This is how central banks work on digital money

Critics fear the abolition of cash, the Volksbanks in Germany even the partial nationalization of the financial sector: The digital euro is already being argued about before a pilot phase has even started. And that’s a good thing – because the decision to use digital central bank money, also known as Central Bank Digital Currency (CBDC), is always a political issue and therefore needs a broad discussion.

However, while the EU will not decide until autumn of this year whether it will even start a project for digital central bank money, central banks in other parts of the world have long since made progress. Eleven countries have already started their CBDC, and 21 others are already in the pilot phase. The CBDC trackers by the think tank The Atlantic Council shows the current progress of projects worldwide.

In the past two years, the number of projects has almost quadrupled. Almost every G20 country has made significant progress over the past six months, investing time and money in these projects. The central banks are being driven by the “fear of missing out” (FOMO): They don’t want to leave the digital world to private payment providers, cryptocurrencies or stablecoins that aren’t quite as stable. The crypto winter acts like an accelerator: high price losses and company bankruptcies have weakened confidence in the crypto market.

However, the central bank projects are accompanied by heated debates. The financial sector finds the project superfluous, fears the weakening of the deposit business and warns of the danger of a digital bank run. Other critics warn of the loss of privacy. With the CDBC, states could be given Orwellian tools to spy on and control citizens.

The call for anonymity for the e-euro is so loud because advanced CBDC projects are being issued by states that may not be so particular about it. Three states and three projects show the different phases of the CBDC exploration – and the status of the discussion.

In the transparency discussion about digital central bank money, he is the pink elephant in the room: the E-Yuan (E-CNY). China started its E-CNY project back in 2017, and in April 2020 the digital currency was introduced in four cities for the first time. Around 260 million people are said to have already been included in the test.

This makes the Chinese digital currency a tangible example of what citizens can do with it in practice: it can be used to pay for anything from bus tickets to supermarket purchases. However, the Chinese population is still skeptical. So the government has to set a number of incentives to get the use of the E-CNY going in the pilot cities, such as discounts on purchases.

However, the Chinese government can also enforce the enforcement of the new means of payment, for example by decreeing the payment of wages via the e-yuan. This shows the great control and monitoring options that are in a CBDC.

The Chinese central bank is currently working on better integrating the existing payment channels into the E-CNY, so Alipay started offering the E-CNY in the express payments category at the beginning of 2023. According to the Chinese central bank, the digital yuan currently accounts for only 0.13 percent of the cash and reserves it holds.

When the United States jumps into CBDC exploration, it wants to be at the forefront. At least that was Joe Biden’s goal when he issued a presidential decree in March 2022 that required the government to assess the risks and opportunities of digital money. A digital version of the world’s reserve currency would also send a strong signal for CBDC enforcement. In fact, however, the project is still in the early exploration stage and has recently come to a standstill.

Because the e-dollar is an issue in the beginning of the presidential election campaign, Republican candidates have already spoken out vehemently against its introduction. “The Biden administration’s efforts to introduce a central bank digital currency are about surveillance and control,” warned Republican Ron DeSantis.

Fed boss Jerome Powell has made it clear several times that the central bank is dependent on a vote in Congress before it can issue a retail CBDC. This means digital central bank money that can be used by every citizen. However, projects for an institutional CBDC for banks (wholesale CBDC) are currently being promoted.

In contrast to the studies and experiments of other states, the sand dollar of the Bahamas is already a reality. Launched in October 2020, it was the world’s first central bank digital currency. A major reason for its introduction is also one of the strongest arguments for a retail CBDC: the financial inclusion of citizens. Even people who previously had no access to the financial system should have one.

However, the sand dollar has hardly arrived in people’s everyday lives. Only 0.013 percent of the money supply is currently made up of sand dollars. The central bank justifies this by initially concentrating on expanding the sand dollar network and new applications for the CBDC. The Covid-19 restrictions would also have hindered the introduction of the sand dollar.

But even in Nigeria, where it has been possible to pay with the e-naira since October 2021, acceptance is low. Less than 0.5 percent of citizens use the digital currency. Recently, the government has tried to force citizens to use it with fees and cash limits. That sparked nationwide protests in February.