As concerns rise that cryptocurrencies and stablecoins rivaling traditional payment systems could harm financial stability, central banks are stepping up their efforts to create their own digital currencies.
While cryptocurrencies and stablecoins are gaining popularity in the global monetary system, the lack of regulatory and supervisory mechanisms for digital assets raises concerns.
Central banks are also working on alternative instruments due to the risks that digital assets may pose as rivals to traditional payment systems.
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While the sharp fluctuations in the markets last year increased the demands for regulation and supervision due to concerns about the reliability of cryptocurrencies and stablecoins, it is noteworthy that the global interest in Central Bank Digital Currencies (CBDC) is intensifying.
Digital version of official currencies
The Central Bank Digital Currency is defined as the digital version of a country’s official currency.
The fact that they are produced based on a center is shown as the most basic feature that distinguishes Central Bank Digital Currencies from cryptocurrencies such as Bitcoin. There is no central authority that manages cryptocurrencies created using distributed ledger technology and distributed over digital networks.
Central Bank Digital Currencies have some advantages and disadvantages compared to physical money.
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Encouraging financial inclusion by providing easy and secure access to money, improving competition and resilience in domestic payments, increasing efficiency in payments and reducing transaction costs, creating programmable money and improving transparency in money flows, ensuring uninterrupted and easy flow of monetary and fiscal policy are among the motivations of central banks to develop digital currencies.
Being vulnerable to cyber attacks carries operational risks
Besides the potential opportunities, there are some challenges for countries to develop their Central Bank Digital Currencies.
Chief among these challenges is the ability of citizens to withdraw too much money from banks at once by purchasing Central Bank Digital Currencies. It is stated that this situation may trigger the escape from banks and affect their lending capabilities and interest rates. It is pointed out that this is a problem especially for countries with unstable financial systems.
The vulnerability of Central Bank Digital Currencies to cyber attacks also carries operational risks.
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Central Bank Digital Currencies also require the establishment of a complex regulatory framework that includes standards for privacy, consumer protection and anti-money laundering.
It is pointed out that the new payment systems will also create externalities that affect the daily lives of citizens and possibly endanger the national security objectives of the countries. An example of this is their ability to limit the United States’ ability to monitor and sanction cross-border flows.
Central banks of 114 countries conduct digital currency research
According to a report by the International Monetary Fund (IMF) on the subject, Central Bank Digital Currencies are expected to have significant effects on monetary policy, financial stability and the international monetary system.
The IMF’s report states that Central Bank Digital Currency research has accelerated during the COVID-19 pandemic, often in response to the emergence of crypto assets.
According to data from the Atlantic Council, 114 countries representing more than 95 percent of the global economy are actively researching Central Bank Digital Currency.
While it is noteworthy that the research of the countries in this area are intensified, it is noted that only 35 countries evaluated the Central Bank Digital Currency in May 2020.
While 11 countries including the Bahamas, Jamaica, Nigeria and 8 Eastern Caribbean countries have fully launched the digital currency, China’s pilot application, which has reached 260 million people, is expected to spread across the country in 2023.
Jamaica stands out as the latest country to launch the Central Bank Digital Currency JAM-DEX.
Sanctions against Russia force countries to flee from the dollar
As financial sanctions against Russia prompt countries to consider payment systems that avoid the dollar, central banks of more than 20 countries are expected to take significant steps towards piloting digital currencies this year.
It is noted that Australia, Thailand, Brazil, India, South Korea and Russia plan to continue or start pilot tests this year.
As of December 2022, it is stated that all G7 economies are in the development stage of Central Bank Digital Currency, while 18 of the G20 countries are in the advanced stage of development, and 7 of them are currently in the pilot phase.
ECB works with regional central banks for digital euro
The European Central Bank (ECB) is also expected to start piloting, possibly next year.
The ECB is currently working with the Eurozone’s national central banks to explore whether a digital euro could be introduced.
According to the information on the bank’s website, it is stated that the digital Euro will offer an electronic payment tool that anyone in the Eurozone can use, and will be as secure and user-friendly as cash.
The research phase, which began in October 2021, is expected to last approximately two years and conclude in October 2023.
Fed has yet to decide on digital dollar
The US Federal Reserve (Fed), on the other hand, has not made any decision to issue the Central Bank Digital Bus unit. The Fed continues to explore the potential benefits and risks of central bank digital currencies from various perspectives, including technological research and experimentation.
Fed Chairman Jerome Powell said in March that they were not “in a real decision-making stage” on the central bank digital currency.
On the other hand, it is stated that the New York Fed has moved the USA from research to development stage with the “wholesale” central bank digital currency experiment “Project Cedar” for use between banks and the Fed.
The Boston Fed is also collaborating on “Project Hamilton” with the Massachusetts Institute of Technology’s Digital Currency Initiative.
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China leads in digital currency studies
The People’s Bank of China (PBoC) is leading the development of domestic and cross-border payment networks through digital currencies.
In China, which started the Digital Currency Electronic Payments project called “e-CNY” in 2017, it is recorded that the pilot implementation of the project, which started in 2019, reached 260 million people.
It is stated that China, which is working to better integrate existing payment channels with e-CNY, included e-CNY in its currency circulation calculations in January 2023, and the digital yuan accounts for 0.13 percent of cash and reserves at the central bank.
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