CBDC momentum growing amid race to master digital currencies

Money is undergoing its biggest reinvention in centuries.
With many consumers abandoning physical cash and cryptocurrencies evolving fast, central banks are on the move to ensure they don’t fall behind on innovation.
A total of 134 countries representing 98% of the global economy are now exploring digital versions of their currencies, with almost half at an advanced stage and pioneers like China, the Bahamas and Nigeria starting to see a pickup in usage.
All G20 nations are now looking into central bank digital currencies (CBDCs) and that 44 countries in total are piloting them, according to a research by the US-based Atlantic Council published last week.
That is up from 36 a year ago and is part of a global push by authorities to respond to declining cash usage and the threat to their money-printing powers from the likes of bitcoin and the Big Tech.
One of the most notable developments this year has been the sizeable increase in the Bahamas, Jamaica and Nigeria’s CBDCs, the only three countries that have already launched them.
China, which is running the world’s largest pilot scheme, has seen use of its porotype e-CNY nearly quadruple to 7tn yuan ($987bn) of transactions.
CBDCs are not so different, at least on the surface, from keeping money in a bank account and using plastic cards, smartphones or fintech apps to send it electronically into the world.
The key difference to popular digital means of payment is that central-bank money — whether it’s cash or a figure on a screen — is ostensibly risk-free.
CBDCs, like cash, would be a direct liability of the central bank, carrying its guarantee presumably for at least as long as the country behind it lasts.
CBDCs have nothing much to do with crypto apart from the blockchain technology powering crypto, which is also being used in some CBDC projects.
Central banks are experimenting on two main tracks: wholesale and retail.
In the latter, consumers would have direct access to digital central-bank money, just as they nowadays hold cash. In wholesale projects, the focus is on a more-efficient technology for payments between banks and the central bank, possibly using blockchain.
Retail CBDCs are particularly interesting for less-developed countries, where financial inclusion and even the logistics of distributing cash are a big issue.
Most developed countries have instead focused on wholesale applications and are more reserved about retail because of their potential impact on commercial banking.
Digital payments could be settled cheaper and faster than they currently are — perhaps instantly, which would eliminate credit risk, and without the need for correspondent banks when crossing borders.
In some countries where electronic payment methods are not very prevalent due to high costs for merchants, using a card or phone could become more widespread. That could foster competition among payment service providers so that even conventional credit card systems — like Visa or Mastercard — might become cheaper.
On the other hand, in a retail CBDC setting, every citizen could theoretically have an electronic wallet at the central bank, eliminating the need for a regular bank account. That could undermine the broader financial system, since commercial banks are still needed for making loans and other important tasks.
The European Central Bank has launched a multi-year digital euro pilot, while the US, which has long dragged its feet on a digital dollar, has joined a cross-border CBDC project with six other major central banks.
Longer term, amid a global race by central banks to master the concept of digital currencies – a disruptive technology once they looked down with regulatory scepticism – the goal is a digital form of legal tender that can compete with private-sector alternatives by being safer and cheaper to use.