Will 2022 be the year for CBDCs?

The heat is on in the race for traditional banks to issue Central Bank Digital Currencies (CBDCs). In the simplest terms, CBDCs are digital versions of fiat currencies that a government “central bank” would issue as an alternative to paper money. Same value, different format. The idea has been around for a while, but for the most part, traditional financial institutions were not very interested in the idea. Until now.

Why? Because traditional banks have finally realized that digital currencies are here to stay. And for those that don’t come to the party soon, they could potentially lose customers, market share, and profits.

Will 2022 be the year of CBDCs? If you’ve tracking the activity in this area of the cryptocurrency marketplace, you may be inclined to think, yes.

Consider these statistics from the Atlantic Council, a U.S. think tank that is tracking the development of CBDCs around the world:

  • 87 countries are exploring a CBDC. That’s up more than a 150% from May 2020, when only 35 countries were considering a CBDC.
  • 9 countries have a digital currency.
  • 14 countries, including China, South Korea, and Sweden, are currently piloting a CBDC.

“These…countries represent over 90% of the world’s gross domestic product (GDP),” Business Insider explains. “The pandemic, the surge in interest from ordinary investors, and the price of Bitcoin hitting an all-time high in the last 12 months have changed the landscape considerably.”

Interestingly, some of the countries with the largest Central Banks have yet to move beyond the thinking phase to the pilot phase of CBDCs.

Take, for example, the European Union.

“In July 2021 we decided to launch a digital euro project,” the European Central Bank said earlier this year. “This doesn’t mean that we will necessarily issue a digital euro, but rather that we will get ready to possibly issue it.”

The United Kingdom also is exploring a CBDC. “Exploring” is the operative word here as the country announced a “research and exploration” phase would begin in 2022.

“In 2022, HMT (HM Treasury) and the Bank (Bank of England) will launch a consultation which will set out their assessment of the case for a UK CBDC, including the merits of further work to develop an operational and technology model for a UK CBDC,” the Bank of England said in November. “It will evaluate the main issues at hand, consider the high-level design features, possible benefits and implications for users and businesses, and considerations for further work.”

In the U.S., debate continues as to whether to officially enter market. A recent study on stablecoins released by the federal government cautioned that these coins, which remain relatively stable in value, are a threat to people and the traditional fiat currency systems.

US Treasury Secretary Janet Yellen is on the fence. “I see both pros and cons doing it,” she recently said. “And my own mind is not made up about this.”

Not surprisingly, when it comes to CBDCs, “of 4 largest central banks (the US, the Euro Area, Japan, and the UK), the United States is furthest behind,” the Atlantic Council reports.

In the meantime, China continues to move forward with its digital renminbi pilot project, which began in April. It also joined the United Arab Emirates (UAE) Hong Kong, and Thailand in a joint CBDC cross-border test. Called the “Multiple Central Bank Digital Currency (m-CBDC) Bridge,” this pilot tests the use of DLT for foreign currency payments.

Australia, Malaysia, Singapore and South Africa are “moving forward with the world’s first cross-border central bank digital currency exchange program led by the Bank for International Settlements (BIS), which is known as the central bank of central banks,” Time magazine reports.

“These platforms would enable financial institutions to transact directly with each other in CBDCs, which could eliminate the need for intermediaries and reduce the time and cost of transactions,” Reuters explains.

In the meantime, Bahamas Sand Dollar CBDC, which was launched in 2016 and is the first CBDC issued by a central bank, is moving right along, and is now integrated into a Bahamas-based stock exchange. And Nigeria recently became the first African country to launch a CBDC, the eNaria.

Whether it’s the US, the UK, or the Eurozone, the prime moment of opportunity to join the growing movement toward CBDCs could come in the new year. The question becomes, will they manage and accept the risks — as they do with traditional fiat currencies — to reap the rewards of a digital form of their money?

“The dilemma between facilitating money laundering or competing with private banks in the provision of deposits led many central banks to keep their CBDC projects on hold,” noted Santiago Fernández de Lis, Head of Regulation, BBVA, in a recent article published in the International Banker.

But for how much longer can these major financial systems remain on the sidelines? 2022 may hold the answer.

Joyce Pavia Hanson




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