Who’s leading the next breakthrough? The current landscape of Central Bank Digital Currencies

Updated: Feb 16

1. A brief introduction to Central Bank Digital Currency (CBDC)

As the focus of this article is to explore the current landscape of Central Bank Digital Currencies, this will only be a short and general explanation of what is CBDC. In short, CBDC is a digital variation of Central Bank Issued Currency that differentiate itself from traditional physical form of central bank issued money. It can be further broken down into two main categories: ‘wholesale’ CBDC, which is a restricted-access digital token for wholesale settlements, and general purpose CBDC, which will be available to the general public. The former is used for interbank payments, securities settlement, Fed Fund etc, and the latter targets retail transactions.

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Most countries are looking to issue CBDC alongside with physical cash as a complement. However, with the unprecedented pace of technological development and effect of COVID-19 on accelerating digitalization trends, the replacement of physical form of legal tender by its digital form is not completely impossible.

2. Central Bank Digital Currency and Blockchain

One key feature of CBDC that various countries are trying to explore is the use of Blockchain (Distributed-Ledger-Technology, or DLT). The main characteristics of Blockchain technology are: transparency, immutability and a decentralized system. Note that the use of Blockchain Technology in CBDC will not be a permissionless Blockchain like the system used by Bitcoin, but rather a permissioned or private network that is limited to a group of approved participants, which ensures that central banks still have control over each country’s monetary system and have the ability to implement its policies such as money supply and interest rate, ensuring fundamental monetary stability.

3. Overview of the current landscape

According to a survey conducted by the Bank for International Settlement in late 2019, 80% of banks have engaged in research and have started to conceptualize potentials in CBDC, 40% of them have made progress in building proofs of concepts and are actually experimenting on it. 10% of central banks have already been running pilot projects, bringing the concept into reality. Furthermore, 20% out of the 66 countries involved in the survey indicated that they would possibly release their CBDC to the general public by 2026. Examples of pilot projects include ‘Project Jasper’ by Bank of Canada, ‘Project Ubin’ by Bank of Singapore, ‘Sovereign Currency’ by the Republic of the Marshall Islands and much more. It was often argued that it was Facebook’s initiative to launch the Libra currency that acted as a catalyst for this trend. Libra differs from cryptocurrencies such as Bitcoin. Bitcoin are mostly used for speculative purposes while Libra pegged it self to fiat and international currencies, targeting retail international transactions. This largely raised concerns from governments in controlling its own currency inflows and outflows, thus prompting and accelerating research into CBDC. Governments are looking to use CBDC as a way to maintain control of its own currencies and monetary stability in both physical and digital means, establishing authority in a fast changing digital world.

4. The first CBDC in the world — Central Bank of Bahamas — design and motivation

Not China, Not the US nor the UK, you might be surprised to find out that the first ever country to successfully roll out a large-scale nationwide adoption of CBDC is Bahamas. To understand the motivations behind the fast adoption rate and the development of Bahamas’s CBDC, we need to acknowledge the fact that Bahamas has a unique Geographical feature. It consists of 700 islands that scatter across a huge range of ocean, which means standardization of physical currency will be extremely challenging. Furthermore, the Central Bank of Bahamas claims that the project aims to improve financial inclusiveness for broader population to gain access to regulated payments and various financial services, as well as reducing transaction cost and efficiency.

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The CBDC of Bahamas is named “Sand Dollar”. In terms of its design and structure, it consists of a group of Authorized Financial Institutions (AFI), including commercial banks, payment services providers. These AFIs provide services to the retail customers, performing Know Your Customer, anti money laundering checks, wallet services and custodial services. Payments are made through a digital wallet app, which is segregated into three tiers : each with different requirements on KYC and corresponding limits on the amount of Sand Dollars that can be held in the wallet. A key feature that distinguishes CBDC from the majority of existing digital wallets is that they can be used when disconnected from the internet, further improving its convenience and lowering transaction costs.

5. Singapore — The ambitious experimenter — ‘Project Ubin’

The Project Ubin consists of five phases and is a carefully designed, comprehensive project. In 2016, the project stepped into its first phase, which focuses on interbank transactions using Blockchain, forming a consortium between 10 leading banks such as Credit Suisse, HSBC, JP Morgan. The last phase — phase five have closed and the report was released back in 13 July 2020. This phase focuses on evaluating the use cases and proving the value that CBDC could bring to various industries, such as trade and supply side finance, insurance. This organized step-by-step practical experimentation approach has left the Central Bank of Singapore with a deep understanding of the feasibility and economic value of CBDC. However, the project doesn’t give an answer to us regarding when we will really see Singapore issue nationwide CBDC to the general public. The project took an explorational and research based approach rather than a piloting that would lead to actual adoption. Nevertheless, the payment network prototype and various technical infrastructure used in the project establishes a strong leadership position for Singapore in this CBDC race, equipping it with matured and well- tested technologies. The next step will just be a more concrete public policy framework concerning the adoption by the general public.

