Year after year, people keep wondering how long the crypto hype is going to last. The market volatility and crashes it has faced continue to make some believe that the days of digital currency are over. But without fail, it always reappears… why?
This month at Fintech time we are going to examine what makes digital currencies so popular. We’ll also learn about emerging alternatives to cryptos and why the digital future looks so intriguing. Our second focus this month will be on Central Bank Digital Currencies (CBDCs). We start by analyzing which countries are leading the way in the development of CBDCs.
We have gathered a variety of perspectives from across the industry when we hear Brock pierce, Conor Svensson, pseudo Drurry, Bobby Pham and Cecile Tamez on who is driving the development of CBDCs in 2022.
The US and UK have underdeveloped CBDC programs
Brock Pierce is the president of the Bitcoin Foundation, an American non-profit corporation seeking to restore Bitcoin’s reputation and a cryptocurrency innovator. He explains what CBDCs are and which countries he thinks are leading the way:
“In many ways, CBDCs are identical to traditional fiat currency. What sets CBDC apart from traditional fiat currency is that it is digital instead of being denominated in physical notes. As they are just the digital version of traditional fiat currency. CBDCs do not offer some or many of the benefits of cryptocurrencies. Examples include decentralization and the ability to foster financial inclusion by opening up financial tools to those without a traditional bank account.
“Countries that have already launched CBDCs or pilot CBDC programs include the Bahamas, Jamaica, Nigeria, China as well as eight Caribbean countries that have collectively launched Dcash, a CBDC launched by the Eastern Caribbean Central Bank (ECCB). China’s digital renminbi pilot program is expected to launch in 2023. Currently, 105 countries, collectively representing approximately 95% of global GDP, are exploring CBDCs.
“According to Atlantic Adviceof all the G7 countries, the US and UK have the least developed CBDC programs.
“Although the United States does not have a CBDC, there are a number of digital dollar cryptocurrencies that are pegged to the US dollar. These represent an alternative to current CBDC projects and provide a bulwark against the widespread adoption of China’s CBDC, the digital Renminbi.
10 countries have launched CBDCs but are at different levels of maturity
Conor Svensson is CEO and co-founder of Web3 Laboratories, the blockchain technology company. Svensson analyzes the development of CBDCs in China while identifying smaller countries that have made significant progress.
“CBDCs are being adopted by countries big and small. China has made far more progress with its digital renminbi than any other major nation. Starting in 2020 in Shenzhen, it has been tested in a number of cities including Shanghai, with plans underway for other major cities and Hong Kong.
“In some of the world’s smaller economies, CBDCs are already active, such as Nigeria – Africa’s largest economy – launched the eNaira Last year. So far, 10 countries have fully launched a digital currency, but are all at different levels of maturity.
“Surprisingly, despite being economic powerhouses, the US, the ECB and the UK are even further behind in developing their CBDCs. In the UK for example, Fality for all intents and purposes operates a synthetic CBDC. They provide a bank of england-regulated wholesale payment infrastructure that uses blockchain technology. As it is not run by the Bank of England (although it is regulated by it), it is not a typical wholesale CBDC.
“On the other hand, there are several challenges related to CBDCs. This includes vulnerability to cyberattacks and the need for a strong regulatory framework to cover privacy, consumer protection and anti-money laundering standards.
“Many countries are seriously exploring alternative international payment systems, but more needs to be done to have stablecoins both in name and in kind. CBDCs will have to coexist and play well with the crypto and web3 ecosystems.
Fund settlement in Asia and Africa
Mojaloop CBDC Center of Excellence (COE) was created to carry out the foundation’s mission to advance financial inclusion in emerging markets. Its director, Nick Drury, explains why the development of CBDCs is so important:
“When we look at Asia and Africa, we can see that the exploratory work being done on CBDCs is enabling individuals to settle funds across borders faster and cheaper. But there is still much to be done to reduce transaction costs. Especially if we want to reach the UN’s sustainable development goal of 3%.
