While many cryptocurrencies are in freefall, bitcoin, ether, stablecoin TerraUSDetc., central bank digital currencies (MNBC or CBDC in English) are expanding. The research carried out by BanklessTimes showed that the number of countries taking an interest in MNBC increased by 160% between 2019 and 2022.
A look back at the advent of central bank digital currencies in France, the United States, China, but also in Europe, Africa, and all over the world.
What is a central bank digital currency?
MNBCs are the digital form of fiat currencies, used every day in the countries where they are the official currency (the yuan in China, the euro for the 19 members of the euro zone, the yen in Japan, etc.) . This currency is issued, controlled and regulated by the central bank of a monetary zone or country. This means that if the countries of the euro zone wish to embark on the MNBC in connection with the euro (the digital euro) the European central bank will be the guarantor. However, France can also, for its part, be interested in the MNBC: at that time, it is the Banque de France that manages it.
MNBC works in the same way as fiat currencies: it is a means of payment, a unit of account and a way of quantifying the value of a good. It falls into two categories: retail MNBC intended for individuals, which can be used in addition to fiat currencies, and the Interbank MNBC (also called “wholesale” or “wholesale”) for banks in procedures for the exchange and settlement of financial assets. States can decide to develop one of these two types of currency, both at the same time or neither.
So, what is the advantage for central banks to take an interest in MNBC? The latter would, for example, reduce the costs of intermediation, which are frequent when using fiduciary currencies, facilitate and lower the costs of cross-border payments, or even fight against money laundering.
Note that central bank digital currency is not intended to replace fiat currency, but to offer an alternative.
What is the major difference with the current financial system?
Another benefit cited by pro-MNBCs is financial inclusion. This digital currency would make it possible to democratize access to the financial system for individuals excluded from the banking system or who are used to using their smartphones to carry out transactions.
Take as an example the payment system currently used in the United States. The US financial system can be broken down into three layers. The topmost layer is the Federal Reserve, which is the central bank of the United States. The middle layer constitutes the private banks or anyone who can deposit or withdraw fiat currency. These private banks have accounts with the Federal Reserve.
The final layer includes non-bank payment service providers (PSPs): VISA, Mastercard, PayPal, etc. In short, all payment services that an individual can use to make a payment or receive money. For PSPs, holding reserve accounts with the Federal Reserve is prohibited. This means that these services are obliged to be affiliated with private banks to carry out the part of their activities related to payments.
With interbank MNBCs, this layer could be removed. In other words: service providers would no longer have to go through a private bank to offer their services.
The state of central bank digital currencies around the world
In 2014, China was one of the first countries in the world to announce its interest in central bank digital currency. After several years of research and many experiments in 2020 and 2021, the digital yuan came into existence and nearly 200 million yuan was injected in order to test the new Chinese digital currency. In November 2021, 140 million Chinese were using the digital yuan and 8.5 billion euros (62 billion yuan) have already been spent.
Between 2014 and 2020, more than 60 countries have at least started initial work to launch a central bank digital currency. This acceleration is accompanied by the development of new use cases for blockchain technology. Note that an MNBC is not necessarily based on the blockchain. However, the central banks of many countries are moving towards this option.
According to investigation conducted by PwC, 88% of digital currency projects, in production or in the pilot phase, use the blockchain. According to the analysis proposed by PwC, its use as a technological support for a central currency brings notable advantages such as greater transparency of flows, the possibility of configuring confidentiality characteristics or even of increasing interoperability with other digital assets “.
This time curve allows you to see the list of countries that have embarked on the MNBC. In orange, these are the countries in the research phase, in red, those in the pilot phase, and in black, those in the production phase, at the end of March 2021. Since then, China and Nigeria have been in the phase of production, Ukraine, Russia, India and Japan are in the pilot phase. Image: PwC.
Between 2019 and 2022, the number of central banks interested in digital currencies has more than doubled, increasing from 35 countries to 91 countries. About forty of them, including most of Europe and the United States, are still in the research phase.
In Africa, one country has taken the lead: Nigeria. eNaira is the country’s MNBC, managed by its Nigerian central bank since October 25, 2021. The currency was thought of as an alternative to cryptocurrencies, very popular in the country: Nigeria is the third country in the world where cryptocurrencies are the most exploited .
