As the digital revolution in global financial systems continues to gain traction, the development and exploration of Central Bank Digital Currencies (CBDCs) is becoming an increasingly pivotal topic.
A staggering 93% of the world’s central banks are engaged in various forms of CBDC-related work, signifying a significant paradigm shift in global monetary policy.
The Evolution of CBDCs and Their Increasing Relevance
According to a recent survey conducted by the Bank for International Settlements (BIS), four central banks have introduced operational retail CBDCs.
These trailblazers, hailing from The Bahamas, Eastern Caribbean, Jamaica, and Nigeria, have initiated a trend that 18% of central banks worldwide are projected to follow in the foreseeable future.
Insights from CBDC experiments carried out by multiple central banks including the Reserve Bank of Australia, the Federal Reserve Bank of New York, and Sveriges Riksbank are significantly shaping the global financial narrative.
Various institutions, such as the Central Reserve Bank of Peru and the European Central Bank, have initiated public consultations or progress reports detailing the potential facets of digital versions of their local currencies, highlighting the gravity of the global shift toward CBDCs.
Impact of Cryptocurrency Market Turbulence on CBDC Development
Cryptocurrency markets have witnessed substantial turbulence throughout 2022 and early 2023, shaking the confidence of investors and prompting regulators to seek greater control.
The failure of significant cryptoasset providers, including TerraUSD and FTX, has prompted 60% of central banks to accelerate their efforts in CBDC research and development.
In response to these challenges, central banks and international standard-setting bodies have strengthened their focus on cryptoassets, engaging in extensive policy work to fortify regulatory approaches to these new forms of digital currencies.
Both the Financial Stability Board and the Basel Committee on Banking Supervision have published frameworks and standards for dealing with cryptoassets, reflecting the urgency and importance of these new financial instruments.
Accelerated Adoption and Advancement of CBDCs
More than half of the central banks surveyed are now engaged in tangible CBDC experiments or working on pilots. These efforts represent a marked increase from previous years, with Sveriges Riksbank, among others, completing successful retail and wholesale CBDC tests.
The results also highlight that Emerging Market and Developing Economies (EMDEs) are leading the CBDC race, with all current live CBDCs issued in these jurisdictions.
In an interconnected digital world, the spread of Fast Payment Systems (FPS) has been a crucial evolution. Over 70% of jurisdictions surveyed have an FPS in operation, with an additional 18% planning to launch one.
CBDCs and FPS can serve similar purposes such as promoting financial inclusion, faster payments, and fostering innovation. However, there is a key distinction – CBDCs represent central bank money, while FPS involves commercial bank money.
In the face of increasing uncertainty, central banks are acknowledging the potential of having both an FPS and a CBDC, with more than 80% seeing the value in this strategy.
The increasing likelihood of CBDC issuance, particularly in EMDE jurisdictions, suggests a bright future for these digital currencies. By the end of the decade, we could see as many as 15 retail and nine wholesale CBDCs in circulation, a testament to the swift embrace of the digital revolution in global financial systems.
