Central Banks Advance State-Controlled Digital Currency Projects

Central bank-issued digital currency experiments outside of the United States are taking small steps forward as part of an in-depth look at private sector stablecoins.

Why is this important: Governments are interested in the potential for faster and more efficient payment options between countries with digital currencies, but want to preserve monetary and financial stability.

  • So-called CBDCs are government-backed digital currencies for consumer and business use, while stablecoins are cryptocurrencies designed be pegged to government-issued currency such as the US dollar or British pound.

State of play: Nine out of 10 central banks are considering issuing CBDCs, according to a survey of more than 80 central banks by the Bank for International Settlements last year. And CBDCs have seen small inroads in projects outside of the US

  • The People’s Bank of China announced last month that it would expand the pilot project of its digital currency called “e-CNY” to more cities.
  • A decades-old Belgian banking messaging system is teaming up with a French IT company to experiment with cross-border payments.
  • Bahamians could use facial recognition software to authorize mobile payments with their CBDC Sand Dollar.

Meanwhile, Norway has partnered with start-up Nahmii to develop an experimental test prototype of its CBDC using a private company Ethereum blockchain.

  • Norges Bank chose the Ethereum blockchain because it is open source. “The plan is to make the code public, making it easy to use for collaboration and a foundation for a technical sandbox,” a spokesperson told Axios.

United States is the “furthest behind” on these efforts compared to the four largest central banks, according to the Atlantic Council, a think tank that tracks CBDCs.

  • The Biden administration’s executive order on digital assets asks at least to consider the pros and cons of CBDCs (see below).

The plot: Republican members of the U.S. House Financial Services Committee last week sent a letter to Federal Reserve Chairman Jerome Powell questioning whether the benefits of a CBDC “outweigh the risk for commercial banks, the existing payment system and consumers”.

reality check: CBDCs are currently more theoretical and IRL may not be very useful for ordinary people to start with.

  • For example, the Bahamian CDBC was introduced in October 2020, but the sand dollar represents less than 0.1% of the currency in circulation there, the IMF said in a recently released report.

Separately, CBDC crypto-poo-poo natives and don’t consider them cryptocurrencies (they don’t even need to use blockchain!).

  • The very premise of centralized authority behind a digital asset goes against the industry ideology of disrupting traditional financial systems.
  • Confidentiality is another major issue.

💭 Crystal’s Thought Bubble: Private sector stablecoins will likely be regulated before the Fed acts on CBDCs.