Governments want in on crypto, too

Twitter CEO Jack Dorsey may think bitcoin will unite the planet, but the governments of the world are less sure.

In fact, rather than pinning their hopes on pure cryptocurrencies like bitcoin or ether, many are taking matters into their own hands and exploring central bank digital currencies (CBDCs).

Managed and legitimized by a national bank, CBDCs could give poorer people greater access to the perks of modern, digitized banking systems, like convenience and security. They could also lower the cost of banking by eliminating fees, and they promise to provide a simpler and faster way for immigrants to send remittances to their family and friends back home.

“Millions of people who currently can't afford to be in the banking system and therefore are relegated to conducting economic activity in physical cash would be able to get online and participate in an internet-based economy more easily,” Lev Menand, a lecturer and fellow at Columbia Law School, told Emerging Tech Brew.

But CBDCs, like all things digital, could be susceptible to hacking and other forms of privacy breaches, both from third parties and prying governments alike. And unlike cryptocurrencies, which pride themselves on being decentralized, CBDCs are as centralized as it gets: They’re legal tender minted and offered by a central bank.

It’s still early days for CBDCs—only five countries have rolled out digital currencies nationwide: the Bahamas, Antigua, Saint Kitts, Saint Lucia, and Grenada. But the number of countries exploring digital currencies more than doubled in the last year, rising from 35 in May 2020 to 81 as of July 2021. These 81 countries are not taking a uniform approach, but instead are experimenting with different strategies and moving at different speeds. Read on for a brief tour of some notable efforts.

China

With the rollout of the digital yuan in April 2020, China became the first major economy to pilot a digital currency. The digital yuan is designed to eventually replace physical cash, and banks allow customers to exchange their banknotes for digital currency. A Chinese central bank official claimed the digital yuan has “controllable anonymity,” with protections in place to curb illegal activity like money laundering.

• So far, the program has generated over $5.39 billion in transactions.
• China is looking to test the currency across borders during the 2022 Beijing Winter Olympics, when there's an influx of foreign tourists.

Japan

In neighboring Japan, the enthusiasm is much more muted. Japan’s economy has an entrenched preference for conducting transactions in cash, which gives the central bank less incentive to chase a CBDC. Nevertheless, in April 2021, the Japanese central bank created a test environment to see the value of a CBDC in action—these trials of digital yen are expected to last until March 2022.

Nigeria

In Nigeria—the largest economy in Africa by gross domestic product—the central bank has been researching the e-naira since 2017. And soon, in October 2021, the country will pilot the digital currency. Nigeria’s motivation extends beyond just financial inclusion within the nation: It’s the tenth-largest remittance recipient in the world, relying on the cross-border payments for $17 billion each year, or 4% of its GDP. With a government-backed digital currency, expats will likely be able to send money back home with lower fees.

United States

The US’ approach to CBDCs has been...slow. The caution likely comes from the fact that the US dollar serves as the de facto international reserve currency, making up more than 60% of global foreign exchange reserves.

• Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen have stated the US is interested in implementing a digital currency in the near future, but the specifics haven’t been revealed. Powell said in a congressional hearing in July that the Fed would release its findings on CBDCs in September 2021.

The Bahamas

Starting with a trial run on the island of Exuma, the Caribbean island nation expanded its digital currency—called the “sand dollar”—nationwide in October 2020. It was the first CBDC adopted nationally in the world. The Central Bank of the Bahamas claimed it was pursuing the sand dollar to crack down on illicit activity, like counterfeiting and money laundering, and to provide banking access to residents on the smaller islands in the archipelago.

The European Union

European Central Bank President Christine Lagarde stated in March 2021 that a CBDC could be issued in the EU within four years. While the European Central Bank alone is tasked with creating a digital euro, each country in the EU has contributed to researching its applications and feasibility.

• France has been spirited in its collaboration with the ECB, trying out a number of pilots and tests to examine its viability.
• Germany has been more conservative in its approach, opting instead to assess the risks that might present themselves if a CBDC were adopted.

Britain is charting its own route post-Brexit, with a partnership formed in April 2021 between Her Majesty’s Treasury and the Bank of England designed to explore the potential of a CDBC.

Ecuador

Not all efforts to launch a CBDC are successful. Ecuador’s central bank was an early adopter—it tried to establish a digital currency in 2015 to improve banking access for the nation’s poor—but it was derailed by low adoption and a lack of trust in the government. It shuttered in 2017.

Venezuela

Venezuela also tried its hand at a digital currency in 2018 with the petro. The petro was backed by oil, gold, iron, and diamond resources, in an attempt to distance the Venezuelan economy from the US dollar. It failed to catch on with the wider populace and is barely used in any transactions at all. President Nicolás Maduro unveiled a second attempt at a CBDC when he announced Venezuela's bolivar will be going digital in October 2021.

Looking ahead…

CBDCs have enormous potential to reshape the way that banking is done in the digital age. They can lower the cost of banking and make its benefits more accessible to all—but whether that promise is met depends entirely on preparation and implementation.

“A large monetary system with a lot of players [needs] an understanding of how existing institutions are going to change as a result of [CBDCs] and be prepared for that,” Menand, the Columbia lecturer and fellow, said. “If you don't do a good job thinking them through, just like any project, you can cause problems. A CBDC isn't something that just takes care of itself—it requires a lot of coordination and work.”