Central bank digital currencies: what is CBDC and the main projects around the world

Published on Nov 04 2022.

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Have you been following the advances in the agenda for central bank currencies? CBDCs (Central Bank Digital Currencies) have been discussed in over 60 countries according to a PwC CBDC Global Index study. And here, we’re keeping a close eye on that transformation!

This is a movement that started around 2014 and that now, as some projects are being implemented, accelerates even more. The World Bank, the International Monetary Fund (IMF) and the World Economic Forum are some of the entities that regularly debate how these assets can be used to contribute to the Financial inclusion, to reduce the circulation of paper money and to reduce crimes related to financial fraud.

In this article, we’ll share what’s most relevant in the discussion in Brazil and other countries on advances in central bank digital currencies. Check it out!

 

What is CBDC?

As mentioned, CBDCs stands for Central Bank Digital Currencies—which, as the term suggests, are digital currencies created by central banks.

Most of them leverage blockchain technology, and that is one of the reasons why there are similarities with cryptocurrencies, such as bitcoin and etherum. However, there are some essential differences between them: Cryptocurrencies are basically a decentralized and non-regulated asset (without an issuer party), which makes them much more volatile and causes a lower level of governance than for central bank digital currencies—which in turn have an issuer party and are regulated.

Therefore, CBDC would be a new form of representation for a currency that is already issued by monetary authorities in paper money, but now in digital format.

 

Types of digital currencies developed by central banks

In ongoing projects all over the world—which we’ll talk more about later—, there are two potential types of CBDC:

  • Digital currencies that can be bought by citizens or companies as digital money, which are complementary to money bills and can be kept and used in transactions through digital platforms;
  • Digital currencies that can only be used in interbank operations, which means that its use is limited to financial institutions.

Among the projects falling into the first category, 23% have already reached the deployment stage, according to data collection conducted by PwC. Those projects are more advanced in emerging economies, since the benefit of financial inclusion is much more extensive.

Among CBDCs projects, in which its use is oriented to interbank transactions, 70% are still running pilots. Those projects focus on countries where the financial and banking systems are more developed.

In this article, we’ll focus on digital currencies being created by central banks for the entire population to use as digital money—therefore, mainly in developing economies. 

What are the central bank digital currencies coming up in the world?

Among the more than 60 countries and regions that are evolving their CBDC projects, there are different levels of maturity in terms of implementation and, as with other guidelines (such as Open Banking e Instant Payment System), there are particularities in each of them.

We will list below some of the most relevant and promising projects at the moment, as well as the movement in Latin American countries for adopting central bank digital currencies.

 

Brazil: Advances in Digital Real

As part of the agenda of Bacen for the modernization of the Brazilian financial system, the Digital Real should contribute to the internationalization of the country's economy and to further strengthen the Pix. The currency will be a token and will facilitate new business in the digital economy.

  • The first guidelines for the Digital Real were released in May 2021, and the pilot project should start in 2022;
  • The Digital Real will apply to instant payments, such as Pix;
  • The currency has bank secrecy, which serves as encouragement for payments through the Internet of Things (IoT) and intelligent contracts. Also, it will be able to operate in association with other countries’ digital currencies.

 

Want to learn more about the potential of the Digital Real? Watch the webinar hosted by Bacen:

 

CBDC in China: Digital Yuan is already in final testing stage

The Digital Yuan (DCEP) is in advanced testing, which sets China in the forefront of countries researching digital currencies: The project started in 2014—concurrently with the Chinese government repression to using cryptocurrencies.

  • In April 2020, the country became the first great economy to start a digital currency project;
  • The pilot project was carried out in four big cities in the country, located in different regions: Beijing, Shanghai, Shenzhen and Jingjinji;
  • The Digital Yuan was issued by the National Bank of China for commercial banks operating in the country, which in turn distribute the currency to the population;
  • By October 2021, transactions totalized over 5 billion Yuan in digital format—around 700 million dollars;
  • The Chinese CBDC is expected to help drive a promising digital financial service industry;
  • The use of digital currency should be extended during the Winter Olympics in Beijing in 2022.

 

Uruguay: A global leader in CBDC; however, no concrete plan has been announced

Uruguay is the only country in Latin America to figure among the most advanced CBDC projects globally, with one successful pilot conducted between 2017 and 2018. At the time, no other country in the world had started a digital currency project with tokens for consumers.

  • The pilot project was carried out for six months and defined limits for issuing: 20 million dollars for 10 thousand mobile phone users, restricted to 30 thousand dollars per wallet and 200 thousand dollars for businesses enrolled in the project;
  • The Uruguayan initiative for digital currencies leveraged an internal system, rather than blockchain;
  • The e-peso is designed to be anonymous, yet trackable, which can avoid expenses on duplicity and counterfeit money;
  • There is no information on incidents during the pilot project, but since it was concluded in April 2018, the central bank of the country hasn’t made further investments in the project nor announced the next steps for its release;
  • The Central Bank of Uruguay, however, still considers issuing e-peso in scale for the population.

