It might surprise you, but “digital money” has existed since 1871, when Western Union first introduced electronic fund transfers (EFT) in the U.S. In the 1990s, the internet made online payments more common, and now, cryptocurrency is on the rise.

This leads to a big question: Will digital currency, issued by the Central Banks of different countries, fully replace traditional money (aka fiat).

As with most innovations, there are pros and cons. Read on for an update on Central Bank Digital Currencies (CBDCs) and what’s happening with CBDC adoption around the world.

What is a CBDC?

For hundreds of years in most countries, the central bank has been the public institution responsible for implementing monetary policy, managing the currency of a country or group of countries, and controlling the money supply. For example, in the US, the Federal Reserve serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system. Do you need a primer on the traditional role of the Fed? Check out Investopedia’s (one of my favorite sites for financial info) article about the US Federal Reserve. I also cover CBDCs vs. traditional Fed operations at the end of this post.

Central Bank Digital Currency (CBDC) is government-issued and regulated digital money that could change how countries handle finances globally. Unlike cryptocurrencies such as Bitcoin or stablecoins like USDC, CBDCs are centralized and backed by the government.

While cryptocurrencies can be unstable and aren’t always accepted, a CBDC would, in theory, be a stable and widely recognized form of money. CBDCs also create new ways for governments to control currency features, which we’ll explore later in this post. If you want to dive deeper into the global impact of CBDCs, the International Monetary Fund has more information in this pdf: ]The Status of Central Bank Digital Currencies.

Global Overview of CBDC Progress

As the world moves further into the digital age, CBDCs are becoming a key focus for many countries looking to update their financial systems. The Atlantic Council’s CBDC Tracker is a great resource for checking out which countries are working on CBDC projects.

So far, only a few countries have fully launched CBDCs: the Bahamas, Jamaica, and Nigeria. These early adopters have introduced CBDCs for different reasons, such as:

- Improving financial inclusion.

- Providing an efficient digital payment option for everyone, no matter where they live.

- Boosting economic growth and stability while reducing the informal economy.

- Modernizing payment systems and improving financial access.

- Lowering the costs of managing cash.

- Making cross-border transactions more efficient.

Besides these leaders, many other countries are actively exploring and testing CBDCs.

Key Statistics from the Atlantic Council CBDC Tracker

CBDC projects are happening across Asia, Europe, Africa, and the Americas. Here’s a quick overview:

Implemented CBDCs: Three countries—the Bahamas, Jamaica, and Nigeria—have fully launched their CBDCs.

Pilot Programs: 36 countries are testing their CBDCs through pilot programs.

Research and Development: Over 74 countries are exploring the benefits and challenges of CBDCs.

Global CBDC Activity: A Deeper Dive

The Atlantic Council CBDC Tracker provides key insights into each country’s progress with CBDCs, including:

Status: This shows where a country is in its CBDC journey, whether in research, testing, or full implementation.

Use Case: The specific ways a CBDC might be used, like for retail payments, wholesale transactions, or cross-border payments.

Technology: The tech behind the CBDC, including whether it uses blockchain, what type of consensus mechanism it employs, and its cryptographic features.

Architecture: How the CBDC system works, such as whether it’s account-based or token-based and whether it’s centralized, decentralized, or a hybrid.

Infrastructure: The financial and technological systems supporting the CBDC, including payment systems, digital wallets, and regulatory frameworks.

Technology Partnerships: The tech companies and fintech firms helping develop and launch the CBDC.

The Status of CBDCs in Key Regions

United States: The U.S. is researching a digital dollar, but there’s no launch date yet. The Federal Reserve is running studies, pilot programs, and working with universities and private companies to explore the possibilities. Supporters argue that the U.S. risks falling behind in financial innovation, while critics worry about privacy, financial disruption, and government surveillance. In May 2023, a law was passed preventing the Federal Reserve from issuing a CBDC without Congress's approval.

Russia: Russia is currently testing a CBDC. The conflict with Ukraine has influenced its approach and urgency in developing a digital currency.

Europe/EU: The European Central Bank (ECB) has finished a detailed study phase and is now exploring the practical applications of a CBDC, with ongoing pilot projects and public consultations.

