A world tour of digital currency projects

June 3, 2021 11:51 AM

There are hundreds of central bank digital currency initiatives in various stages of development across the world, but only a handful are close to coming to market — and fewer are live.

The most advanced projects are in the Bahamas, which began using its Sand Dollar last year; and China, which is testing its digital yuan with retailers and consumers. Other major markets like the U.S. are considering models and use cases for digital currencies.

Here's a sample of what CBDC strategy looks like in countries that are farthest along in their own projects, or large enough to influence the work being done elsewhere.

China

Bloomberg

The digital yuan is currently the most influential CBDC because of the country's size. China is the world's largest digital retail market, with more than $1.5 trillion in sales in 2020.

China is testing its digital currency with major retail chains such as Starbucks and McDonald's, and has distributed the currency directly to consumers in an attempt to boost adoption ahead of a launch that could come as early as this year.

China's digital currency has been a source of controversy. There are concerns that the government will use the technology to spy on its citizens and displace Alipay and WeChat Pay, China's major private-sector digital wallets.

The Chinese government insists neither claims are true, and has promised the digital yuan will be compatible with private digital wallets.

There's also a Cold War element, as the digital yuan is positioned as a way to counter the influence of cryptocurrency, the U.S. dollar and major U.S. firms that seek to expand in China, such as Visa, Mastercard, PayPal, Apple and Amazon.

China, which has been working on its digital currency for seven years, plans to test the digital yuan at the upcoming Beijing Winter Olympics in 2022, providing a view of how comfortable travelers from outside China are with the nation's CBDC and digital currencies in general.

U.S.

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The U.S. is far behind China, with research into a digital dollar in its early stages. Fed Chair Jerome Powell recently criticized cryptocurrencies, while suggesting the underlying technology could be used to support a digital dollar.

The U.S. government is working with MIT to build and test models for a digital dollar, though the earliest word from these experiments is not expected until later this summer. A digital dollar briefly made its way into coronavirus relief bills in the U.S. Congress in 2020, though the initiative was dropped during negotiations (the uneven rollout of pandemic stimulus checks added momentum for a U.S. digital currency as a way to streamline government disbursements).

A U.S. CBDC has bipartisan support, though there are differences in details, such as the role of private-sector financial institutions — Republicans support a greater role for banks, while the Democrats' liberal wing supports a more direct relationship between the Federal Reserve and consumers. An evenly split government means there will likely be a role for the card networks and banks in a U.S. CBDC.

It will be several years before a CBDC is introduced in the U.S., given Powell has said the U.S. is not in a race with China, but is more focused on improving financial inclusion and government payments through a digital dollar.

"It's not a race from the U.S. perspective, but it is a race from the perspective of China," said Adam Gilbert, a New York-based regulatory head of PwC's financial services advisory practice, adding China sees the digital yuan as a way to counter the influence of the dollar as a reserve currency, while Europe and the U.S. view CBDCs more as a way to broaden access to the financial system to underserved markets.

U.K.

Bloomberg

The Bank of England and HM Treasury in April formed a task force to research a potential CBDC for the U.K., bringing together government agencies and the private sector to consider a currency that would be an alternative to traditional cash and deposits.

The rapid decline of cash in the U.K. has caused a corresponding reduction in ATMs, along with a dispute between Barclays and the government over support for a national scheme that protects cash access by using post offices as cash distribution centers.

This has raised fears, particularly among regulators such as the Financial Conduct Authority, of ATM or cash "deserts" that leave underbanked consumers out. These consumers could be served through a digital currency.

The task force will identify use cases, opportunities and risk and will evaluate a design for the digital pound and assess the overall case for at CBDC in the U.K. It will also track developments in other nations.

The U.K.'s existing monetary system, which dates back centuries, poses a particular challenge for CBDC development in the U.K.; the country must figure out how its long-standing traditional currency and a CBDC will work in tandem.

European Union

Bloomberg

In an April speech to the European Parliament, ECB board member Fabio Panetta said the central bank was accumulating input from stakeholders from around the EU on the design of a digital euro, if the EU decides to digitize its currency.

The public input, mostly from consumers and payment businesses, has emphasized privacy, money laundering protections and payment security.

The momentum is leaning towards the EU moving forward with a CBDC. The EU this week warned that countries that do not digitize their currency could become reliant on outside payment companies and large technology firms, threatening monetary policy.

In remarks earlier this year, the European Central Bank President Christine Lagarde advocated for a digital euro to avoid the EU being left behind as digital currency projects progress elsewhere. Lagarde estimated it would take about four years to develop a digital euro.

