain the increased interest and point out the leaders and laggards.

Central banks need a new tool to fulfill their task

The money and payment landscape is changing rapidly. Cash usage continues to decline as people increasingly use digital forms of money (such as credit/debit cards, payment apps). Combined with the rise of cryptocurrencies, this trend is shifting the balance between central-bank issued public money and private money consisting of deposits at commercial banks, money in e-wallets, and cryptocurrencies (see diagram). That shift could have dire consequences as it limits the ability of central banks’ monetary policy tools to manage the economic cycle. Since the amount of money influences inflation, it is no surprise that central banks are exploring Central Bank Digital Currencies, or CBDCs, as an alternative to influence the money supply. A CBDC would give central banks a new tool to directly influence the money supply and monitor how money is used. Moreover, CBDCs could increase financial inclusion and support citizens in time of need by enabling governments to directly transfer funds, even if people have no (access to) commercial bank accounts. As a result, CBDCs would significantly expand the central bank’s toolkit to ensure financial stability.

Broaden Your Horizons

• The Atlantic Council CBDC tracker provides an interactive overview of the status of CBDC development globally, with detailed descriptions per country.
• Mondato sheds more light on the different motivations of countries to explore the development of CBDCs.
• Nigeria’s eNaira is the largest nationally-deployed CBDC project in the world, as TechMonitor describes, however, the roll-out has been troubled.

Digital fiat currencies receive a boost

The number of countries exploring CBDCs increased from only 35 in 2020 to around 100 in February 2022. Emerging markets with large unbanked populations are the most eager. The first national deployments are found in the Caribbean, led by the Bahamas and closely followed by the Eastern Caribbean Currency Union, which has made DCash available in seven of its eight member states. China is also one of the leading countries in CBDC development. Its pilot officially launched in 2019 and at the end of 2021 it counted more than 260 million users, with total transaction values surpassing $14 billion. Most advanced markets, however, are still in the research phase, with the U.S. being one of the laggards. President Biden, however, wants to remedy that: he views the rise of digital assets as an opportunity to reinforce U.S. leadership in the global financial system. On March 9, he issued an executive order on regulating cryptocurrencies and assessing the potential benefits and risks of a CBDC, effectively telling the FED, the Attorney General and the Treasury to speed up research and development.

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