Central Bank Digital Currencies (CBDCs) are designed for two primary purposes: retail and wholesale. Retail CBDCs are intended for use by the general public, aiming to enhance the efficiency, security, and inclusivity of everyday transactions. In contrast, wholesale CBDCs are targeted at financial institutions, focusing on improving the efficiency of large-scale, cross-border transactions and interbank settlements. While this article explores wholesale CBDCs later on, it will mainly focus on the retail aspect of CBDCs, examining their deployments, potential benefits, underlying challenges, and how they compare to traditional payment methods.

As cryptocurrencies like Bitcoin and Ethereum have soared in popularity, central banks around the world have scrambled to develop their own retail focused variants of digital currencies – CBDCs. Unlike decentralized cryptocurrencies, retail-oriented CBDCs represent central bank money transformed into digital form. They are not mined or created through complex cryptographic protocols but directly issued by central banks as a digital version of physical banknotes. With this comes certain differentiating benefits and drawbacks for CBDCs compared to their decentralised counterparts.

‍

The above figure, created by sociologist Ole Bjerhg for his paper ‘Designing New Money – the Trilemma of CBDC’, outlines where this digital currency falls within today’s current monetary foundations. The development of CBDCs represents central banks' reactions to the growth of decentralized digital currencies and the potential threats they pose to traditional finance and currencies. By creating digitized forms of national currencies, central banks aim to offer the speed and convenience of crypto payments while still maintaining control over monetary policy and financial stability. Today, many central banks are actively researching CBDCs, though only a handful have progressed to pilot programs or live launches. Cases range from the Bahamas' Sand Dollar to China's digital yuan trials to Nigeria's eNaira rollout. Each CBDC takes a slightly different approach regarding design choices around privacy, offline usage, interoperability with existing payments infrastructure, and more.

This article will analyse the key drivers behind CBDC development globally, examine prominent CBDC implementations, and evaluate whether CBDCs are likely to gain widespread adoption. There are open questions around issues of financial inclusion, impact on monetary policy effectiveness, and public uptake that must still be addressed. While CBDCs address concerns around cryptocurrencies' volatility, significant barriers around privacy and security must be addressed for CBDCs to succeed as true digital fiat alternatives.

The Journey from Cash to Code

CBDCs represents a convergence of several drivers that aim to steer the financial landscape into a new era. One driver is the digitization of payments and finance, which has acted as the primary catalyst. As the world hurtles toward an increasingly interconnected digital economy, the demand for more efficient, secure, and accessible payment systems has surged. CBDCs emerge as a strategic response to this demand, promising instantaneous transactions, reduced costs, and enhanced financial inclusion for unbanked populations. This technological evolution aligns with the evolving preferences of a digital-native generation, fostering an environment where convenience and immediacy in financial transactions are paramount.

Moreover, the rapid growth of cryptocurrencies, led by the groundbreaking rise of Bitcoin and subsequent altcoins, has played a pivotal role in propelling CBDC development. Cryptocurrencies demonstrated the potential for decentralized, borderless, and resilient financial systems, captivating both users and policymakers. CBDCs borrow from the innovation of cryptocurrencies while retaining the stability and regulatory oversight of traditional currencies, aiming to strike a harmonious balance between innovation and regulation in the monetary sphere. This crypto-driven momentum has compelled central banks globally to explore and experiment with their own digital currency initiatives, harnessing blockchain technology's transformative potential.

Furthermore, the evolving geopolitical landscape and the quest for financial sovereignty have spurred CBDC initiatives. The realization that digital currencies can be wielded as a tool for geopolitical influence and economic leverage has intensified the race among nations to develop their sovereign digital currencies. Additionally, the potential for CBDCs to counter the dominance of foreign currencies, ensuring autonomy in domestic financial systems, has been a driving force for countries exploring their development. This pursuit of maintaining monetary autonomy in an increasingly digitized global economy underscores the strategic significance attached to CBDCs to safeguard financial sovereignty.

These combined forces have fuelled a rapid proliferation of CBDC initiatives across continents, underscoring the transformative potential that these digital currencies can hold in the contemporary financial landscape.

The Sand Dollar Story

As of early 2024, 130 countries and their respective central banks, representing 98% of global GDP, are actively researching CBDCs, with 32 having progressed to pilot programs or live launches. Additionally, 19 of the G20 countries are now in relatively advanced stages of CBDC development. The landmark developments are of course those that have successfully achieved a live launch – 11 in total. Nigeria, Bahamas, Jamaica, Anguilla as well as 7 other Eastern Caribbean countries complete this list.

