May 24, 2022 - Economy & Business

Central-bank issued digital currency experiments inch forward outside the U.S.

Illustration: Natalie Peeples/Axios
Illustration: Gabriella Turrisi/Axios

Central-bank issued digital currency experiments outside of the U.S. are making small steps forward amid heightened scrutiny of private-sector stablecoins.

Why it matters: Governments are keen on the potential for faster, more efficient payment options between countries with digital currencies, but want to preserve monetary and financial stability.

  • So-called CBDCs are government-backed digital currencies for consumer and business use, whereas stablecoins are cryptocurrency designed to be pegged to state-issued money like the U.S. dollar or the UK pound.

State of play: Nine out of 10 central banks are exploring CBDC issuance, according to a survey last year of more than 80 central banks by the Bank for International Settlements. And CBDCs have seen small advances in projects outside of the U.S.

  • People's Bank of China last month said it would expand the pilot of its digital currency called "e-CNY" to more cities.
  • A decades-old Belgian bank messaging system is teaming up with a French IT company to experiment with cross-border payments.
  • Bahamanians can reportedly use facial recognition software to authorize mobile payments with their CBDC Sand Dollar.

Meanwhile, Norway partnered with upstart Nahmii to develop a prototype for experimental testing of its CBDC using a private enterprise Ethereum blockchain.

  • Norges Bank chose the Ethereum blockchain because of it being open source. “The plan is to make the code public, which easily avails it for collaboration and a basis for a technical sandbox,” a spokesperson tells Axios.

The U.S. is the "furthest behind" such efforts compared among the four largest central banks, according to the Atlantic Council, a think tank which has been tracking CBDCs.

  • The Biden administration's executive order on digital assets at least asks for consideration of the pros and cos on CBDCs (more below).

The intrigue: Republican members of the U.S. House Committee on Financial Services last week sent a letter to Federal Reserve Chair Jerome Powell, questioning whether the benefits of a CBDC "outweigh the risk to commercial banks, the existing payments system, and consumers."

Reality check: CBDCs right now are more theoretical and IRL may not be all that useful for regular folks to start.

  • For example, Bahamian CDBC was introduced in October 2020, but the Sand Dollar makes up less than 0.1% of currency in circulation there, the IMF said in a recently published report.

Separately, crypto natives poo-poo CBDCs and don't consider them cryptocurrency (they don't even have to make use of blockchain!).

  • The very premise of centralized authority behind a digital asset flies counter to industry ideology of disrupting traditional financial systems.
  • Privacy is another major issue.

💭 Crystal's thought bubble: Private-sector stablecoins will likely get regulated before the Fed makes moves on CBDCs.

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