We have already written about what central bank digital currencies, also known as CBDC, are in this article. CBDCs are so-called digital tokens, like cryptocurrency in many respects, but they are issued and controlled by central banks. In general, they can be described as digital or virtual money, which is pegged to the value of that country’s fiat currency.

CBDCs are something new in the financial world, some see them as the future, and others believe they spell economic doom.

There are pretty extensive plans for introducing a digital euro at the European Union level. Currently, talks and negotiations are still taking place on what such a currency should look like, and the European Central Bank has said it could be launched in about four years.

Some countries or central banks have already introduced digital currencies, while others have launched them in test form. According to the Atlantic Council, an independent organisation based in Washington DC, 87 countries (representing more than 90 per cent of global GDP) are researching CBDCs. In May 2020, only 35 countries were considering CBDC.

Digital currencies in the Bahamas, Caribbean and Nigeria

Three digital currencies are currently in full swing in nine countries. They have e-Naira in Nigeria, the Sand Dollar in the Bahamas, and DCash in seven countries where the Eastern Caribbean Central Bank operates.

In December 2019, the Central Bank of the Bahamas launched the Sand Dollar project on the island of Exuma. After successfully completing the pilot programme, the digital currency became available nationwide in October 2020. The “sand dollar” is the world’s first digital currency.

As soon as it was issued, the digital currency became available to all citizens in the Bahamas, while integration with the commercial banking system was introduced gradually.

According to the official website, the Sand Dollar allows greater flexibility and accessibility for residents who want to participate in financial services via either a mobile phone application (iOS and Android) or using a physical payment card to access a digital wallet. It also provides an excellent record of income and spending, which can be used as supporting data for micro-loan applications.

In March 2021, the Eastern Caribbean Central Bank also introduced its blockchain-based CBDC, called DCash, for public use in the seven island countries participating in the Eastern Caribbean Currency Union, including Dominica and Grenada. However, in January this year, a technical error related to security certificates disabled DCash, which remained inactive for several weeks.

In October 2021, Nigerian President Muhammadu Buhari unveiled the e-Naira currency, Africa’s first CBDC. However, the digital currency was issued only a few months after the Central Bank of Nigeria banned cryptocurrency-related activities.

With the introduction of digital currency, the central bank governor said that around 500 million eNaira had been issued, amounting to about 1.21 million US dollars. Currently, only people with bank accounts can access the digital currency, and in the next phase, use with the help of a national identification number is also envisaged. Depending on how many credentials users provide, there is a limit to eNaira transactions.

Pilot programmes of digital currencies in several countries, including Russia and China

A few more countries have launched CBDC pilot projects. Pilot projects are underway in 15 countries, including Sweden, Ukraine, Russia and China.

The Central Bank of Sweden, Sveriges Riksbank, is currently investigating whether it would be possible to launch its own virtual currency, the e-krona. A final decision has not yet been reached. Still, they have recently moved from the project phase. They tested the digital currency with simulated participants and will move on to the next phase, which involves working with external participants in a test environment. The project started in 2017.

In February 2019, the National Bank of Ukraine successfully completed a two-month pilot of a national digital currency, the e-hryvnia. In January 2021, the bank signed a contract with the Stellar Development Foundation to help develop the CBDC, among other things. In July 2021, Ukraine adopted legislation to legalise cryptocurrencies, which opened opportunities for further development of the e-hryvnia.

The Central Bank of Russia published a report for the first time in October 2020, in which they analysed a possible CBDC that would be pegged to the rouble. In September last year, they announced that they would begin pilot testing of the digital rouble in January 2022 and that they see no obstacles to the actual introduction. In February 2022, the Bank of Russia launched the testing of the digital rouble platform and successfully completed the first digital rouble transfers between individuals.

In April 2020, China became the first major economy to decide to test its digital currency. In February this year, the pilot project operated in 11 regions. Chinese officials said the digital currency would have “controllable anonymity”, which will allow the government to ensure a decent level of privacy while also regulating the prevention of money laundering and other illegal activities.

Similar pilot projects can be found in Saudi Arabia, the United Arab Emirates, South Africa, Singapore, Malaysia, South Korea, Lithuania, Hong Kong, Thailand, Jamaica, and Anguilla.

In most countries so far, only research is underway

Research is still underway in 40 countries or monetary unions on what the digital currency would look like, while 16 countries have already begun to develop theirs.

In October 2021, the European Central Bank launched a two-year investigation phase to define the design features of a digital euro, such as how to ensure confidentiality, which use cases to prioritise and what business options to offer intermediaries. The research also examines how to distribute the digital euro to retailers and the public, its impact on the market, and the changes to European legislation that might be needed.

The US, one of the countries with the four largest central banks (the US, the euro area, Japan and the United Kingdom), lags behind most. The US Federal Reserve is exploring the possibility of introducing a CBDC. In January 2022, the Federal Reserve also issued a report on the subject.

Although no specific commitment was made to introducing a CBDC, they highlighted the many potential benefits of such digital currencies. They called on Congress and the public to engage in this critical discussion. However, on March 9th, 2022, the Biden Administration released the Executive Order on Ensuring Responsible Development of Digital Assets, urging the entire government to develop a CBDC.

What happened in the two countries where the projects were cancelled?

In 2014, the Ecuadorian Central Bank (BCE) introduced the digital currency Sistema de Dinero Electrónico (SDE), of which every dollar was backed by a physical dollar stored in the BCE. Although 500,000 users were expected by the end of 2015, only 5,000 had signed up.

At the end of 2017, 402,515 accounts were created, of which less than 30 per cent were active. A year later, the digital currency SDE accounted for less than 0.003 per cent of all cash in circulation. Distrust of the central bank, mainly due to past mistakes made by the government, contributed to the poor adoption of the SDE, and the project was cancelled in December 2017.

In 2016, the West African Economic and Monetary Union (WAEMU) decided to use the Senegal Member State as a testing ground for a potential digital currency. From the very beginning, the central bank distanced itself from the project, which was cancelled shortly afterwards. In addition, they have stated that they have no intention of developing a CBDC soon.

Author: Marko Želko

Keywords: CBDC, digital currencies, money, digitization.

Disclaimer:

This article is part of joint project of the Wilfried Martens Centre for European Studies and the Anton Korošec Institute (INAK) Following the path of digitalization in Slovenia and Europe. This project receives funding from the European Parliament. 

The information and views set out in this article are those of the author and do not necessarily reflect the official opinion of the European Union institutions/Wilfried Martens Centre for European Studies/ Anton Korošec Institute. Organizations mentioned above assume no responsibility for facts or opinions expressed in this article or any subsequent use of the information contained therein.