Central bank digital currencies are being talked about all over the world, we break down what exactly each country is doing (or not doing!) with their CBDCs.
What is Digital Currency?
A Bank of International Settlements (BIS) study in January 2020 revealed that 80% of worldwide central banks are engaged in CBDC-related research.
Bahamas CBDC – Sand Dollar
The currency was expected to be the world’s first retail CBDC. It marks the culmination of years of work through the country’s Payments Systems Modernization Initiative, which began in the early 2000s.
The first phase of the Sand Dollar’s rollout will focus on “immediate readiness” in the private sector, involving the rollout of three tiers of authorized Sand Dollar accounts, each subject to different levels of Know Your Customer (KYC) due diligence.
This means Bahamians can open:
- “low-value” personal wallets, which have low transaction limits and are subject to looser KYC compliance;
- regular, personal accounts that follow KYC obligations in line with traditional banking due diligence;
- enterprise or high net worth individual accounts, subject to more rigorous KYC checks, which offer higher limits for transactions and holdings.
The central bank’s focus on private stakeholders will extend until Q2 2021. A parallel phase, focused on the sand dollar’s integration into government services and utilities, will intensify throughout Q1 and Q2 2021. The central bank has clarified that the digital currency, unlike cash, will not be anonymous and will be linked to an anti-money laundering and counter financing of terrorism (AML/CFT) regulatory regime.
However, it has assured Bahamians that the currency’s infrastructure “incorporates strict attention to confidentiality and data protection. Each wallet provides a unique set of data encryption to ensure privacy and confidentiality.”
“We’re looking at a digital representation of our currency. It’s not a different currency; it’s the same currency. In law, it will never be different. It can’t differ in value in any way or the other so Sand Dollars can never be priced differently from Bahamian dollars.”
While its initial rollout will be for use in domestic payments, the Central Bank of the Bahamas is apparently working on a solution that will make the Sand Dollar interoperable with other global digital currencies.
Brazil Digital Currency
“To have a digital currency, you need an instant payment system that is efficient and interoperable; an open system, where you can create competition; and a currency that has credibility, is convertible and international. After that, I think you have all the ingredients to have a digital currency. We think we [in Brazil] will have this in 2022.”
Notably, the Brazilian Instant Payment Scheme (PIX) — which has conditionally launched at the time of writing with plans to fully launch by the end of November 2020 — supports peer-to-peer and business-to-business transactions in 10 seconds or less, via mobile phone, internet banking and select ATMs.
In wording that closely parallels the Bahamian central bank governor John Rolle, Campos Neto has summarized a CBDC as relying on national trust, unlike Bitcoin, and therefore “just a new form of representation of the currency already issued by the national monetary authority.”
The two main scenarios it anticipates are:
- a precipitous decline in the use of bank notes, to the point where they become unviable for everyday transactions;
- the launch of a private sector-issued digital currency, which would compete with the Canadian dollar as money (method of payment, store of value and unit of account).
The BoC now has a major contingency plan underway, which will ensure the bank is ready — both in terms of policy and operationally — to launch a CBDC relatively quickly if needed.
Prior to its CBDC contingency plan, Canada initiated an ambitious and collaborative research initiative called Project Jasper in 2017. It has focused on public-private cooperation on experiments with distributed ledger technologies (DLT), particularly in the field of wholesale payments: for example, clearing and settling high-value interbank payments.
The Bank of Canada’s partners over the different phases of Jasper have included R3, Payments Canada, Accenture, the Monetary Authority of Singapore, JP Morgan and the Bank of England.
China CDBC – Digital Yuan
China is expected to become the first major global economy to launch a CBDC, having devoted five years to its research and system development. Formally named DCEP — or digital yuan — the currency has already been piloted in major cities and key economic regions.
The airdropped digital currency, accessible through an official Digital Renminbi App, could be spent in designated shops for a week-long period. It was not transferable to other citizens nor to regular bank accounts.
Ecuador CDBC – Dinero Electrónico
The digital currency became usable in February 2015. Consumers kept account balances on the Ecuadorian Central Bank’s balance sheet and transacted DE using a mobile app. However, after less than three years, the electronic currency system was shut down. Account holders were told they had until the end of March 2018 to withdraw their funds.
