More Than 87 Countries Are Working On The Issuance Of CBDCs
The crypto boom has acted as a trigger for the emergence of the digital economy globally. The scope of cryptocurrencies has increased beyond mere investments. Financial institutions and governments across the world are exploring ways to utilize crypto for benefitting the economy. The digital economy is going to play a major role in the recovery of the global economy. According to the World Economic Forum, 70% of new value created in the economy over the next decade will be based on digitally enabled platform business models. With nearly 5 billion internet users in the world, the rise of the digital economy is expected to be significant and quick. Countries across the world have realized the arrival of the digital economy and hence, they are working on developing their own CBDC.
What Is CBDC?
A CBDC ( Central Bank Digital Currency) is a digital form of a country’s currency, issued by its central bank. Digital payments have been around for more than a decade. From swiping a credit card to sending money online to relatives or friends, we utilize digital means for transactions in our daily lives frequently. Online payments are proof of how digitization makes transactions more convenient. However, a CBDC is designed to act as a digital representation of FIAT, allowing people to hold the currency, and make transactions digitally. The widespread popularity of cryptocurrencies has forced financial institutions to come up with their own CBDCs. The interest of countries in CBDCs has simply skyrocketed. As of March 2022, more than 87 countries are considering the issuance of CBDCs. In fact, Nine countries have already launched CBDCs.
CBDCs aim to eliminate middlemen from the financial system, reducing the chances of corruption of fraud significantly. They create a direct connection between consumers and the central bank within a country, thereby eliminating the risk to consumers in case of the collapse of a commercial bank.
CBDC Vs Crypto
While cryptocurrencies like Bitcoin and CBDCs both are a part of the digital economy, CBDC is unrelated to crypto. Cryptocurrencies are decentralized digital assets that can be transferred globally on a peer-to-peer basis without the involvement of any central authority or intermediaries. On the other hand, CBDCs are merely a digital representation of a country’s FIAT and are issued by a central bank or a centralized institution.
The key difference between crypto and CBDC is that the former is stored on a decentralized blockchain network whilst the latter is stored using a centralized method. CBDCs can be regulated due to their centralized nature while there’s still a lot of ambiguity around the regulation of crypto assets. One of the major reasons that countries across the world are developing their own CBDCs is to counter the decentralized nature of crypto and the anonymity in crypto transactions.
Top Countries Developing Their CBDCs
While nearly 100 countries are considering launching their own CBDCs, it is the leading economies whose decision matters the most. Here are the 5 major countries developing their CBDCs:
- United States: The Federal Bank Reserve in the US has expressed its interest in launching the CBDC. The reports of Washington planning to launch the CBDC gained strength after President Joe Biden signed an executive order on March 9 ordering the US Treasury Department, the Commerce Department, and other key agencies to prepare reports on “the future of money”. The order directs the concerned authorities to assess the technological infrastructure needed for a potential American CBDC. The Federal Bank Reserve could start working on the CBDC once the assessment is complete.
- India: India has more than 100 million crypto investors, the highest in the world. The central government announced the plan to launch its own CBDC while announcing a 30% tax on crypto gains earlier this year. As per the announcement, India’s CBDC will be called the “digital rupee”. The Reserve Bank of India will use blockchain technology in the development of a “digital rupee”. Indian aims to use the “digital rupee” to tackle the major problem of corruption in the financial system and develop a cost-efficient currency management system. India’s finance minister said the “digital rupee” would provide a major boost to the digital economy in the country. India aims to launch its CBDC by March 2023.
- China: China has been relentless in its approach to emerging as a frontrunner in the booming digital economy. China started a pilot for its CBDC, e-Yuan or digital yuan, in April 2020, becoming the first major economy to do so. According to IMF, more than a hundred million users are using the digital yuan as a part of the pilot project and the transaction volume is in billions. The country has also issued a digital yuan wallet to make its use more convenient. The People’s Bank of China aims to enable widespread domestic use of the digital yuan by the end of 2022.
- Eurozone: The European Central Bank (ECB) has also intensified its efforts to create a digital version of the euro. ECB announced its plan to launch a CBDC in July 2021. ECB’s efforts to launch a digital version of the euro are motivated by the widespread popularity and rising importance of cryptocurrencies like Bitcoin. The European Commission has announced to propose a bill for the digital euro in 2023. Europe could soon emerge as one of the leading powers in the digital economy with the launch of the digital euro.
- Russia: Russia is another major country working on the development of its own digital currency or CBDC. Moscow announced its plans to launch a digital ruble back in October 2017. Russia’s central bank aggressively backs the creation of the digital ruble while arguing that it could reduce the cost of payment services and promote competition among financial institutions. The CBDC will be built on a hybrid platform combining DLT (distributed ledger technology) and central control from the bank of Russia. Russia aims to reduce its dependence on the US dollar and provide its citizens with a convenient method for transactions within the country by launching the digital ruble. If reports of Moscow using crypto to mitigate the risk of NATO sanctions are true, the development of the digital ruble could soon pick up the pace. Russia also plans to make its CBDC available offline.
Final Word
CBDCs could be an effective medium to make transactions convenient within a country or even internationally. Besides the 5 major countries mentioned above, there are more than 80 countries including Sweden, Brazil, and Thailand, that are set to introduce their CBDCs in the coming years. Several countries including The Bahamas and Nigeria, have already introduced their CBDCs. Contrary to the popular belief, CBDCs are here to reduce the complexities in the traditional financial systems through digitization. They also help establish a connection between the consumers and the central bank in a country, eliminating the intermediaries and reinstating confidence in financial institutions. In the restructuring world order, CBDCs could be a tool for countries to assert their dominance in the global digital economy.