CBDC: Survey of central bank digital currencies

Digital Central Bank Currencies (CBDC) - Research and development of digital versions of national currencies by central banks aimed at improving payment systems

More than 100 countries around the world are currently studying the issuing of CBDCs (“Central Bank Digital Currencies”). Central banks are exploring the prospects and risks, studying the experience of other countries, organizing tests of an alternative form of money and discussing the issues of CBDC introduction into the global financial systеm.

What is the essence of central bank digital currencies? What are the advantages of CBDC? Do people need digital euros, hryvnias, dollars or yuan?

Let’s take a look at what central bank digital currencies are, what stage their implementation projects are at, and what impact they may have on the global financial landscape and the lives of ordinary citizens.

What is CBDC

Central Bank Digital Currency (CBDC) is a form of government issued money that is a more technologically advanced and efficient counterpart to traditional fiat currency.

The introduction of CBDC into circulation is seen as an important step in the digitalization of the global economy, as central bank digital currencies will help improve the state of affairs in the global financial systеm through the use of decentralized technology tools and the best practices of the cryptocurrency market.

Unlike cryptocurrencies, for which there are always questions about the collateralization, this form of asset offers a higher level of security and regulation, as its issuer and guarantor is a state-owned central bank.

In fact, CBDCs are a new form of government financial obligation in addition to electronic money and cash. Digital money, just like cash and electronic money, will be backed by the country’s foreign exchange reserves. For states, the technological basis of CBDC will provide additional opportunities for transparent financial monitoring, taxation control and anti-corruption. And for ordinary users it will open wide prospects for fast and convenient transactions with minimal commissions.

In fact, financial regulators, observing the development and advantages of decentralized financial systems over traditional ones, have realized the need to innovate the classical financial hierarchy in order to remain competitive and strengthen control over the global economy.

CBDC is effectively centralized in nature, as it is issued, managed and regulated by a single government entity, the central bank. However, in terms of technical architecture and approaches, decentralized solutions are widely used in the development of CBDC, which can vary depending on the objectives of the issuing country. The integration of central bank digital currencies and blockchain offers tremendous opportunities, as distributed ledger technologies provide enhanced security, transparency, speed and cost-effectiveness for financial transactions.

Benefits of central bank digital currencies

CBDC and international payments (facilitating cross-border transactions)

International transactions will be done instantaneously and cost many times cheaper. This is a significant advantage for companies operating in different countries, for citizens transferring money abroad and for states when conducting foreign economic activities.

CBDC is a direct analog of fiat money, they are conducted directly and they do not depend on the ability of commercial banks, payment systems or other financial intermediaries to service them. For example, the transfer of one digital currency into another will be conducted directly without reference to the USD exchange rate, eliminating conversion fees from the cost chain.

Currently, the cost of making a cross-border payment can be as high as 10% of the value of the payment, and the time it takes will be three to five business days. CBDC transactions will be processed 24/7/365 and without the delays associated with cumbersome verification procedures, technologically outdated platforms and limited business hours per week. In comparison, CBDC can process more than 50,000 transactions per second while VISA averages about 5,000 transactions.

Reducing the cost of maintaining the financial systеm and eliminating intermediaries will reduce the underlying cost of conducting transactions. According to analysts, more than 50% of central banks expect central bank digital currencies to significantly reduce the cost of cross-border transactions, and more than 30% expect tangible savings in ongoing costs.

Fighting corruption and financial monitoring

The problem of corruption is reaching global proportions and is acute in Ukraine. According to the US Secretary of State Anthony Blinken, our country loses about 30% of its GDP due to the negative impact of corruption processes.

CBDC’s global initiatives are aimed at supporting anti-corruption campaigns by governments and the IMF, increasing the transparency of financial markets and improving the effectiveness of the fight against money laundering. CBDC pilot projects enable central banks to track currency transactions by aggregating real-time information on currency movements and providing access to both aggregated statistics and individual transactions and wallets.

Once CBDC is implemented, officials receive their salaries and other income into a digital currency wallet, and are not allowed to spend the money in ways other than from the digital wallet. They are also required to declare cash receipts and deposit them in the digital account. In this way, all income and expenses of public officials become transparent to oversight bodies for sources of income, inappropriate spending and corruption.

The availability of financial monitoring allows the state to track any payments. Algorithms capable of detecting anomalous transactions between individuals, companies, officials and government agencies will reduce the burden on existing security systems and allow for the prompt detection of corrupt and monopolistic activities at various levels.

