What successes have already been achieved by individual states and what development prospects should be expected in 2022? Let’s take a closer look at the current state of CBDC and what the future may bring.
Successes and Achievements
As of early 2022, 87 countries are interested in creating their own digital currencies. Some countries are already actively testing state-backed digital assets, while most are still consulting with experts.
There are three CBDCs currently in operation around the world as of January 2022:
- From October 2020, residents of the Bahamas can actively use the world’s first national digital currency, the Sand Dollar.
- In March 2021, the Eastern Caribbean Central Bank issued the world’s second CBDC, called DCash. It is the first retail and cross-border CBDC, combining several island states into a single digital financial system.
- In October 2021, the Nigerian authorities opened access to the state digital currency, eNaira.
In 2021, the European Central Bank formed an advisory group to develop and distribute CBDCs. Over the next two years, the group will advise EU officials on CBDC development and opportunities for the payment ecosystem.
In October 2021, the G7 Summit was held in Washington, D.C., where the CBDC control project for national governments was presented. The G7 heads of state adopted a series of agreements concerning the transformation of the world’s digital economy. The main points of this agreement are based on the fact that all studies and legislation aimed at creating and implementing CBDCs should be primarily based on ensuring the stability of the currency market, privacy and the protection of personal information.
The Banque de France is actively testing the possibility of introducing the virtual euro. In May 2020, the regulator and Societe Generale tested a pilot CBDC project. The Banque de France and the Monetary Authority of Singapore are also simulating cross-border and cross-currency transactions using the digital euro and the Singapore dollar. The results of the wholesale CBDC tests were deemed successful in November 2021.
Sweden has been testing the e-krona since 2020. The project will be tested in February 2022, after which a decision will be made on the further development of the CBDC project.
The Current Situation
The list of countries showing interest in creating their own digital currencies is quite extensive. According to the Atlantic Council’s CBDC Tracker service, as of January 2022, 14 countries are at the experimental stage and preparing for a potential full launch.
The front-runner in the race to implement a CBDC in 2022 is the People’s Republic of China. In January 2022, the People’s Bank of China introduced an app for iOS and Android devices that allows users to use e-CNY. A limited number of users are involved in the app’s testing, but anyone can familiarize themselves with its capabilities. Testing will be completed in the near future. The rush is due to the PBC’s announcement that the digital currency will be used during the Beijing Winter Olympics from February 4th to 20th, 2022. Chinese authorities have already banned the use of the two main competitors of the digital yuan (Alipay and WeChat Pay) in the Olympic Village. Athletes will only be able to pay with cash, Visa cards and e-CNY.
Ukraine is one of the countries actively exploring the possibility of creating its own digital currency. In early July 2021, the National Bank of Ukraine published the results of a pilot project to develop a digital hryvnia. Then, a bill on the legalization of virtual assets was passed in September. This event was a fundamental step towards the digitalization of the Ukrainian economy.
The plan of the Ministry of Digital Transformation of Ukraine includes such steps to implement the national digital currency:
- Integrating virtual assets into the financial sector and consolidating the asset tokenization mechanism is planned by May 2022.
- Creating the infrastructure for issuing digital assets by March 2023.
- Introducing the CBDC in January 2024.
As early as May 2024, about 10% of Ukraine’s businesses are expected to use digital assets, and at least 47% of the country’s citizens will use the CBDC daily.
In April 2021, the Central Bank of the Russian Federation released a report on the development of the CBDC, which indicated that the digital ruble would work as a regulator for banks opening accounts for customers. So, on January 20th, 2022, some Russian banks began testing digital ruble transactions. TASS reports that Promsvyazbank has already started piloting C2C payments. Technical testing of C2C-, B2C- and B2B-payments will follow. Also, such major Russian banks as VTB and Tinkoff Bank have expressed their willingness to start testing CBDCs. The Russian Ministry of Finance emphasizes that the launch of the digital ruble is one of the key projects in their strategy for developing the financial market through to 2030.
The Bank of Japan’s preliminary study of CBDC implementation capabilities began in 2021. The country’s central bank supported the decision of a consortium of 70 Japanese companies to test the DCJPY digital currency, which bank deposits will back. During the current concept validation phase, the Central Bank of Japan is developing a test environment for the CBDC system and is experimenting with the basic functions. The test project results are scheduled to be released by March 2022. The Bank of Japan has not yet decided whether to move to the CBDC and plans to have more clarity by the end of 2022.
In late December 2021, South Korean banking giant Kookmin Bank (KB) announced that it had finalized the development of new multi-coin wallets compatible with central bank coins. The new wallets are scheduled to be tested during the initial phase of the CBDC implementation pilot project. The testing aims to be complete by the end of 2022.
At the end of December 2021, the BoJ successfully completed a pilot test of a prototype national digital currency launched back in March. The Jamaica Information Service reports that a nationwide rollout of the CBDC is planned for Q1 of this year. Several wallet providers at the National Commercial Bank of Jamaica are already testing the virtual system.
Many other countries that are ready to try out CBDC solutions or complete testing of state bank digital currencies in 2022, including the following:
- Anguilla remains the last of the ECCU’s eight island nations not yet to use the DCash digital currency launched by the Eastern Caribbean Central Bank (ECCB). The British Overseas Territory is still in the testing phase of the CBDC.
- Since last April, Sweden’s Riksbank has continued to evaluate the use of e-krona for large commercial and small retail payments.
- Saudi Arabia is developing and testing a payment system that offers significant improvements over the centralized payment system.
- The UAE is working on a cross-border CBDC project with China, Thailand and Hong Kong to test the use of DLT for foreign currency payments.
- In September 2021, the South African Reserve Bank joined with central banks in Australia, Malaysia and Singapore in the BIS Dunbar project to test the use of CBDCs in international payments. The results of the project are expected to be released in early 2022.
- The Monetary Authority of Singapore discusses the creation of several CBDC mechanisms to improve the speed, cost and transparency of cross-border payments.
Key Challenges, Predictions and Trends
While there are active developments to implement CBDCs in many public financial institutions, there are also a number of challenges and controversies that significantly affect the rollout speed of CBDCs:
- First, the creation of CBDCs involves potential risks such as cyberattacks. Most countries must develop more sophisticated security mechanisms aimed at combating cyber fraud before releasing CBDCs to the public. Implementing security protocols should be one of the primary tasks of central banks in the CBDC testing process.
- Secondly, acting as a regulator of the process, state banks will monitor all CBDC transactions and, if necessary, control them. Thus, their implementation may lead to a complete loss of financial anonymity, which goes against the principles of the decentralization of digital currencies.
- Finally, differences in the regulatory framework across countries and the legal aspects of the use of CBDCs may lead to national digital currencies not being fungible. Thus, the central bank should pay particular attention to harmonizing the implementation of CBDCs as a transnational currency.
As for CBDC development trends in general, according to the forecasts of ECB president Christine Lagarde, digital currencies in the next 5-10 years will not replace fiat but may become a complement to them. Also, the introduction of CBDCs will allow states to significantly reduce the circulation of cash, which will reduce the cost of producing paper currencies, thus saving the state treasury.
According to experts from the Bank of America, a CBDC is a payment mechanism that is qualitatively different from cash. That is why the currencies of central banks in countries that are not in a hurry to create their own digital currencies which comes with the risk of losing demand. Furthermore, the value of their own currencies could plummet if citizens start actively using other countries’ digital currencies.
One thing is clear: the race for leadership in CBDC implementation will only increase. Eventually, all countries will move to the use of central bank digital currencies in one way or another. But the states that successfully implement CBDCs first will have the opportunity to make their digital currencies global.