Having emerged against a backdrop of hyperinflation (1999) and subsequent dollarization of the national economy, the government attempted to calm fears that DE was a stepping stone towards de-dollarization. It therefore made the system voluntary, rather than mandatory, in 2014.
The actual number of accounts opened in 2015 ended up being less than 5,000; in January 2016, it was estimated that use of the DE corresponded to less than 0.003% of the monetary liabilities of the Ecuadorian financial system. While originally intended to benefit the un- and underbanked population in the country, the system’s ultimate lack of popularity proved to be its Achilles heel.
Given that the Ecuadorian government had defaulted on sovereign dollar-denominated bonds in 2008, some argued that citizens perceived that dollars on deposit at the central bank money was less secure than those at private, commercial banks. Amid apparent mistrust of DE, and citizens’ persistent preference for the U.S. dollar, use of the system peaked at just £8.3 million in account balances, with a total value transacted over the entire lifecycle of the system only £48 million.
Eurozone CBDC – Digital Euro
The European Central Bank has made it clear that it will come to a decision on whether or not to launch a digital euro project towards the middle of 2021. In its appeal to the general public for feedback on its October report, the ECB proposed that CBDC issuance could cushion the impact of extreme events, like pandemics or natural disasters, which could bring traditional payments services to a halt.
Beyond disaster-readiness, the ECB has pitched the digital euro as a matter of “strategic autonomy” for the Eurozone, at a time when evolving digital means of payments from overseas providers could prospectively “undermine financial stability and monetary sovereignty in the euro area.”
Europe indeed took a hard line against Facebook’s proposed Libra project, warning that no global stablecoin would be allowed to operate in the European Union (EU) without a resolution of the legal, regulatory and oversight risks involved.
The ECB’s report covers both disintermediated, intermediated and hybrid models of a digital euro. The first category of the digital currency, which would not require a central bank or middleman to process every transaction, would offer better provisions for data privacy, according to the ECB, while an intermediated version offers more potential for integration with existing services.
Key areas for consideration raised in the report weigh privacy and cash-like features against the need for anti-money laundering compliance, also framed as a balance between individual rights and the public interest; the creation of back-up systems to make the digital euro resilient amid “extreme events,” and the potential use of the digital currency overseas.
European central bank executives have made it clear that they are unlikely to adopt blockchain technology as infrastructure for the currency, noting that the ECB or European central banks would serve as the trusted central party for a future digital euro system.
The one explicit mention of distributed ledger technologies outside the realm of crypto assets (which the ECB evokes in order to illustrate their essential difference from CBDCs) in the ECB’s report is a footnote in reference to various privacy architectures that could be implemented for select scenarios.
Existing regulations in Europe do not allow for the anonymity of electronic payments, as distinct from cash, and any future digital euro would be expected to comply with this principle.
France Virtual Currency
A key player in the Eurozone, France’s central bankers and ministers have offered some clues into the possible future approaches to a digital euro.
Villeroy de Galhau gave a helpful sketch of how this has played out in recent years, pointing to:
- The digitalization of the retail economy, with the rise of new and convenient digital payment solutions. The subsequent decline of cash raises the issue of a decline of central bank money in circulation with the public.
- The European ecosystem’s overreliance on both international card schemes and Big Tech, reducing the bloc’s control over its technical and commercial decision-making and data regulations.
Echoing other Eurozone governors, Villeroy de Galhau has also characterized the prospect of private sector stablecoins and private financial infrastructures as a potential threat to nations’ financial sovereignty.
To resolve this, the Banque de France has mapped out a “strategic square” for the Eurozone’s response to revolutions in conventional money:
- Reducing existing frictions in cross border payments shortcomings;
- Taking on BigTech’s global projects in finance, i.e. stablecoins;
- Consolidating the European Payment Initiative;
- Potentially issuing a euro-CBDC.
Europe has “one to two years,” as of September 2020, to decide on a digital currency, in France’s view.