Simplifying the taxation systеm

CBDC opens wide opportunities for automation of audit, tax control and tax payment in real time, thanks to integration with public and private registries and databases. In this case, the state budget will automatically receive tax deductions and companies will be able to save costs for accounting services.

CBDC challenges

Risk of deepening crisis. It is believed that the widespread adoption of central bank digital currencies could catalyze a deepening economic crisis. Due to the dramatic withdrawal of money from the traditional banking systеm into digital currencies, institutions in the classical financial systеm could be severely affected due to insolvency risks.

Trust. It is unknown how much trust people accustomed to the traditional banking systеm will have in the innovative technology.

CBDC security does not address privacy issues. And this has led to concerns that the government rather than the individuals needs this tool. For example, Ron DeSantis, Governor of Florida, USA, recently made a statement that the digital dollar is a no go in Florida. In his opinion, the central bank’s digital dollar will only be issued for the purpose of strengthening financial oversight and not for the benefit of American citizens. After all, national banks and other government agencies will be able to track any transactions, identify the sender and the recipient, and this raises the issue of data privacy, which is protected by international law.

Lack of clear regulation of CBDCs. International legal regulations for central bank digital currencies are still evolving.

What is the situation in the global market for central bank digital currencies

At the time of writing, 130 countries with a combined GDP of 90% of global GDP are exploring the prospects for the development and issuance of central bank digital currencies, the extent of CBDC’s impact on domestic and foreign economies in light of future interactions between fiat currencies and CBDCs. As of 2020, there were only 35.

Of these, 64 are in the in-depth research phase (development, Pilot or launch, addressing CBDC implementation challenges).

Pilot programs have been launched in 21 countries (Ukraine is among them).

11 countries have already implemented the circulation of CB digital currencies at the state level (Nigeria, Jamaica, Commonwealth of the Bahamas and eight Caribbean island states). Their analytical framework is used to evaluate the CBDC user experience.

The largest digital CB currency, eNaira, was issued by the Central Bank of Nigeria. It is based on the Stellar blockchain, with 33 banks participating in the program and more than 5 million registered wallets.

The first Central Bank digital currency issuer was the Bahamas. Their digital “Sand Dollar” has been in circulation since 2020.

The European Central Bank is in the process of developing a pilot project of the digital euro.

G7 central banks are currently developing digital currency prototypes and consulting on CBDC functionality and security.

The United States of America is actively promoting the development of wholesale (interbank) CBDC. More than ten international wholesale projects have already been established.

China is one of the undisputed favorites in this race. Research on the digital yuan started back in 2014. Currently, e-CNYs worth over $2 billion equivalent are in circulation. The pilot project is being tested in over 200 areas, with over 260 million Chinese citizens participating.

Ukraine’s central bank digital currency

In recent years, Ukraine has demonstrated great success in digitalizing and simplifying the interaction of citizens with government services and institutions. The number of users of the “Diya” application has reached about 20 million. At the same time, our country has created favorable conditions for the development of the IT sector with a large number of highly qualified specialists in the development and implementation of decentralized projects. The implementation of the digital currency of the central bank of Ukraine is a natural and logical stage of the evolution of digitalization in our country.

Questions about the launch of CBDC in circulation began to be discussed in Ukraine back in 2016, and already in 2021 the NBU presented the concept of e-hryvnia and a plan to launch it in 2024. Last year Ukrpatent registered the NBU’s rights to the trademark “e-hryvnia”. Currently, our country is preparing for the second stage of testing the Central Bank’s digital currency, which will be conducted by the end of this year.

In conclusion

The creation of central bank digital currencies can be described as a technological breakthrough that has a significant impact on the global financial systеm through the digitalization of the world economy.

It will take more than a year or two for CBDC to be properly implemented in the traditional financial systеm. CBDC is not a tool against cryptocurrencies, but rather the soil in which the best solutions of decentralized technologies will be integrated. The renewed world of finance will assign new functions to central and commercial banks and provide new opportunities for users.

Thank you for your attention!

This article was written by the team of AnyExchange, a cryptocurrency exchanger that has been successfully providing services on the international financial market for more than five years. With the help of our service you can convert the most popular cryptocurrencies at the most favorable exchange rate . We carry out financial transactions with both electronic money and cash. One of the specialties of our platform is fast and secure money transfers around the world.