While most central banks across the globe are exploring the issuance of a CBDC, the key motivations for its issuance are specific to each country’s unique requirements.
Currently 105 countries, representing over 95% of global GDP, are exploring a central bank digital currency (CBDC).
A CBDC is a digital form of central bank money that is widely available to the general public. ‘Central bank money’ refers to money that is a liability of the central bank.
A CBDC provides the public, digital alternative to cash and private digital money. One of the compelling reasons for a developing nation to consider is supporting payment system resilience: Digital payments that operate on private rails are owned by private (and often foreign) providers which creates a single source of failure for digital payments. A CBDC can improve resilience by providing a new payments infrastructure while new technologies such as distributed ledgers are inherently more resilient than incumbent infrastructure.
THE DIFFERENCE BETWEEN CRYPTOCURRENCIES AND DBDCS
The main question asked is, what is the difference between cryptocurrencies and CBDCs? BDO South Africa’s Financial Services Technology Lead and Head of Crypto Desk, Nevellan Moodley, explains.
Countries such as El Salvador and Central African Republic have adopted bitcoin as a legal tender, which allows their respective citizens to make payments using bitcoin. A major difference between accepting cryptocurrencies and CBDCs is that CBDCs are, by definition, not cryptocurrencies. The table below explains the major differences between cryptocurrencies and CBDCs:
|Pseudonymous (real name and personal details unknown)||Not pseudonymous (real name and personal details are known by the bank)|
|The value fluctuates depending on the market||The value is the same as or based on the official currency|
|Using public blockchain||Using a private digital ledger or private blockchain|
|Decentralised, and decisions are made by consensus||Centralised or regulations and decisions are regulated by the government|
|Crypto can be used for speculative purposes as well as for payments||CBDC can only be used for payments and other monetary transactions|
So, what does the CBDC landscape look like?
The DCash Project was developed with technology partner Bitt Inc and was launched on 31 March during the COVID-19 pandemic. The project is a strategic initiative of the Eastern Caribbean Central Bank (EECB) with the aim to advance socio-economic transformation of the region through the development of a blockchain-based digital currency.
The digital euro is an electronic form of money issued by the Eurosystem (the ECB and the national central banks of the euro area) and would be accessible to all citizens and firms.
A digital euro would not replace cash, but rather complement it. A digital euro would give people an additional choice about how to pay and make it easier to do so, contributing to accessibility and inclusion. Similarly, to physical note and coin counterpart, it would be issued by the Eurosystem, which includes the ECB and national central banks.
The People’s Bank of China (PBOC) has been developing the digital yuan − a central bank digital currency that aims to replace some of the cash in circulation. PBOC will distribute the digital yuan to commercial banks, and the banks will be responsible for getting the currency into the hands of consumers. This could include services to allow consumers to exchange their coins and cash for digital yuan. WeChat, which is the largest messaging app in the country, is also integrating the digital yuan, which will see 1,3 billion mobile wallets being created. Every citizen will be required to match their identity number to their wallet.
The Multiple CBDC (mCBDC) Bridge is a wholesale central bank digital currency (CBDC) co-creation project that explores the capabilities of distributed ledger technology (DLT) and studies the application of CBDC in enhancing financial infrastructure to support multi-currency cross-border payments.
Project Aber is a joint effort between two central banks, the Saudi Arabian Monetary Authority (SAMA) and the Central Bank of the UAE (CBUAE). The project, which was initiated in early 2019, was established based on the close financial and cultural relationship, and real money was used.
Project Dunbar developed two prototypes for a shared platform that could enable international settlements using digital currencies issued by multiple central banks.
The platform was designed to facilitate direct cross-border transactions between financial institutions in different currencies, with the potential to cut costs and increase speed.
The project identified challenges of implementing a multi-CBDC platform shared across central banks and proposes practical design solutions to address them.
Project Helvetia was a multi-phase investigation by the BIS Innovation Hub, the Swiss National Bank (SNB) and the financial infrastructure operator SIX.
The project explored how central banks could offer settlement in central bank money in a future with more tokenised financial assets based on distributed ledger technology (DLT), focusing on operational, legal and policy questions.
Jura explores the direct transfer of euro and Swiss franc wholesale central bank digital currencies (wCBDCs) between French and Swiss commercial banks on a single DLT platform operated by a third party. Tokenised asset and foreign exchange trades are settled safely and efficiently using payment versus payment (PvP) and delivery versus payment (DvP) mechanisms. The experiment is conducted in a near-real setting, using real-value transactions and complying with current regulatory requirements.
Project Jasper is a proof of concept of a DLT-based wholesale payment system. The experiment provided significant insights into the relative strengths and weaknesses of using DLT for financial market infrastructures. The project, led by Payments Canada, started in 2017 when the Bank of Canada launched Project Jasper to understand how DLT can transform the payments system in Canada, and across borders.
Project Stella, a joint research project of the European Central Bank (ECB) and the Bank of Japan (BOJ), has contributed to the ongoing debate via experimental work and conceptual studies exploring the opportunities and challenges of DLT for FM.
BDO South Africa’s Financial Services Technology team under the risks associated with instituting these digital currencies in your industry and market. Speak to Nevellan Moodley, Head of Financial Services Technology, for further assistance.