The world is going through a significant change in financial trends. Thanks in part to the coronavirus pandemic and more, countries and people are beginning to see that it is time for a fundamental shift in currency formats and a change in the status quo.
So far, the primary focus appears to be possible Central Bank Digital Currencies (CBDCs).
What is a Central Bank Digital Currency?
Put simply; a CBDC is the digital version of a sovereign country's fiat currency. These assets are essentially cryptocurrencies, but with approval and backing from governments and central banks.
The push for CBDCs has been primarily due to the increase in digital payments. The coronavirus pandemic forced businesses and individuals to abandon paper money and move to digital payment forms instead. Countries decided that perhaps it was time to make the switch to digital money as well.
The CBDC utilizes the functionality of blockchain technology to provide effective monetary policy handling. These assets can process more transactions in less time, they are more secure, and they can offer sufficient cross-border payments without delays and cost implications.
Governments also benefit from issuing CBDCs. A central bank has control over CBDC use and circulation, and it can also access users' information in a bid to stop criminal acts like terrorist financing and money laundering. Theoretically, the implementation of CBDCs makes sense.
However, it is worth noting that the monetary policy implications of these CBDCs are still under debate. Some critics believe that CBDCs will still provide a means for anti-censorship, and others have questioned whether central banks will be able to keep a steady supply that will hold inflation in check.
Simultaneously, some regions have not seen increases in digital payment adoption – despite the coronavirus. These countries will be much less keen to adopt CBDCs.
Still, many developed nations have shown propensities towards digitizing their currencies. Let’s take a look at some of them:
As with many technological advancements, China leads the way in CBDC development. The Chinese government made overtures to improve blockchain adoption in October 2019, and 2020 saw the country move fast in CBDC development.
Currently, trials for the "digital yuan" have been at a quick pace. Last month, local news sources confirmed that three internet companies had joined the tests for the asset. The firms include Didi Chixing, China's largest ride-hailing service commercial products and bike-sharing company Meituan, and video-based social media site Bilibili. Each of them had incorporated the digital yuan to allow citizens in the Suzhou district to spend the currency on their apps.
The Peoples' Bank of China has also brought several other tech companies into its tests, including Alipay and WeChat Pay. Huawei has announced that it will provide a digital yuan-compatible wallet with its upcoming Mate e40 Series flagship devices. According to a report from Economic Information Daily, a gas station also ran a test with the digital yuan in October.
It is unclear when the Peoples' Bank will launch the asset, but things are moving at an incredible pace.
Like China, Japan has also made significant progress in digitizing its currency. The Bank of Japan announced a plan to launch proofs-of-concept for its "digital yen" months back, and it hasn't looked back since then.
Recently, Reuters reported that the Bank of Japan had called up 30 firms to partner with it on the digital yen initiative. According to the report, the companies come from different sectors of Japan's economy. The list includes brokerage firms, banks, tech firms, utility companies, and more.
The committee will be led by Hiromi Yamaoka, a former executive for the Bank of Japan.
Several countries have made progress with digital currencies in Europe. France, Germany, and more are leading the charge on the continent. However, the European Union as a whole could be heading towards a continent-wide CBDC too.
In September, Christine Lagarde, the European Central Bank (ECB) president, said in an online panel that the agency was considering issuing a digital currency. The agency has since released a consultation paper on the asset, explaining that it plans to use the "digital euro" as a compliment for traditional cash.
The consultation paper appears to be the final step towards a full-fledged study on a possible digital euro's implications. The ECB has confirmed that studies will begin in 2021, although it is unclear when exactly this will be.
All in all, there are hopes that a digital euro could come in the next two years.
Other Notable Countries
While the three jurisdictions above have been the most prominent when it comes to CBDC development, it is worth noting that some other counties have made progress as well.
Last month, the Innovation Center at the Bank of International Settlements' Swiss Center announced that it had completed two proofs-of-concept with the Six Exchange, Switzer land's top stock exchange platform. Per an announcement, the initiative – known as Project Helvetia – will study the feasibility of transferring digital assets through a wholesale-facing CBDC.
Bloomberg also reported last month that the Swedish government was making progress with its CBDC. Per the report, the government had launched a formal review of a national cryptocurrency, hoping to begin work on the digital asset by 2022.
Turkey is also toeing the same line. In November, President Tayyip Erdogan reportedly ordered that the first round of tests for the country's CBDC be completed before the end of 2020. It is unclear whether this was actualized, but more work is expected going into 2021
All eyes will be on these economies and much more as they chart a course for effective currency digitization. With the focus on digital payments getting even more steady, it is expected that more countries will fall in line.