This map highlights the state of progress of central bank digital currencies by country in October 2021. In pink, the countries where the currency is in operation, in green, the countries where it is in the production phase, in turquoise, where it is in development, in blue, countries where a research phase is underway, in dark yellow, countries that have already started research on the subject but where the project is currently inactive, in red, where the project was eventually abandoned. Image: Atlantic Council.
What about the digital euro project?
In Europe, the European Central Bank (ECB) launched a public consultation on creating a digital euro in October 2020. More than 8,000 responses were collected and the results are unequivocal: 43% of the remarks refer to the protection of privacy, 18% to security, 11% to the possibility of payment in the whole area euro, 9% at no additional cost and 8% offline. Work on the digital euro should therefore focus on these themes.
Fabio Panetta, member of the Executive Board of the ECB, declared that a ” digital euro would only be a success if it meets the needs of Europeans. We will do everything we can to ensure that a digital euro meets the expectations of the inhabitants of the euro zone as expressed during this public consultation “.
All responses were taken into account to inform research to determine the usefulness of the digital euro. In July 2021, the ECB formalizes the launch of the project which will revolve around a two-year survey to study the design, distribution and use of the digital euro. Thus, a prototype would be proposed by 2023 and this new currency could be ready for 2025.
In March 2022, a new public consultation was launched with the aim of finding out how the digital euro could be used in everyday life. All eventualities have been taken into account, and the feedback is currently being analysed. In Europe, banks are not necessarily in favor of adopting the digital euro, fearing that savers could convert their digital currency deposits with a simple click in the event of a financial crisis.
A few months before the launch of the ECB’s first public consultation, the Banque de France had launched a call for candidates to experiment with the use of an interbank MNBC. Three use cases were proposed to guide organizations wishing to take part in the project:
- Payment in digital currency against the delivery of real listed or unlisted financial instruments.
- Payment in MNBC against a digital currency from another central bank.
- Payment in central bank digital currency against real digital assets.
Eight applications were selected: those of HSBC, Accenture, Euroclean, Seba Bank, Société Générale Forge, but also Iznes, LiquidShare and ProsperUS, three start-ups specializing in blockchain. These experiments are still in progress and complete the investigation phase for the digital euro.
In both cases, the objective is to anchor the use of the currency issued by the central bank as a settlement asset, both in the daily lives of citizens (digital euro) and in transactions between financial intermediaries (interbank MNBC), with the aim of securing all financial transactions “.
France thus wishes to accelerate the process of development of this digital currency, for fear of being left behind by China, but also by the United States which could, in the future, take a step closer to the digital dollar.
Towards the advent of the digital dollar?
On March 9, 2022, the President of the United States, Joe Biden, signed a Executive Decree around cryptocurrency, inviting federal agencies to address this sector in a coordinated manner. Six key areas are targeted: consumer protection, illicit activities, US competitiveness, innovation, financial stability and financial inclusion.
These last two points are at the center of one of the Biden administration’s wishes: to explore a version of the digital dollar. Even if the decree itself does not specify that the United States will launch its own digital currency, it asks financial and technological organizations to devote some of their time to the research and development of such a currency. currency if it were to exist in the future.
However, just like in Europe, US banks do not look favorably on the development of the digital dollar. Several of them came together under the aegis of the American Bankers Association (ABA) to write a series of letters to the attention of the Federal Reserve of the United States. They consider that the MNBC represents a danger for the entire financial sector to the point of upsetting ” the relationship between the citizens, the Federal Reserve and the current monetary system “.
According to the ABA, a digital currency “ serve as a competitive competitor to retail bank deposits “. As explained earlier, payment service providers will no longer have to turn to banks to offer their offers to the general public. Therefore, banks consider that money held in bank accounts will be on digital wallets managed by the US central bank.
For its part, the Federal Reserve is committed to respecting the privacy of citizens while fighting against any fraud that may exist. She says the digital dollar will speed up the exchange of funds while providing a secure means of payment, but acknowledges that an MNBC could pose a risk to monetary and financial stability.
Around the world, central banks are taking a keen interest in MNBC. This momentum can be explained first of all by the lead that China has been able to take, but also other countries (such as Nigeria) in this sector. In addition, the enthusiasm that exists around blockchain technology is attracting central banks who wish, in turn, to acquire their digital currency. Finally, it represents a way, for some countries, to guarantee greater stability and financial inclusion than usual.
