Central Bank Digital Currencies: A Global Revolution and Impact

In the last week of December 2023, India clocked a million daily transactions in the retail segment of its Central Bank Digital Currency (CBDC) called e-rupee, announced the Reserve Bank of India (RBI). In June, the number was less than one-fourth of the current figure. (source: RBI)

Besides RBI, nearly 90% of the world's central banks are actively exploring or developing CBDC projects. The central banks of the United States and South Africa, are in the preliminary stages of exploration. Others like the European Union are advancing towards development, and countries like China are already conducting pilot tests. In places like Nigeria and the Bahamas, functional solutions are in place.

But despite this intense activity, most CBDC initiatives are still in the early phases of market development, and in many instances, the technical specifics are yet to be determined. Having said this, the digitally issued form of public currency represents a groundbreaking advancement in central bank innovation within the financial sector. Let’s explore what CBDCs are, why they are important and understand in detail some of the successful examples of CBDC implementation.

What are CBDCs?

CBDCs represent digital versions of traditional fiat currencies. These are similar to tangible banknotes. Like them, CBDCs are authorised and issued by central banks and underpinned by the government's trust and guarantee.

However, unlike physical money, CBDCs don't require printing. At present, CBDCs can be categorised into two main types: retail and wholesale. Retail CBDCs are crafted for direct use and transactions among individuals and commercial entities. Whereas wholesale CBDCs cater specifically to the needs of financial institutions.

CBDCs Vs E-money tokens

The growing need for ‘cash 2.0’

Central banks are increasingly exploring central bank digital currencies (CBDCs) and commercial banks are catching up. But why is there a growing trend of CBDCs? You may ask. Several factors have intensified central banks' interest in CBDCs:

• Decline in Cash Use: Cash is used less now, especially in Europe where it dropped by a third from 2014-2021. Central banks need to rethink their roles because of this.

• Digital Asset Competition: Many people in places like the UK, EU, India, Brazil, and the US are using digital assets. This makes central banks worried about the future of regular currencies.

• Payment Innovation: Some central banks feel left out in creating new ways to pay. Digital currencies like CBDCs can update old systems, make transactions cheaper, and help more people access banking.

• Global Payments: Central banks want to keep an eye on worldwide payment systems. They see CBDCs as a way to make sure things stay stable locally and globally.

In simple terms, as cash use goes down and more people use digital money, central banks are thinking of new ways to stay relevant. CBDCs, like digital wallets linked to central banks, could be the answer. They can help people who don't use banks much and make payments smoother for everyone.

An Insight into the CBDC Landscape

There is a global trend of nations exploring CBDC possibilities. Approximately 95% of the world's GDP-contributing countries are actively considering or developing CBDCs. Notably, 16 G20 nations are in the process of either developing or testing CBDCs.

Interestingly, countries beyond the G20 have been pioneers in launching CBDCs. The Bahamas took the lead with its national CBDC, the Sand Dollar. Following suit, Nigeria introduced the eNaira in 2021, and Jamaica most recently unveiled JAM-DEX.

Countries with CBDC Launches:

• The Bahamas introduced the Sand Dollar CBDC in October 2020.

• Nigeria launched the eNaira in October 2021.

• Jamaica unveiled JAM-DEX in June 2022.

Economic Impact

Currently, three nations have successfully implemented CBDCs. The Bahamas projects a 7% GDP growth for 2024. Nigeria projects a GDP growth rate of 3.2% in 2024 and Jamaica anticipates a 2.3% growth rate. Notably, Nigeria stands out with the largest economy, boasting a GDP of $1.117 trillion at the end of 2023.

Countries in the Pilot Phase of CBDC

On November 1, 2022, India launched its wholesale digital rupee e₹-W. This was followed by the launch of the retail variant, e₹-R, on December 1, 2022 through selected banks for testing purposes.

Other nations in the pilot phase are

• Ghana

• Canada

• the UAE

• Saudi Arabia (collaborating on a joint digital currency project)

• Sweden

• Uruguay

• Australia

• Hong Kong

• Singapore

• Kazakhstan.

Additionally, the Eastern Caribbean nations have introduced DCash as their digital currency.

Moreover, the Atlantic Council indicates that eight ECCU countries have initiated digital currency projects, with others in the ECCU region also exploring CBDCs for future implementation.

Japan is currently not planning to introduce a digital Yen. However, the Bank of Japan (BOJ) has initiated a pilot program to study its potential implementation. Similarly, the European Central Bank (ECB) has entered a two-year "preparation phase" to assess the feasibility of a digital euro. Meanwhile, the U.S. Federal Reserve is also actively evaluating the pros and cons of issuing a Central Bank Digital Currency (CBDC).

Case Study: China's Digital Yuan (E-CNY)

In 2019, China's central bank, the People's Bank of China, launched a pilot program for its digital currency, known as E-CNY, in 15 cities. This initiative aimed to test and understand the potential of digital currency in various sectors.

Key Findings

• Impressive Numbers: By June 2023, the E-CNY pilot had processed over 1.8 trillion yuan (equivalent to $249.33 billion).

• Diverse Usage: The pilot was not limited to one sector but spanned across areas like transportation, government services, and retail.

Potential Impact

• National Scale: E-CNY could revolutionise China's payment system, moving it closer to a fully digital, real-time payment setup.

• Global Implications: Internationally, E-CNY could become an alternative for global trade settlements, potentially reducing reliance on the US dollar and the SWIFT network.

Unique Features

• Hybrid Design: E-CNY combines an account-based system for large transactions and a token-based system for day-to-day retail transactions.

• Collaborative Approach: The initiative involves state-owned banks, commercial banks, and payment networks. Commercial banks manage both individual and business E-CNY wallets.

Challenges & Future Steps

E-CNY is also being tested for cross-border transactions. A notable example is the project between Mainland China and Hong Kong, which involves 200 Bank of China (Hong Kong) employees and selected merchants, highlighting the potential for global digital currency applications. In summary, China's E-CNY pilot showcases the country's ambitious steps toward a digital future, with vast implications both domestically and globally.

Navigating the future of finance with CBDCs

CBDCs can play a key role in providing access to digital payments without the requirement of a bank account. Access would be facilitated by a central bank–issued digital wallet. The Nigerian and Jamaican CBDC models offer a template for how this could be accomplished. CBDCs are ushering in a financial revolution. Scallop stands at the forefront of this with its regulated blockchain that can seamlessly integrate with countries’ e-monetary policies. This offers a massive scalability potential for projects that will be developed on the interoperable and secure Scallop Chain.