“As large assistance programs become increasingly digital, settlement time and costs still need to be reduced. Covid-19 has driven more countries to invest in instant payments infrastructure to send financial assistance to unbanked citizens and migrant workers.However, these payments represented only a fraction of the existing national emergency and international assistance programs needed for G2P (government to person) and cross-border payments, according to the World Bank.
“Migrant workers send $200 home on bank rail have to pay more than $18 (six percent), is more than double the United Nations Sustainable Development Goal, according to the World Bank. As part of the continued implementation of inclusive interoperable technologies, CBDCs must play a key role in further reducing cross-border settlement costs to achieve the 3% SDG target.
“Connecting the underlying payment rails between the Asian and African corridors can only happen if similar inclusive interoperable systems exist in both geographies. We need to consider how pairing CBDCs with instant payment services will allow funds to be traced back to their end recipients. It also needs to use strong anti-fraud capabilities to fight terrorist financing and anti-money laundering, performing near real-time transactions.
Active CBDC testers
Bobby Pham, CMO, KardiaChain, discusses how CBDC rumors aren’t always started because of a genuine belief that technology can help. Rather, the term is used as a means of finding political success. He looked at four CBDCs that have actually been implemented or tested:
“More than 100 countries are working on the development of their CBDC or have already launched it.
“However, many countries that are in the exploratory phase might just express this for political purposes.
1.) The Bahamas | The Sand Dollar Project
The Bahamas has always been considered a tax haven for the wealthy and big investors. The crypto market attracts a large chunk of these investors, so it doesn’t surprise me that they were the first to launch the CBDC. This is likely a move to keep them as one of the attractive havens for wealthy investors.
2.) China | The digital yuan (e-CNY)
I expect them to be one of the first powers to launch a CBDC. Having its own CBDC allows the PBOC to continue monitoring financial transactions. It would have been harder for them without one.
3.) Nigeria | eNaira
Nigeria has the largest economy in Africa and the 31st globally. With over 200 million inhabitants, it is filled with a young and bright population that has embraced technology. I am convinced that with the addition of a CBDC, a greater part of its population will have access to financial services.
4.) India | digital rupee
The RBI has expressed some concerns about the use of crypto assets for money laundering and tax evasion. However, they also see crypto as an opportunity. This would allow many of its 130 million unbanked people to access financial services. In turn, this would boost the world’s fifth largest economy. »
Emerging Markets vs. Established Markets
Cecilia Tamez, Director of Money Transfer Systems Strategy for Paytech, Euronetdifferentiates the development of CBDCs in emerging and established markets:
“Some selected central banks have already launched digital currencies:
- The People’s Bank of China – Digital RMB
- The Central Bank of the Bahamas – Sand Dollar
- Eastern Caribbean Central Bank – DCash
- The Central Bank of Nigeria – e-Naira
- The Bank of Jamaica – JamDex
“Each country has its own unique infrastructure challenges, population, and requirements for digital currencies. There are, however, some widespread benefits that have prompted interest and investment in the development of CBDCs. These include the desire to modernize the technical payment infrastructure, reduce transaction costs and the complexity of payments, improve economic health through financial inclusion, combat financial crime through greater transparency of payments and better control of economic policy.
Notably, there is a pronounced divide in these motivations between emerging and established markets:
“Emerging markets want to leverage digital currencies to modernize and overcome barriers presented by legacy banking and payment infrastructures. Nigeria, for example, introduced one of the world’s first CBDCs. By enabling access to eNaira via a mobile wallet, the central bank hopes to improve financial inclusion for 90% of the population, which is huge for a market where 36% of the population is unbanked.
“Established markets are exploring CBDCs with the aim of influencing the transformation of digital payments in their country. By offering a digital alternative to cryptocurrencies, governments seek to improve the transparency, security and stability of their financial system. If central banks can proactively administer how CBDCs are introduced, it will allow them to shape the impact currencies will have on economic policy.