Photo by Eric Prouzet
Central Bank Digital Currencies (CBDCs) are a form of virtual, central bank-issued money that is pegged to the fiat currency of that nation. While the idea for a digital currency derived from the emergence of cryptocurrency and blockchain technology, CBDCs are not cryptocurrencies. The main difference being that crypto is decentralized with a high degree of privacy and can be issued by private entities, while CBDCs are highly controlled and issued by a central bank and will offer less privacy than crypto.
According to the IMF, Central Bank Digital Currencies would help lower transaction costs, promote financial inclusion, enable more seamless monetary policy implementation, and limit illicit activities. However, they also warn of challenges surrounding the transition period, including potential bank runs of citizens flock to purchase CBDCs to quickly, potential for public backlash due to the centralization of a system initially designed for privacy and decentralization, cybersecurity threats, and insufficient regulatory infrastructure to support the new technology.
While there are currently only 9 nations that have officially implemented CBDCs, such as Nigeria and the Bahamas, many more are in various stages of development. According to the Atlantic Council CBDC tracker, 14 nations are in the piloting stage, including China, South Korea, Russia, Sweden, and Saudi Arabia. Another 16 are in various stages of development, such as Canada, EU, Australia, Brazil, and India. 40 nations are still in the research phase, including the US, UK, Mexico, Taiwan, and New Zealand.
The Digital Yuan, also called e-CNY, became the first CBDC to be issued by a major economy after China launched its trial program in 2021. China has recently announced an expansion of the pilot program into major cities such as Beijing, Tianjin, and Guangzhou. Meanwhile, the West is still playing catchup. Last month, President Biden signed an executive order calling for the development on a national policy for digital assets – including placing urgency on research and development of a potential US CBDC.
Some argue the progress China has made on their CBDC – the Digital Yuan – poses a real threat to the dollar’s future supremacy as the world’s reserve currency. Richard Turrin, author of Cashless: China’s Digital Currency Revolution shared his thoughts on CNBC back in March, saying “If we go about five to 10 years out, yes the digital yuan can play a significant role in reducing the dollar’s usage in international trade.” Turrin believes the e-CNY will slowly compete with the greenback as the main currency used for trade with China as some countries look to reduce their dependence on the dollar.
But its not just the US dollar under pressure from the Digital Yuan. The Euro, which has long been the predominant counter currency for dollar trades, is at a more immediate risk of losing out to the increasingly internationalized Chinese currency. The Yuan is still far from being a dominant currency on the global market, but their quest for a CBDC could change that in the coming years.
At this point, it seems to be a forgone conclusion that the US and other Western nations will develop and implement their own CBDC. Its just a matter of when, and how much ground they will have to make up to catch the Digital Yuan.