Hong Kong CBDC
The Hong Kong Monetary Authority (HKMA) has recently appointed blockchain firm ConsenSys to develop technology for its ongoing study of using central bank digital currency (CBDC) for cross-border payments. Since May 2019, HKMA and the Bank of Thailand (BoT) have been working on a joint project that combines their respective CBDC research initiatives into a study focused on cross-border flows.
Inthanon-LionRock had concluded its third phase in December 2019 with the creation of a working CBDC prototype that used distributed ledger technology (DLT). The system established a Thai Baht-Hong Kong Dollar cross-border corridor, and used smart contracts for real-time cross-border funds transfers.
Ten banks participated in prior phases, including HSBC and Standard Chartered, and the HKMA believes its development work on the project so far will provide “good references to the central banking community on the use of central bank digital currency.”
Japan CBDC – Digital Yen
The Bank of Japan has recently revealed that it plans to begin experimenting with designs for a digital yen within the current fiscal year (up until March 2021). While the bank has been relatively cautious on this front, Japanese ministers have warned that the country cannot afford to let private sector actors take the lead with their own digital currencies. The head of the head of the Liberal Democratic Party’s council on financial affairs, Kozo Yamamto, has said:
“If something too convenient pops up from the private sector, people might start to doubt whether they need yen as a currency unit. We must prevent this from happening. This is fundamentally about protecting Japan’s currency sovereignty.”
As well as discussions about public-private competition and monetary sovereignty, talk of the digital yen has also sparked a reconsideration of the Bank of Japan’s mandates. These may need to be revised to include CBDC issuance, as well as adding inflation targeting and full employment, taking the precedent set by the United States’ Federal Reserve.
South Korea CBDC – Digital Won
The Bank of Korea plans to start testing the distribution of its central bank digital currency in 2021. BoK launched a 22-month CBDC pilot program in April 2020 that will run through to December 2021. Having completed phases 1 and 2, which involved technological development and operational analyses, phase 3 will entail the BoK overseeing the distribution and circulation of the digital currency. Notably, BoK is using blockchain technology to keep track of CBDC transactions for its trial system.
The central bank has underscored that the lengthy program remains a pilot and does not necessarily mean that Korea will see an actual CBDC rollout in future.
Russian Federation CBDC – Digital Ruble
Domestically, the central bank believes that a single, central bank-issued digital ruble would reduce citizens’ reliance on various payments service providers, further promoting stability, and improving financial inclusion in remote and sparsely populated regions. A prospective digital ruble would not replace cash and would be a digital representation of the national fiat currency, ensured by the state and Bank of Russia. The bank’s latest report outlines that citizens can benefit from e-wallets and mobile applications and that payments would be supported both on- and offline.
The digital currency use would extend to citizens, financial market participants, and government entities, and would, as legal tender, function as a store of value, recognized unit of account and medium of exchange.
The most recent reports allege that the first digital ruble pilots are expected to launch in 2021, once Russia’s law “On Digital Financial Assets” has been adopted on the 1st of January, 2021. The Bank of Russia is apparently considering using the digital ruble to distribute salaries and benefits, and is also expecting merchants to have to reconfigure their payments terminals ahead of the CBDC’s rollout.
Singapore CBDC – Project Ubin
The Monetary Authority of Singapore (MAS) has conducted a pioneering, multi-year and multi-phase research initiative into blockchain technology and CBDCs called Project Ubin.
Participant banks in this digital currency project have included Bank of America Merrill Lynch, Citi, Credit Suisse, HSBC, J.P. Morgan, Mitsubishi UFJ Financial Group, Standard Chartered and others.
A of Phase 2, R3, IBM, Consensys and Microsoft have offered support for work with their DLT platforms: Corda, Hyperledger Fabric, Quorum and Azure.
“The project provides connectivity interfaces for the issuance of digital currencies on the network, by different partners which could be both central banks and commercial banks.
Where the issuer is a central bank, the corresponding digital currency on the network would be what we commonly refer to as Central Bank Digital Currency (CBDC).
Where the issuer is a commercial bank, the corresponding digital currency would be commercial bank money, and this is similar to off-shore foreign currency clearing.”
South Africa CBDC – South African Reserve Bank
SARB has been conducting research into CBDCs, or electronic legal tender, since late 2016. Until now, this research has delved into the various models of existing public and private digital currencies, as well as the potential implications of the creation of a domestic, general purpose digital currency that would be issued and backed by SARB.