 

The Bahamas: Sand Dollar is the most developed of all central bank digital currencies globally

The Sand dollar, project, the Bahamas’ CBDC, is the most developed CBDC globally and has risen to facilitate financial inclusion in more than 30 inhabited islands of the archipelago.

  • Its pilot started in December 2019, and the digital currency was officially released in October 2020;
  • The Sand Dollar can be bought by all country residents at accredited financial institutions. The country’s CBDC is kept in digital wallets that are included in apps or physical cards;
  • Information on user earnings and spendings can be leveraged for microcredit operations.

 

Watch the video to learn how the Sand Dollar has transformed lives in the Bahamas when facing challenges such as COVID-19 and natural disasters:

Nigeria: e-Naira puts the African country in the forefront of CBDCs

The Central Bank of Nigeria announced the release of its digital currency e-Naira on October 25th, 2021. The goal is to improve efficiency in cross-border payments, expand financial inclusion, make transfers easier and reduce informal payments and transfers.

e-Naira has made Nigeria become one of the first countries to release its own CBDC.

Chile: first steps for issuing a Digital Peso?

In September 2021, the Central Bank of Chile announced that a strategy for issuing the country’s CBDC will be defined at the beginning of 2022—which hasn’t been confirmed yet.

  • In case they proceed with the project, it is expected to contribute to the stability and effectiveness for the Chilean monetary policy;
  • The working group studying a possible propostthat of CBDC is focused on assessing, among other topics, the risks related to fraudfinancial;
  • The working group studying a possible propostthat of CBDC is focused on assessing, among other topics, the risks related to fraudfinancial statements;
  • The financial industry in Chile is considered one of the most stable ones in Latin America and, in case the agenda moves forward, it will certainly contribute to good practices for digital currency projects in other countries in the region.

Mexico: Banxico expects their digital currency to be released in 2024

The Central Bank of Mexico (Banxico) has recently announced that they intend to put their digital currency in circulation in 2024. In order to do that, they are developing an implementation platform based on the existing compensation and settlement infrastructure on SPEI, the Mexican electronic payment system.

It is also known that it won’t be a cryptocurrency based on blockchain; in fact, it will be a digital version of the Mexican currency. By releasing their CBDC, the institution intends to contribute to financial inclusion in the country—with greater opportunity to open accounts for banked and unbanked individuals—and increase the use of quick, secure and interoperable payment solutions.

Also, the goal is to have a versatile asset that drives innovation and enables different functionalities to be implemented, such as automation mechanisms.

More digital currency initiatives around the world

Besides the cases mentioned, a number of countries also have their own digital currency projects, and we should watch as those CBDCs are released in the upcoming years.

Check the graph below for the most evolved initiatives according to PwC CBDC Global Index:

CBDC: Leading Digital Currency Projects Around the World - dock

10 most advanced CBDC projects in the world

  1. Bahamas
  2. Cambodia
  3. China
  4. Ukraine
  5. Uruguay
  6. Ecuador
  7. eastern caribbean
  8. Sweden
  9. South Korea
  10. Türkiye

Top 10 most evolved CBDC projects globally

  1. The Bahamas
  2. Cambodia
  3. China
  4. Ukraine
  5. Uruguay
  6. Ecuador
  7. Eastern Caribbean
  8. Sweden
  9. South Korea
  10. Turkey

 

CBDC projects are part of the pathway for a future of payments and banking

Although there are issues specific to each region, the main goal for governments in creating their own digital currencies is to make the financial industry more efficient.

Therefore, it brings great benefits for economies, such as:

  • Ensuring more secure transactions.
  • promote the bankarization;
  • Promote banking;
  • Reducing costs related to issuing a physical currency;
  • Encourage innovation in means of payment and financial services;
  • Encourage innovation in means of payment and financial services;
  • Encouraging new business models to be created in a variety of industries;
  • Enabling new players to join the industry;
  • Improving efficiency in cross-border transactions;
  • Bringing programmability for settlement and payment systems;
  • Reducing the average ticket for financial transactions;
  • Improving efficiency for wholesale and retail payments.

At Dock, we’re keeping a close eye on this transformation and doing our part to make financial translations more streamlined and free of limitations!

 

Takeaways from digital currencies: CBDCs advance around the world

  • CBDC stands for Central Bank Digital Currency.
  • There are several benefits for economies issuing CBDCs, such as promoting financial inclusion, lowering costs related to transactions and reducing financial fraud.
  • The agenda on central bank digital currencies advances around the world as some countries already are already using CBDC—such as the Bahamas—and others are in advanced testing stages—such as China.
  • In Latin America, Uruguay was the CBDC project pioneer, and Brazil is making progress in discussing the Digital Real, which should be implemented in 2022.

 

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