Central Bank Digital Currency: The Future of Money?

As of June 2023, 11 countries have adopted central bank digital currencies (CBDC), with an additional 53 being in advanced planning stages and 46 researching the topic. According to data from the Atlantic Council, the earliest digital version of a fiat currency issued by a central bank is the Bahamian Sand Dollar introduced in 2019. The most recent addition to the countries issuing a CDBC is Jamaica with JAM-DEX, which was added to mobile payment provider Lynk in July 2022. As our chart shows, the movement through the pipeline between pilot projects and implementation has accelerated over the past two years.

In June 2021, only six countries had adopted this type of digital currency, all of which were Caribbean islands. Nigeria introduced the eNaira in October 2021, with four additional Caribbean island states following until July 2022. The implementation of CBDC is not limited by country borders though. Notable cross-border programs in the pilot phase include mBridge, a bank-to-bank project including the central banks of China, Thailand, Hong Kong and the United Arab Emirates, as well as the digital euro, which the European Union is currently setting up a legal framework for and the continuation of which will supposedly be decided by the European Central Bank in October 2023.

Compared to regular cryptocurrencies like Bitcoin and even stablecoins aligned to a traditional fiat currency, transactions with central bank digital currencies aren't necessarily carried out on a decentralized protocol by a private entity, but supervised by the issuing authority. Instead of having a checking account with a regular bank, citizens of the country could exchange their fiat currency 1:1 for digital tokens issued by and claimed on the corresponding central bank. So unlike Bitcoin, Ethereum and other digital tokens, CBDC isn't intended as a means of financial speculation but rather to, for example, provide the un- and underbanked better access to money and make digital payments more time- and cost-efficient. As of now, regular digital and mobile payment solutions also fulfill at least some of these needs, even though they are mainly in the hands of private companies.

Centralizing a digital currency is not without its drawbacks, however. Digital currencies are particularly vulnerable to cybercrime and efficiently regulating this new technology can require a massive administrative, financial and legal effort. By some critics, CDBCs are also seen as prestige projects with little to no impact. Adoption rates also seem uncertain due to concerns about data privacy and security. In the Bahamas, the first official implementation of a CDBC only led to an adoption rate of eight percent and a circulation of roughly 300,000 Sand Dollars.