Upon publishing the tender, SARB representatives told reporters that:
“The next phase will be practical hands-on experimentation of potential design models in an innovation lab (sandpit) environment by considering available emerging technologies as well as security and risk management aspects.”
The results of this experimentation, together with SARB’s earlier phases of CBDC and broader digital currency research, are expected to serve as the basis for the central bank’s position on CBDC issuance in the country.
Since meeting with prospective tender vendors to discuss the project in spring 2019, SARB has not published extensive official updates on more recent developments.
The award also commended that transactions were cleared, across a network of geographically distributed nodes, with full transactional privacy and settlement finality. Single transactions took just two seconds and SARB maintained full regulatory oversight over the network throughout.
Sweden CBDC – e-Krona
The pilot project is being run together with Accenture and is intended to simulate a test environment, in order to better understand how an e-krona could be used by a general public. The pilot currency is based on distributed ledger technology (DLT), specifically R3 Corda.
“There is currently no decision on issuing an e-krona, how an e-krona might be designed or what technology might be used,” Riksbank’s statement for the pilot has emphasized.
The pilot network being used for e-krona is permissioned, meaning it is private and only accessible to Riksbank-approved participants. The system’s architecture has been distilled into five components:
- E-krona network and governance, controlled by Sveriges Riksbank;
- Participant nodes, their databases and e-krona contracts, and flows. These contracts (structured as Corda-distributed applications) enforce the central bank’s regulatory framework via technical and legal rules;
- An integration layer (application programming interfaces, or API) for interacting with existing systems such as RIX and core banking systems;
- Multiple forms of digital wallets (smart mobile apps, wearables, cards, terminals);
- Simulated versions of banking systems and RIX (the Riksbank’s settlement and central payments system).
Thailand CBDC – Digital Baht
BoT’s stated goals have been to learn more about distributed ledger technologies and to trial a tokenized version of the Thai fiat currency, the baht, as part of a decentralized real time gross settlement system (RTGS), as well as for liquidity saving mechanisms (LSM).
In addition, Phase 2 investigated the use of a tokenized baht for interbank bond trading and interbank repos (short-term interbank collateralized lending). The BoT has also assessed the project from the perspective of regulatory compliance and data reconciliation for third party funds transfer.
In January 2020, the BoT announced the creation of a cross-border transfer prototype co-developed with the Hong Kong Monetary Authority.
Its next step will involve BoT, HKMA and their partner financial institutions, with a focus on CBDCs for other use cases in cross-border transfers.
The BoT is wary that a retail digital currency could fundamentally transform the current role of financial institutions and potentially disrupt the overall financial market and financial stability.
Overall, the central bank believes a digital baht will reduce the operational costs of financial transactions, but remains wary of stability risks, as well as the potential threat of private sector digital currencies like Facebook’s Libra.
Ukraine CBDC – e-Hryvnia
NBU has been researching a CBDC for four years. Interestingly, the pilot project of the e-hryvnia involved completely anonymous e-wallets, although the central bank noted it could be developed in future in accordance to Know Your Customer (KYC) requirements.
The central bank tested a centralized ecosystem for the e-hryvnia, involving two levels and a layer of intermediaries.
Level 1 consisted of the NBU, as the CBDC’s issuer, owner of the technological platform and a general accounting book in e-hryvnia. Intermediaries — banks and agents — were appointed to provide services for individuals and merchants through e-wallets. Level 2 consisted of individuals and merchants carrying out transactions in a wide ecosystem.
A decentralized e-hryvnia ecosystem was sketched out, but not tested, by NBU. In this system, the central bank remains owner of the technological platform and a general accounting book in e-hryvnia. However, banks, mobile operators, agents, and non-bank financial institutions are tasked with the digital currency issuance as well as the provision of services to individuals and merchants.
DLT, the central bank noted, is not necessary for a centralized e-hryvnia model, as its main advantages are the absence of a single trust center and the ability to audit transactions by a plurality of distributed parties.
