What is CBDC?

CBDC is the central bank’s digital currency. It’s an electronic obligation of the monetary regulator, denominated in the national unit of account and serving as a means of payment, measure and conservation of value.

Unlike bitcoin, ether, and the like, CBDCs inherently cannot be decentralized. They will be regulated by a central bank.

One of the main benefits of CBDC for central banks is the simplification of monetary policy regulation. The transition to digital finance will allow them to monitor the economy more accurately and respond to changes in real-time.

Types of CBDCs

Retail CBDCs are digital currencies available for widespread use by individuals and businesses. They serve as a substitute for cash (or to supplement it) and an alternative to bank deposits. No interest income is usually accrued.

Key Features:

— CBDC is distributed by the central bank in the ratio of one to one with fiat currency and should be freely convertible into cash.

— CBDCs must operate on an open infrastructure that will allow private companies to create new products and services.

The cost of the transaction should be less than in existing systems.

— Retail CBDC should be a new form of central bank money, issued and controlled by the regulator. The supply of retail digital currency is driven by monetary policy and controlled by the central bank.

— CBDC should be included in the financial statements of the central bank.

Digital currency should be accepted as a means of payment by all citizens, companies and government agencies.

Wholesale (aka direct and commercial) includes digital currencies, which are designed for professional market participants — for example, organizations that keep money in accounts with the central bank.

The transition to a wholesale CBDC in the future will simplify cross-border payments and transfers between banks. With its help, central banks of countries will be able to conduct any monetary policy and track all currency transactions.

— Wholesale CBDCs are created exclusively for professional market participants — they are suitable for interbank transactions, international trade transactions or for clearing. There is no way to pay in-store using a wholesale CBDC.

Countries working on CBDC

China

Several of the world’s largest economies are interested in creating a national digital currency, but China holds the palm. The country began to actively develop CBDC back in 2019, but the COVID-19 pandemic has significantly accelerated the process. In 2020, experiments on the implementation of the digital yuan were conducted in several Chinese cities.

As early as January 2021, the Agricultural Bank of China (ABC) tested the e-CNY to fiat money exchange functionality at conventional ATMs in Shenzhen. In the spring, six of the largest financial institutions — Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, Postal Savings Bank of China and Industrial and Commercial Bank of China — experimented with digital yuan wallets.

And in mid-June, the pilot program for exchanging e-CNY into the regular yuan was significantly expanded — ATMs with such functionality appeared in Beijing. In addition, the Chinese authorities regularly draw large sums of money in the form of digital yuan.

As of the end of October, 140 million people had e-CNY wallets. A total of 62 billion yuan ($9.7 billion) worth of transactions were made with the national digital currency.

The Bahamas

According to a report by consulting firm PricewaterhouseCoopers (PwC), the Bahamas has overtaken China in the development of a national digital currency.

In the fall of 2020, the country’s central bank launched a CBDC called the Sand Dollar (the name given to the flat sea urchin for its resemblance to a coin). The value of the digital currency is pegged to the Bahamian dollar, the exchange rate of which depends on the U.S. dollar. CBDC became available immediately to all residents of the country, and you only need a cell phone to create a wallet.

Japan

Slightly less actively developing CBDC is another major Asian economy — Japan. Back in the summer of 2020, the country’s central bank announced that it would consider the prospects of implementing a national digital currency, and in March 2021, the regulator announced the creation of a committee on CBDC. The latter, in particular, will discuss the prospects of creating a digital currency with businesses and authorities. The first phase of the experiment to implement CBDC in the country began in April.

In early July, a member of Japan’s ruling Liberal Democratic Party, Hideki Murai, who oversees the CBDC project, commented on the timing. He said the government would have an idea of what the digital currency would look like by about the end of 2022.

Outside Asia, the development of their own CBDCs among major economies is not as active. At the same time, many central banks, according to a report by the International Monetary Fund (IMF), are exploring the possibility of implementing digital currencies. According to a survey conducted by the Bank for International Settlements, central banks of countries representing 20% of the world’s population intend to present their projects in the next three years.

Ukraine

One of the countries that are actively exploring the possibility of creating their own digital currency is Ukraine. In 2018, the National Bank of Ukraine (NBU) conducted a pilot project to create a digital hryvnia (or e-currency).

In early July 2021, the NBU published the results of the study and a survey of market participants. Now the regulator has presented three options for the use of e-hryvnia in the future: for retail payments, for transactions with virtual assets and for cross-border transfers.

Sweden

One of the pioneers of CBDC is Sweden, a country that may be the first in the world to eliminate the use of cash. Between 2010 and 2020, the number of Swedish residents who pay with cash dropped from 39% to 9%.

At the same time, the country’s authorities have begun to explore the prospects of introducing a CBDC called the digital krona (or e-krona). Until the spring of 2021, the project was tested virtually, with no real people or organizations involved. But in May, the Swedish Central Bank signed an agreement with the country’s largest bank, Handelsbanken, to conduct a pilot program.

Russia

For the first time about the digital ruble (or “crypto ruble” as it was then called in the media) in Russia began to talk in 2017. Then the Ministry of Communications prepared a draft government decree to study the possibility of creating a CBDC.

Despite this, the project itself is still in its early stages — in 2020, the Central Bank issued a report on the creation of the digital ruble. The document of the regulator, in particular, states that the e-ruble should be converted into fiat currency at a rate of 1:1. According to the plans of the Central Bank, it will be possible to pay for purchases both online and offline.

In April 2021, the Central Bank issued a report on the development of the CBDC. It indicated that the e-ruble will work as follows: the regulator will create wallets for digital currency for banks, and they will open accounts for customers. Testing of the digital ruble is scheduled for 2022.

Summary

CBDC shares common characteristics with both cash and cryptocurrencies. It’s the common characteristics with cryptocurrencies that provide the main advantages in terms of financial regulation and compliance. That said, those same characteristics are also the subject of greatest concern. It follows that due to CBDC’s greater degree of transparency, it could mark the beginning of a new compliance era. But the price for doing so will be increased data tracking.