One in eight central banks in the world has considered launching a central bank digital currency, according to a new study. However, major economies remain cautious about adopting the new technology, citing fears of money laundering, fraud and potential financing of violent crime.
Cryptocurrency is a digital payment system that does not depend on banks to verify transactions. It is a peer-to-peer system that can allow anyone, anywhere to send and receive payments. Like any currency, cryptocoins are only worth what investors are willing to believe they are worth – but the amount of belief invested in these mechanisms is currently increasing on all fronts. That being said, however, the amount lost to scams involving apparent cryptocurrencies also continues to skyrocket – and exacerbated by the inability to control the crypto space, this has led to the notorious market volatility, making values so volatile that crypto still has no practical use beyond speculative investing.
Increasingly, crypto-evangelists are touting state interaction with the digital currency market as a way to stabilize it. Of 150 financial institution decision makers recently surveyed by FTI Consulting, 56% anticipated increased traction on central bank digital currencies (CBDCs). Digital euro among state plans suggesting central banks could be set up to allow the general public to make digital payments, this factor is seen as having a potentially bigger impact on financial services than any other traditional hype factors surrounding crypto or blockchain technology.
Indeed, according to a new study from PwC, the idea of CBDCs is gaining momentum among governments and central banks. The firm Big Four found that 80% of all central banks in the world had considered launching a CBDC, or had already done so. CBDCs are a kind of “stablecoin”, and their widespread deployment could transform the prospects of cryptocurrency as a practical economic asset. A stablecoin is a cryptocurrency designed to have a relatively stable price, usually by being pegged to a commodity or currency or regulating its supply by an algorithm.
“Wholesale CBDCs have the potential to streamline security token post-trade operations through atomic delivery versus payment and increase market efficiency for multiple asset classes,” said Benoit Sureau, PwC France. and Maghreb Financial Services Risk and Blockchain Partner.
“The role of stablecoin in crypto markets has and will continue to evolve as crypto adoption increases, forcing a greater role for stablecoins across the financial ecosystem,” Matt Blumenfeld added. , director and digital asset specialist at PwC. “Regulation will only reinforce the importance and lend credence to the role that stablecoins will play.”
However, it should be noted that despite all the suggestions that central banks were “considering” implementing a CBDC, the banks that have made the leap have mostly been from developing markets. Notably, in the UK, the House of Lords Economic Affairs Committee called CBDCs “a solution in search of a problem”, while saying that despite all its potential to make cross-border payments cheaper and more fast, technology negated these advantages. presenting significant financial stability and privacy challenges.
And while the European Commission is currently planning to propose a bill for a digital euro in 2023, the implementation of this bill could take years. At the same time, the Governing Council of the European Central Bank has not yet taken a final decision on the real need for a digital euro. Germany and France have since urged the ECB to speed up this process, citing fears that the euro zone could be left behind by the CBDC trend – but PwC data shows why looking before jumping might be prudent.
The report identified two categories of CBDCs: retailers and wholesalers. When it comes to retail CBDCs, the country that ranks highest for its adoption rate is Nigeria, which launched its eNaira digital currency in 2021. Although this saw it become the first African country to taking the plunge, amid claims that it “got started”, it experienced issues with its digital wallet when it launched, and adoption has been well below expectations. On top of that, the International Monetary Fund (IMF) has since claimed that eNaira could potentially be used to launder money and finance terrorism.
This might not apply to economies that have also plunged into the CBDC market. The Bahamas, Mainland China, Jamaica, Eastern Caribbean, Ukraine, Uruguay, Thailand, Sweden and South Korea round out the top ten list respectively – and the benefits of growing their economies could outweigh security concerns. But for larger markets (China being the exception), the risks seem to be perceived as much greater when adopting CBDCs.
When it comes to wholesale CBDCs, this trend has also played out to some extent. Thailand tops the list for wholesale CBDC developments alongside Hong Kong. The Bank of Thailand and the Hong Kong Monetary Authority launched a joint effort called mBridge, in 2019, focused on a wholesale CBDC that enables real-time cross-border payments between the two nations.