During its pilot, the central bank revealed it had failed to agree on a business model with payment market participants, due to differences over an appropriate tariff/fee model. The digital currency pilot was therefore completed with a zero-commission model for the time being.
One significant downside for Ukraine, the NBU’s report noted, remains a lack of modernized payment infrastructure that would support the efficient circulation of a future e-hryvnia.
United Kingdom CBDC – Digital Pound
Bailey has underscored that he believes CBDC issuance would have “huge implications” for the nature of payments and society. He equally conceded that digital currency development would only take priority for the Bank of England once the COVID-19 crisis is “behind us.”
Carney argued that instead of one national fiat currency ceding hegemony to another — for example, China’s renminbi — the global financial community would be better served by the creation of a “synthetic hegemonic currency,” backed by a network of central bank digital currencies.
Amid a backdrop of trade wars and prospective currency wars — and well before the Covid-19 pandemic hit — Carney argued that a rethink of the status quo is unavoidable:
“The combination of heightened economic policy uncertainty, outright protectionism and concerns that further, negative shocks could not be adequately offset because of limited policy space is exacerbating the disinflationary bias in the global economy. What then must be done?”
United States CDBC – Digital Dollar
As part of its sketch for a series of “pressure test” programs to explore the potential benefits of a U.S. CBDC, the Foundation listed a series of core components that it considers should be the baseline for testing digital dollar models:
- Tokenized, making it a true bearer instrument;
- Issued by the Federal Reserve;
- Distributed through the existing two-tier banking system and regulated intermediaries;
- Balanced towards individual privacy rights with necessary compliance and regulatory policies;
- A monetary policy neutral transaction object, akin to how cash and accounts-based commercial money currently function;
- Architected and built for future flexibility and driven only by functional requirements that are informed by policy and social decision;
- Able to transact offline when both parties are in close physical proximity;
- Accessible to all persons in the United States regardless of location, income or federally protected classes;
- Supportive and complementary to additional payment sector innovation.
Like most other CBDC research, the proposal pits the right to privacy against the need for regulatory protections against anti-money laundering. The potential scope for government surveillance should be guided by established Fourth Amendment jurisprudence and consumer protection laws, in the Foundation’s view.
The various stakeholders and users of a prospective digital dollar have been differentiated across geographic and functional lines, spanning un- and underbanked consumers, banked consumers, small, medium and multinational business users and financial market infrastructure players.
In one suggested pilot for the financial market participants, the Foundation proposed that the Depository Trust & Clearing Corporation would test atomic settlement procedures for tokenized cash and tokenized securities on ledger.
Another proposed pilot envisioned the use of programmable digital tokens by local and state government assistance agencies in order to distribute benefits and welfare programs.
While the Digital Dollar Foundation’s pilot proposals are far-reaching, ambitious and multi-faceted, they have not been initiated by the Federal Reserve; none are, as of October 2020, operational.
These include the Federal Reserve Bank of Boston’s collaboration with researchers at the Massachusetts Institute of Technology (MIT) to build a hypothetical digital currency oriented for central bank use.
The outcomes of this collaboration are, however, intended to result in an in-depth understanding of relevant technologies and the implications of a CBDC for policy, rather than to offer a prototype for a future Fed-issued digital currency.
Uruguay CBDC – e-Peso
Operational for six months, the consumer-oriented digital currency system ran through a mobile system without the need for internet connection, and did not use distributed ledger technology.
It was designed for transactions at affiliated merchants and peer-to-peer transfers, with limited bill issuance (£14.7 million for 10000 mobile users) and holding limits per user (£22,000 per consumer wallet and £147,000 for registered businesses).
Commercial banks did not participate in the pilot system, which made it difficult to gage the impact of a CBDC on the banking system. However, the IMF considered that the e-peso had the potential to provide more systematic and transparent information on money demand in real time, which could benefit monetary policy transmission. Transparency is also a benefit for tackling tax evasion and money laundering.
The IMF has noted that if the e-peso leads to a reduction in bank deposits, this could increase the funding costs for banks, and an increase in equilibrium interest rates — a concern that is widespread among analysts of retail CBDCs.
While it was an early mover in CBDC research, the Uruguayan Central Bank has since been relatively quiet about the future prospects of e-peso issuance.