Central bank digital currencies, or CBDCs, are gaining traction with 109 countries actively exploring or engaging with them across various phases of development, according to a report compiled by Finbold, a UK-based financial news platform. Forty-five countries are involved in research, 32 in development, while 21 are in the pilot stage. Eleven countries have already launched their CBDC projects, while two have cancelled their involvement.
The total number of countries in advanced exploration phases of CBDC development reached its highest level in June, with 64 countries, a 28 per cent increase from 50 countries in May last year.
The notion that the rise of cryptocurrencies and stablecoins poses a threat to national currencies is one of the key drivers behind CBDCs. CBDCs are the digital form of a country’s money issued by its central bank, and are similar to cryptocurrencies but with a value equal to the country’s fiat currency. They are expected to provide a middle ground for the highly volatile cryptocurrency market, reducing risks associated with using cryptocurrency and providing a stable means of exchanging digital assets.
Up to $5 trillion could move to newer digital money formats such as CBDCs and stablecoins by 2030, of which about half could be linked to distributed ledger technology or blockchain, according to a report by Citi Global Perspectives and Solutions. Governments are positioning CBDCs to boost the efficiency and safety of payment systems, and to accelerate the shift to a cashless society.
The UAE Central Bank began enacting its digital currency strategy, Digital Dirham, in March. It signed an agreement with Abu Dhabi’s G42 Cloud and digital finance services provider R3 to be the infrastructure and technology providers for the implementation of the CBDC.
Despite the rapid acceptance of CBDCs, there are some concerns, such as threats to privacy and operational challenges. Infrastructure development, ensuring interoperability, and managing the transition from cash to digital currency can be intricate and expensive for governments and central banks.
Some of the risks to individual privacy include governments and central banks being able to monitor and track financial transactions, and the potential for cybersecurity vulnerabilities.
The International Monetary Fund unveiled plans last month to create a global platform for the implementation of CBDCs, but warned that if not designed well, they could cause considerable risks for the financial system and economies. The fund’s managing director Kristalina Georgieva said a standardised CBDC platform could help bridge the financial gap.
It is clear that CBDCs are gaining traction worldwide and are seen as a way to reduce risks associated with cryptocurrency, improve payment efficiency, and facilitate the shift to a cashless society. However, there are also concerns regarding privacy and operational challenges that need to be taken into account when implementing these digital currencies.