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How 90% of Central Banks Globally Are Exploring CBDCs (#112 - 11 July 2022)

The Future of Money with Henri Arslanian
How 90% of Central Banks Globally Are Exploring CBDCs (#112 - 11 July 2022)
By Henri Arslanian • Issue #101 • View online
A recent survey from the Bank For International Settlements shows that nine out of ten central banks globally are making significant strides with central bank digital currencies (CBDCs), with over half of the polled central banks moving from the research stage to development and experimentation. 
Why is interest in CBDCs accelerating so rapidly? And what does this mean for the future of money? I unpack the biggest takeaways from the survey in the latest issue of your newsletter. 
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A recent survey by the Bank For International Settlements (BIS) shows that 90% of central banks globally are seriously exploring central bank digital currencies (CBDCs).
The survey also reveals that over half of participating central banks have moved beyond the research stage and into actual concrete experiments, specifically when it comes to retail CBDC. 
The BIS survey polled 81 central banks about their level of engagement with CBDCs, along with their motivations and objectives behind a potential CBDC issuance. 
As we’ve discussed in past issues of this newsletter, CBDCs have been gaining steady momentum around the globe for the past couple of years.
CBDCs are live in The Bahamas with the Sand Dollar, in Nigeria with the eNaira, in China with the e-CNY, and in the Caribbean (Eastern Caribbean Central Bank) with DCash. And, as we covered here in March, Jamaica is gearing up to become the latest country to release a central bank digital currency. 
BIS’s survey shows that a steadily growing number of central banks are engaging with CBDCs, particularly when it comes to retail CBDCs. 
(If you are looking for an introduction to CBDCs, including the difference between retail and wholesale CBDC, I highly recommend you watch my short explainer video here.)
Interestingly enough, all 81 of the central banks that participated in this survey are focused either on both retail and wholesale CBDC or exclusively on retail CBDC; none of the respondents have a narrow wholesale CBDC focus, which was the case in the early years of experimentation on CBDCs. 
For example, nearly 20% of central banks are developing or testing a retail CBDC, nearly double the share of central banks exploring wholesale CBDC.
Source: BIS
Source: BIS
Central banks have also made significant strides in moving from the research stage to the development and experimentation phase over the past year, with the share of central banks either actively developing a CBDC or running a pilot nearly doubling from 14% to 26%. 62% of central banks, meanwhile, are in the proof-of-concept stage. 
The BIS survey also sheds some light on the specific type of CBDC architecture that central banks are interested in. 
As I discuss in my latest book, there are several ways in which central banks can distribute their CBDC to the public. 
Not surprisingly, central banks prefer the two-tiered or the hybrid approach, where whilst the CBDC is issued by the central bank, the distribution of the currency is done via traditional institutions. 
Source: BIS
Source: BIS
The difference between the intermediated approach and the hybrid approach is that in the former model, the central bank only sees wholesale payments and in the hybrid approach, the central bank has a copy of the retail payments.
Source: Henri Arslanian; The Book of Crypto
Source: Henri Arslanian; The Book of Crypto
Another survey question reveals that 76% of central bank respondents are heavily focused on ensuring interoperability between retail CBDCs and existing payment systems. 
Interoperability, after all, would be key to any successful CBDC, as it would encourage and stimulate adoption whilst allowing for coexistence between central bank money and commercial bank money.
Interoperability between payment systems would also allow users to seamlessly move money between their CBDC accounts and their commercial bank accounts via credit card transactions or electronic money transfers. 
When it comes to the motivations behind issuing a CBDC, both central banks from Advanced Economies (AEs) and central banks from Emerging Market and Developing Economies (EMDEs) are broadly aligned.
However, there are a few key differences. 
Source: BIS
Source: BIS
For instance, retail CBDC work in AEs is being driven mainly towards improving domestic payment systems and strengthening financial stability.
Interestingly enough, the financial stability aspect can partially be attributed to the emergence of cryptocurrencies and stablecoins, with central banks in AEs confirming that the rise of digital assets had a notable impact in spurring CBDC research. 
And whilst central banks in EMDEs are also concerned about strengthening payment systems and ensuring financial stability, we see a much greater emphasis on broadening financial inclusion and streamlining cross-border payments. 
Source: BIS
Source: BIS
A number of wholesale CBDC projects around the world, for instance, are specifically focused on increasing the efficiency and effectiveness of cross-border payments, with Project Dunbar (conducted by the central banks of Australia, Malaysia, Singapore, and South Africa as part of the BIS Innovation Hub) a prime example
Central banks and international organizations have long been exploring how to reduce frictions in cross-border payment systems and international settlements, from limited operating hours and fluctuating foreign exchange rates to outdated technology and long transaction chains. 
Source: BIS
Source: BIS
A joint report published last year by BIS, the IMF, and the World Bank found that CBDCs indeed have the potential to improve cross-border payments efficiency, provided that stakeholders work together to ensure that their respective CBDCs are interoperable.
Source: BIS
Source: BIS
Another interesting takeaway from the survey is that over half of the participating central banks expect to issue a retail CBDC in the foreseeable future. This represents a dramatic rise from last year (58% to 65%).
Source: BIS
Source: BIS
The expected issuance of a wholesale CBDC also experienced a noteworthy rise, increasing from 43% of central banks to 54% of central banks.
However, in each case, central banks from EMDEs were far more likely than central banks from AEs to respond with such optimism for a near-term CBDC, suggesting that the motivations for CBDC issuance across the developing world are much stronger than in developed economies. 
When looking at the central banks that expect to issue a CBDC in the near to medium term, a number of factors jump out, from the continuing effects of the Covid-19 pandemic and the general decline in the use of cash in several countries around the world to the growing adoption and use of cryptocurrencies and stablecoins (particularly in AEs).
Source: BIS
Source: BIS
Another change from last year is that the legal authority to issue a CBDC has also increased, rising from 18% to 26%. Another 10% of central banks are currently undergoing changes to their laws that would pave the way for CBDC issuance, meaning more than a third of central banks will soon have a full legal mandate to launch and operate CBDCs. 
Source: BIS
Source: BIS
Ultimately, the growing number of central banks engaging with CBDCs and the speed at which things are moving from the theoretical to the practical means that we should expect several announcements about CBDC pilots and rollouts over the coming months and years. 
Will be very interesting to see what these survey results look like a year from now!
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Henri Arslanian
*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only and none of its content should be construed as investment or financial advice of any kind. 
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Henri Arslanian

Future of Finance and Money - PwC Global Crypto Leader, Best Selling Author, Keynote Speaker, University Professor, Host of Crypto Capsule™ - Views are my own

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