China: China has been testing its digital yuan (e-CNY) since 2019. Large-scale trials are taking place in major cities, and millions of people and businesses are using the digital yuan for everyday transactions. China is leading the way in implementation, but its use of social surveillance alongside the CBDC raises concerns in Western countries.

Each region’s approach to CBDCs reflects its unique economic goals, technological abilities, and global position.

Some Important Concerns You Should Know About CBDCs

While CBDCs offer many benefits, they also face significant objections and concerns. Critics argue that CBDCs could introduce risks to privacy, data protection to financial stability of existing systems.  Below are some of the key objections to CBDCs, drawing on views from the Cato Institute and financial blogger Lyn Alden’s inclusion of the status of digital bank currencies in her essay “What is Money?” 

Some concerns include:

Financial Privacy Concerns: One major worry is that CBDCs could reduce privacy. Unlike cash, digital transactions can be easily tracked. Governments could gain unprecedented access to personal financial data, raising fears of misuse. For instance, CBDCs could be programmed with restrictions, limiting how money can be spent, which could be misused to control behavior.

Financial Inclusion as Tax Enforcement: CBDCs could help tax authorities track income and detect tax evasion. However, simply introducing a CBDC won’t fix deeper issues without broader reforms. In countries with corrupt or inefficient governments, people might resist using CBDCs if they don’t trust that increased tax revenue will benefit society.

Financial Stability Risks: CBDCs could also pose risks to the financial system. For example, if people see CBDCs as safer than traditional bank deposits, it could lead to bank runs, destabilizing the banking sector.

Technological Challenges: Creating a CBDC requires a secure and complex infrastructure. Protecting it from cyberattacks and ensuring it works well with other digital currencies and payment systems adds extra challenges.

Government Control and Surveillance: CBDCs could increase government power, potentially leading to misuse. Authorities might use CBDCs to enforce capital controls or limit access to funds for political reasons, which could erode trust in the financial system.

Impact on Monetary Policy: Managing a digital currency could change how monetary policy works, requiring central banks to adapt their strategies to avoid inflation or deflation.

Possible Security Risks as Quantum Computing Develops: Quantum computers pose a unique future threat to encryption techniques.

CBDCs vs. Traditional Fed Operations

A Central Bank Digital Currency (CBDC) would represent a significant departure from the traditional operations of a central bank like the Federal Reserve. Here's a breakdown of the key differences:

1. Nature of the Currency

• Traditional: Physical currency (coins and banknotes) is the primary form of money in circulation.  

• CBDC: Digital representation of fiat currency held in electronic wallets.  

2. Issuance and Distribution

• Traditional: Central banks issue physical currency and distribute it through commercial banks.  

• CBDC: Central banks would directly issue and manage CBDCs, potentially bypassing commercial banks in some scenarios.

3. Accessibility

• Traditional: Physical currency is accessible to everyone. Bank deposits are accessible to account holders.  

• CBDC: Accessibility would depend on the CBDC design. It could be accessible to everyone, or limited to specific groups or transactions.

4. Interest Payments

• Traditional: Reserves held by commercial banks at the central bank typically earn interest.  

• CBDC: Whether CBDCs would earn interest is a design choice with significant implications for monetary policy and financial stability.

5. Privacy

• Traditional: Cash transactions are generally private. Electronic transactions leave digital traces.

• CBDC: The degree of privacy for CBDC transactions is a design choice. It could range from full anonymity to complete transparency.  

6. Monetary Policy

• Traditional: Central banks use tools like open market operations and interest rate adjustments to influence the money supply and economy.  

• CBDC: CBDCs could potentially offer new tools for monetary policy, such as programmable money or negative interest rates.  

7. Financial Intermediation

• Traditional: Commercial banks act as intermediaries between the central bank and the public.

• CBDC: The role of commercial banks could change significantly, potentially reducing their importance in the financial system.

It's important to note that these are general differences, and the specific implementation of a CBDC would vary between countries. Many of these aspects are still under debate and research.

What do you think?

As countries continue to explore and develop CBDCs, it's crucial to find solutions that balance innovation with the protection of individual freedoms and the stability of the financial system. Do you think it’s important for citizens to understand the pros and cons of CBDCs?

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