Central bank digital currencies: the game changers
Despite their volatility, cryptocurrencies are gaining acceptability as an alternative asset class. However, mass adoption is unlikely, and in the meantime, central bank digital currencies are gaining traction, reports flow’s Graham Buck
W
hile the world grappled with Covid-19 in 2020, central bank digital currencies (CBDCs) quietly
moved forward, largely unremarked upon. By contrast, private cryptocurrencies such as bitcoin continued to attract publicity.
The Bahamas, which in 2018 announced a project to develop its own CBDC with the declared aim of promoting financial inclusion and access across the islands, was first off the starting block. The nation of around 390,000 people officially launched the so-called ‘Sand Dollar’ through the Central Bank of The Bahamas in October 2020,1
although reports suggest a low-key
launch, with around US$130,000-worth of Sand Dollars in circulation over the early weeks, against US$508m in traditional Bahamas dollars. As Deutsche Bank research analyst Marion Laboure notes, “with The Bahamas having 90% penetration for mobile devices and one of the highest per-capita incomes in the Americas, the adoption rate of the Sand Dollar is likely to be high and quick. Furthermore, the Sand Dollar is pegged to the US dollar (USD); in effect, it can be seen as a pilot release of a digital USD by proxy.”
A CBDC initiative is also well advanced in the Eastern Caribbean, under the supervision of the Eastern Caribbean Central Bank. The International Monetary Fund
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(IMF) has encouraged the development of a common digital currency across the region to lessen dependence on cash and cheques. The test phase of a digital Eastern Caribbean dollar has been run over a private permissioned blockchain on IBM’s Hyperledger Fabric.
But both are relatively small-scale CBDC initiatives and could be regarded as the hors d’oeuvre before the main course, which will be served when the world’s main central banks are ready to launch their own CBDCs.
The People’s Bank of China (PBoC) is well ahead of Western institutions, following a transition in the Chinese authorities’ attitude towards digital currencies. The PBoC began reviewing the concept in 2014. By 2020 it was ready to commence trials of a PBoC-backed ‘digital yuan’ as part of the government’s push for a cashless society, with a full-scale release expected ahead of the Beijing Winter Olympics, which opens on 4 February 2022. As Laboure notes, the Chinese adoption rate of the government’s CBDC – influenced by existing consumer habits and demographics – is likely to be faster than in most other countries.
Along with China, another front-runner is Brazil,2
where Roberto Campos Neto,
President of the Banco Central do Brasil (BCB), has said that a BCB-backed
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