CBDC projects pick up the pace as 2023 kicks off

January 2, 2023 10:00 AM

Progress on central bank digital currencies has been relatively slow. But a flurry of tests near the end of the year suggest CBDC initiatives are improving their pace, as central banks try to determine the impact on traditional banking and payment systems.

About a dozen CBDCs have launched, according to a tracker from the Atlantic Council, which adds 17 are in pilot and 72 are in research and development. Eighty percent of central banks are considering a CBDC or have already launched one, according to PwC. There's a mix of motivating factors, such as improving cross-border payments, mitigating financial crimes and improving financial inclusion, reports PwC. Mounting risks from other forms of digital currency, such as volatility in cryptocurrency, are also pushing CBDC projects.

"A well-designed CBDC can help provide a real-time view of risks and currency outflows to help implement specific and targeted measures to prevent financial contagions from spreading further in the event of a crisis," said Gilbert Verdian, founder and CEO of Quant, a London-based blockchain firm.

Here are some CBDC projects that were underway near the start of 2023, with results expected to inform a path forward in these locations in the year ahead.

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United States

Even as debatein the U.S. rages over the utility of a digital dollar, work continues on the nuts and bolts of a potential American CBDC.

The Federal Reserve Bank of New York's innovation center and the Monetary Authority of Singapore are working on an experiment that will determine how wholesale central bank digital currencies can improve cross-border payments. Wholesale CBDCs are designed for large parties to move substantial amounts of money, and are considered likely to be implemented faster than retail CBDCs, which are designed for consumer use.

In a second project, the New York Fed is participating in a proof-of-concept test that will determine the feasibility of digital currencies operating in a network of financial institutions.

BNY Mellon, Citigroup, PNC, TD Bank, Truist, U.S. Bank and Wells Fargo are among the financial institutions participating in the New York Fed test, along with Mastercard and SWIFT.

The New York Fed's projects are experimental, and it has not taken a position on whether the U.S. needs a CBDC.

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Singapore

The Monetary Authority of Singapore is working with partners in several countries on Project Ubin, which is developing uses for blockchain technology and distributed ledgers, including CBDCs. MAS is involved in several CBDC projects, mostly to test how international transactions involving different CBDCs will work.

MAS is part of the New York Fed's test, as well as pilots with central banks in France, Switzerland and the Bank for International Settlements that are experimenting with potential CBDCs and traditional currency in tandem, including the Swiss franc, the euro and Singapore's wholesale CBDC.

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Spain

A coalition of more than two dozen banks is testing the impact of a digital euro. The banks are working with payment processors Bizum, Iberpay and Ressys to see how a digital currency backed by the European Central Bank will work within existing payment systems.

The tests are scheduled to be completed in 2023 and will consider use cases such as sending remittances in digital euros, e-commerce payments and payments that include other digital currencies.

Banks in the project include BBVA, Sabadell, Santander, ING and Deutsche Bank. The banks will be custodians of the CBDC accounts, and payment types include P2P transfers, e-commerce purchases and in-store transactions, which are more in line with the consumer-oriented retail CBDCS.

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U.K.

The Bank of England recruited developers in December to build a digital wallet for a potential CBDC. The contract will be about $200,000 for a wallet that will be used to develop a mobile app, website and server that can connect to an application programming interface.

The wallet will also store information on users, track payments and provide a way for users to register and change their details. The five-month project will evaluate functions such as B2B transfers, business payments, access to withdrawals and notifications.

"A digital pound enables consumers and businesses to automate complex and cumbersome processes and implement logic into money," said Quant's Verdian. "It offers new efficiencies and faster workflows to better meet our needs as our living experience becomes increasingly digital."

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France

The Banque de France and Banque central du Luxembourg in late November worked with the European Investment Bank on the Venus Initiative, which is a 100 million euro digital bond issued by the EIB under Luxembourg law and settled using a tokenized version of euro central bank money.

The Venus Initiative is designed to demonstrate how digital assets can be issued, distributed and settled in the eurozone within a day. The parties also hope to show that a CBDC can be a safe part of a stable tokenized digital asset market in Europe.

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Canada

The Bank of Canada in late October released research on the different patterns of CBDCs, which the bank referred to as "archetypes." These archetypes are based on data tracking privacy, compliance, transparency, scalability, resilience, extensibility and performance during online and offline payments.

The central bank says these archetypes cover a wide range of CBDC designs, adding that some designs may incorporate more than one of the archetypes. The Bank of Canada reports that no single archetype scores high on all areas of functionality, performance and security, and as such recommends CBDC designs that incorporate different archetypes

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Japan

The Bank of Japan plans a proof-of-concept test for a digital yen, according to a Forbes India translation of NIkkei report. Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group will reportedly work with the BoJ to perform a digital currency issuance pilot. In most countries, part of CBDC development is determining a role for commercial banks, which will most likely be involved in disbursement.

The test in Japan will gauge reliability of deposits and withdrawals, and how the CBDC network operates in the event of an internet outage or some other crisis that takes digital banking offline. The BOJ hopes to release a CBDC by 2026.

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Australia

The Reserve Bank of Australia recently announced its plans to finish a pilot of its CBDC by the middle of 2023. The pilot is determining use cases that could fit with a digital currency, which would inform future legislation to govern a digital currency. The Australian government has not made a final decision on a CBDC.

The RBA is concerned that many of the reasons given for CBDC, such as financial inclusion, are not a challenge in Australia, where most of the country has bank accounts. The RBA does say a CBDC could help improve resilience of the monetary and payments system, particularly for transactions that involve a party in emerging economies that have less capacity and are prone to natural disasters.

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Brazil

Brazil may have a CBDC within two years, as the Central Bank of Brazil in late December said it will shortly begin a pilot with a group of financial institutions. The central bank's partners include Santander Brazil and Itau Unibanco.

If the CBDC is a tokenized deposit, it would be regulated similarly to traditional deposits, and should not hurt banks' balance sheets, reports Reuters, which covered a financial conference in Brasilia.

That model could address one of the concerns that banks have about CBDCs, namely that the digital currencies may cause people to withdraw their bank accounts.

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New Zealand

New Zealand is designing a CBDC, though it admits it will be a multi-stage and multi-year process. The Reserve Bank of New Zealand says the technology currently exists to digitize its currency, though work is needed to make the currency user-friendly, resilient and ensure privacy.

The CBDC should also improve financial innovation, support cross-border payments and bring new people into the financial system, the central bank said.

And like many countries, New Zealand is also trying to balance access to the financial system with a broader decline in cash. About 70% of New Zealand's residents use cash as one way of paying, down from 96% in 2019.

China

Development of China's digital yuan is ahead of that of most large economies, and is often cited as a reason for the U.S., U.K. and other large countries to expedite their own work.

While most CBDC projects in large economies are in the experimental phase or still subject to debate, China's CBDC has been active in real-world environments for more than a year, mostly in pilots. Digital yuan transactions recently passed 100 billion, or about $14 billion, according to Reuters.

That includes 360 million payments in 15 provinces, covering more than 5.6 million merchants during in-market tests over the past two years. China's digital yuan has been available for about two years at select McDonald's and Starbucks in China.