While the U.S. and Europe have taken a slow approach that doesn't consider China's progress, there is a need for more urgency given China's influence, according to Antony Welfare, executive director at NEM Software in Gibraltar who has consulted on CBDC projects in the U.K. and several other nations.

Western central banks "need to get their heads around China moving at lightning speed," Welfare said. "China has a CBDC and it's being rolled out. China is the largest country in the world and the largest trading partner. It's a warning sign."

Sweden

Bloomberg

Sweden is further along than most countries in its CBDC project, and is reportedly working with Handelsbanken to test the e-krona's ability to process payments outside of a test environment.

The e-krona project dates to 2017, starting with research to determine whether a digital currency is necessary. It accelerated in 2020 with pilots in conjunction with Accenture, which is also part of the Digital Dollar project that advocates for a CBDC in the U.S.

Riksbank plans to include other commercial banks to pilot different use cases for the e-krona, including general retail payments and business transactions.

Sweden's central bank hopes to use a permissioned blockchain and application programming interfaces to connect to core banking systems and RIX, a Swedish payment system that banks, clearing organizations and the National Debt office use to process transactions.

France

Bloomberg

The Banque de France completed a CBDC test that used a blockchain to support an interbank settlement of about $2.5 million through a private blockchain from SETL earlier this year.

The French central bank is conducting more tests, and a French CBDC has the backing of Francois Villeroy de Galhau, the Banque de France's governor. Galhau has advocated for public-private partnerships to support CBDCs across Europe, supporting both wholesale CBDC projects like the interbank settlement test, and retail usage for consumers.

French politicians have additionally expressed opposition to Diem, the Facebook-affiliated stablecoin. CBDCs are seen as one way to counter that influence, along with an independent European payment system that would also support a digital euro.

The ECB's Lagarde has pushed central banks across the EU to develop compatible CBDCs as a competitive response to foreign corporate incursions into Europe's payment market.

Japan

The Bank of Japan headquarters in Tokyo

Bloomberg

The Bank of Japan's tests directly target some of the concerns about CBDCs, such as impacts on traditional bank accounts and whether CBDCs from different nations can be interoperable.

The BOJ began tests this year that would ensure stability for settlement and payment systems for transactions. It's hoping to address concerns that CBDCs would cause some users to drain their private bank accounts in favor of digital currencies.

The BOJ is also part of an international CBDC organization that includes Canada, the U.K., Switzerland and other nations that are working on models to ensure CBDCs can work in different jurisdictions.

Switzerland

Bloomberg

Switzerland's status as a global banking center makes its CBDC activities particularly important, given a heightened need for interoperability.

The country's central bank recently planned a digital currency test, according to Reuters. The test will involve another central bank that Swiss officials did not identify, and it's geared toward measuring cross-border functionality.

Switzerland is part of a CBDC collaboration with the Bank for International Settlements, the Swiss National Bank and the financial infrastructure operator SIX.

These partners completed a joint proof of concept this year for a project that integrates tokenized digital assets and central bank money. Called Project Helvetia, it's exploring the technological and legal feasibility of issuing CBDCs through a digital asset platform and linking that platform to a payment system.

Hong Kong

Bloomberg

A similar test has been conducted in Hong Kong, where the Hong Kong Monetary Authority and the Bank of Thailand built a prototype to transfer CBDCs to execute payments between the two jurisdictions.

China's central bank is also working on a CBDC bridge that will connect to the Hong Kong and Thai central banks, as well as the Bank for International Settlements, to create an international network for cross-border CBDCs.

The cross-border use cases are consistent with wholesale CBDCs, which are designed for bank or corporate use such as business-to-business transactions.

Hong Kong is also developing a more general retail CBDC that would be geared toward payment companies and retailers, with tests scheduled for this year.

Bahamas

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The Bahamas is one of the few countries that has actually introduced a live CBDC, the Sand Dollar, which launched in October 2020.

The Sand Dollar is designed to distribute cash among the Bahamas' vast network of islands to avoid the expensive process of moving cash using private planes. It's also designed to serve tourists and other visitors.

As a very early mover, the Central Bank of the Bahamas is often called upon for its insight as other nations move forward.

"Market research is essential and needs must be clearly identified for their economies. Having a CBDC for the sake of it is an expensive undertaking that might see little to no return on investment," said Allison Middleton, who's part of the Sand Dollar project management team for the Central Bank of the Bahamas.