The purpose of this white paper, written for practitioners and enthusiasts alike, is to present a global perspective on the state of central bank digital currency (CBDC) developments to date.
As more countries begin to explore digital currency options and central banks ramp up CBDC pilot experiments, our hope is that this paper can serve as a valuable resource for all stakeholders coordinating to solve this multidimensional puzzle.
Enclosed is an examination of the growing body of CBDC literature across central banks and international organizations, such as the Bank for International Settlements (BIS) and the International Monetary Fund (IMF). In conjunction with interviews The Block Research conducted with various experts, we present the global view on central bank digital currencies today: exploring the history, motivations, early technical designs, and implementations of the world’s most advanced CBDC proposals. While not completely exhaustive of every initiative globally, the white paper strives to present the most up-to-date snapshot of publicly disclosed CBDC proposals, including both retail and wholesale CBDC applications. Questions relating to monetary policy, financial stability, policy considerations, among others, have been proposed throughout the CBDC literature and were beyond the scope of this report.
Key findings and interview themes from the report include:
- While only a handful of central banks are likely to progress toward full project implementation and issue a digital currency within the next 5 years, several have already completed or are in the process of initiating advanced stage pilots.
- Redesigning cash to be digitally native offers a wide opportunity set, from transaction efficiency to asset programmability. However, it still remains to be seen what the true appetite is among policymakers and central bankers. Therefore, public-facing progress will continue to inch forward methodically, but slowly. Meanwhile, the digital assets industry offers a relatively low-risk alternative for idea generation and live experimentation.
- The world’s first retail CBDC pilots taught stakeholders that private market participation is necessary to maintain competitiveness and adapt to technological change. Furthermore, jurisdictions provided a clear legislative path to project implementation, creating regulatory sandboxes for authorized pilot testing. The success of these first-movers is a testament to the importance of public-private partnerships.
- Most CBDC proposals maintain the two-tier monetary system architecture that rose to prominence in advanced western economies. Central banks believe it is unpragmatic to disintermediate financial institutions, opting instead for strategic utilization of licensed intermediaries to assist with CBDC life cycle processes; these agents often not only include traditional commercial banks, but non-bank service providers as well.
- Over the past 5 years, central bankers' views on CBDC have evolved to become more accepting of collaborative innovation, particularly from the standpoint of joint research and knowledge sharing. In terms of implementation, the challenge isn’t necessarily the technology, but the prerequisite social coordination across all stakeholders, as well as disputes over key policy questions in relation to CBDC design and governance.
- A common misconception about central bank digital currencies is that privacy can’t exist while transacting. One leading central bank recently explored CBDC anonymity with leading distributed ledger technology (DLT) firms; together they tested a novel proof of concept (POC) using “anonymity vouchers.” This POC successfully anonymized CBDC transfers in a distributed ledger environment.
- Privately-issued stablecoins and CBDCs are not contradictions, but rather complements by design; both require trusted, secure and regulatory compliant financial networks to support digital assets. Should a retail CBDC proposal involve asset tokenization using private-public key cryptography, the current digital assets market infrastructure (wallets, exchanges, custodians, stablecoin providers, etc.) would likely play a supporting role.
The paper is broken out across five parts:
Part 1 Explores the lessons learned from the first completed retail CBDC pilots
Part 2 Examines current retail CBDC pilots in the Bahamas and the Carib-bean, focusing on the paths to implementation
Part 3 Provides a historical summary of the largest public wholesale CBDC pilots, and the potential opportunities within interbank settlement and cross-border payments
Part 4 Gives a current perspective on China’s Digital Currency Electronic Payment system
Part 5 Offers a brief look at other CBDC developments within advanced economies
© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.