6. The US’s approach — slower but with more prudency

While other countries are actively rolling out piloting projects, the United State, who had been one of the leading country in terms of technological advancement, seems to be a little bit behind on its progress towards issuing a CBDC. One of the reason is that for domestic consumers, the existing digital payment system in the US is already very convenient, most consumers are not willing to change their payment methods and adapt to a new digital payment system. A survey conducted by Genesis Mining consisting of 400 participants, revealed that less than 25% of participants agreed to the proposition of a Dollar CBDC. Most respondents have associated the concept of CBDC with crime activities fostered by cryptocurrencies, which could be the major reason why the general public in the US are pushing themselves against the idea of CBDC. The US Federal Reserve is being exceptionally prudent on the issuance of US CBDC. In contrast with most of the countries focusing on the benefits of a CBDC, the US have identified many potential challenges and issues that would arise with the issuance of a CBDC, mainly concerning the security challenges, such as cyber attack, fraud and implementation of anti-money laundering laws in CBDC.

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The Deputy Treasury Secretary Justin Muzinich also said that “ finding a balance between preventing illicit activity and respecting consumer privacy will be a challenge.” The dilemma between security and privacy is a major challenge for US CBDC, as US citizens are more sensitive to cyber privacy issues.

“We do think it’s more important to get it right than to be first and getting it right means that we not only look at the potential benefits of a CBDC, but also the potential risks, and also recognize the important trade-offs that have to be thought through carefully,” — U.S. Federal Reserve Chair Jerome Powell

The US have been researching and developing a hypothetical CBDC with researchers at MIT, but the feasibility and the progress has been much slower than other countries such as China, Japan and Singapore.

7. Concluding remarks

The pandemic has accelerated the transition from physical form of payment to digital form of payment. The maturity of Blockchain Technologies and digital payment systems have prompted more governments to be proactive in the research, experimentation and implementation of Central Bank Digital Currencies. Although many design questions such as design of digital wallet, KYC metrics have been answered, more problems concerning public policy framework such as interest rate, money supply, anti-money laundry are still yet to be resolved. Apart from the government side, the readiness of consumers and businesses for this revolution also need to be addressed. Efforts need to be made to improve the financial literacy of the general public, while also preparing businesses to adapt and transform their current payment mechanism and business model to embrace CBDC payments.

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  1. Bharathan, Vipin. “Central Bank Digital urrency: The First Nationwide CBDC In The World Has Been Launched By The Bahamas.” Forbes, Forbes Magazine, 22 Oct. 2020, www.forbes.com/sites/vipinbharathan/2020/10/21/central-bank-digital-currency-the-first-nationwide-cbdc-in-the-world-has-been-launched-by-the-bahamas/?sh=3363a541506e.

  2. De, Nikhilesh. “Deputy Treasury Secretary Discusses US CBDC Plans.” CoinDesk, CoinDesk, 7 Oct. 2020, www.coindesk.com/muzinich-treasury-digital-currency.

  3. “Digital Bahamian Currency.” SandDollar, www.sanddollar.bs/.

  4. “Fed’s Powell: More Important for U.S. to Get Digital Currency Right than Be First.” Reuters, Thomson Reuters, 19 Oct. 2020, uk.reuters.com/article/us-usa-fed-powell-digitalcurrency/feds-powell-more-important-for-u-s-to-get-digital-currency-right-than-be-first-idUKKBN2741OI.

  5. Bank for International Settlement. “Impending Arrival — a Sequel to the Survey on Central Bank Digital Currency .” BIS Papers , No 107 , Jan. 2020.

  6. Mapperson, Joshua. “Most Americans Are against a Digital Dollar CBDC, Survey Reveals.” Cointelegraph, Cointelegraph, 25 Sept. 2020, cointelegraph.com/news/most-americans-are-against-a-digital-dollar-cbdc-survey-reveals.

  7. Monetary Authority of Singapore. “PROJECT UBIN PHASE 5 Enabling Broad Ecosystem Opportunities.” 2020.

  8. “Project Ubin: Central Bank Digital Money Using Distributed Ledger Technology.” Monetary Authority of Singapore, www.mas.gov.sg/schemes-and-initiatives/project-ubin#:~:text=The successful conclusion of the,and built on blockchain technology.

  9. PwC. “The Rise of Central Bank Digital Currencies (CBDCs).” PwC, Nov. 2019.

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