One of the early CBDCs launched in late 2020 is the ‘Sand Dollar’ of The Bahamas. The digital currency became available to citizens upon release, with the primary use case being in the retail space. However, integration with commercial banking systems has been a more gradual rollout. It is important to note that one of Sand Dollar's end goals was to improve the customer payment journey and increase financial inclusion by helping individuals transition away from holding and using physical cash.

‍

‍

An analysis of data published by the Central Bank of the Bahamas sheds some light on how things have gone thus far. Since its release over 3 years ago, about $2.5 million worth of Sand Dollars are currently in circulation. There are sudden bursts of uptake followed by sustained periods of stagnated growth. These sporadic bursts are likely the result of new technologies increasing accessibility to the digital currency, such as new wallets or banking integrations, and enabling new individuals to purchase the Sand Dollar. However, given that there is no sustained and healthy growth each month, there is reason to believe that the uptake of this CBDC is not spreading widely through local communities. Rather, it is being adopted by a more select number of individuals, who are already likely financially included.

The digital currency accounts for only 0.062% (as of July 2024) of the total Bahamian Dollar currency in circulation (and that is excluding the large amounts of USD that are preferentially used by Bahamians). To put this into a wider context, physical money (coins + notes) accounts for 15%. So, the financial inclusion goals of the Sand Dollar, to increase financial inclusion and ultimately replace the use of physical money, have not been achieved yet. The Sand Dollar thus far has averaged a 9% monthly rise in circulated value since Jan 2021. Whether this growth rate can be sustained remains to be seen, as initial increases due to enhanced availability and technical implementations may level off, requiring broader community adoption for continued growth.

There are a handful of reasons why the Sand Dollar has coursed its way to today’s situation – in a bit of a transitory no-man’s land. But some lessons can already be deduced and applied to future CBDC projects. Ultimately, financial exclusion is not a substantial issue in the Bahamas compared to other nations. As a result, there is not an outpouring of unbanked citizens suddenly adopting the Sand Dollar to increase personal financial inclusion. Perhaps then, this goal was a bit mis-aligned with reality. Furthermore, one can question whether the release of the Sand Dollar even solves the ‘problem’ of financial exclusion in the Bahamas anyway - the slow adoption so far indicates it does not. Retrospectively, the more simple and effective solution may have been to push for greater use of bank-issued debit cards among the older and more rural fringes of the Bahamas population.

Exploring Other Global CBDCs

Beyond the Sand Dollar, there are other realised retail CBDC implementations, however these too have come with varying degrees of success. At face value one can see success from the prompt development and implementation timeframes of these digital currencies – they’re first to the market with this new technology after all. Moreover, none of these CBDCs have been pulled from their live state since release. Despite this, no whirlwind rush of quantifiable revolution has been observed in any of these markets because of their newly minted digital currencies.

Nigeria’s ‘eNaira’ has witnessed slower adoption than expected, despite alarming figures surrounding cash shortage. Launched amidst considerable anticipation, it has encountered a tepid reception, reflective of broader challenges facing Central Bank Digital Currencies (CBDCs). Despite the pressing issue of cash shortages in Nigeria, the eNaira's adoption has been sluggish, mirroring a trend observed in other CBDC implementations globally. This hesitant uptake highlights the complexity of fostering digital currency adoption in markets where traditional cash usage remains deeply ingrained. The eNaira's journey underscores the need for substantial infrastructure and educational efforts to integrate CBDCs effectively within existing financial systems and the daily lives of citizens.

Launched in July 2022, Jamaica's central bank digital currency, JAM-DEX, aims to promote financial inclusion and streamline digital transactions across the nation. Despite the initial rollout challenges, such as low merchant adoption due to the need for additional point-of-sale infrastructure, the government has implemented several incentives to boost uptake. These incentives included a J$2,500 digital currency deposit for the first 100,000 wallet users and rewards for merchants and regular users, aiming to onboard small and micro-merchants to the platform. The Bank of Jamaica has also made regulatory adjustments to ensure JAM-DEX's seamless integration into the financial system, positioning it as a legal tender alongside traditional notes and coins. However, despite all this, only two wallet providers so far offer Jamaica’s ‘Jam-Dex’, recently sparking Bank of Jamaica’s Governor Richard Byles to express he is growing “impatient” with both these providers and merchants. Sometimes, even with robust support, widespread adoption may take time.

The world's major economies are acting more conservatively with their CBDC timelines. However, that is not to say that development is slow. One example is the digital euro, a project spearheaded by the European Central Bank (ECB), which aims to introduce a secure and efficient digital currency to complement cash within the eurozone. Expected to be launched by 2027, the digital euro will facilitate both online and offline transactions through a digital wallet, offering the convenience of cash-like privacy even without internet access. The initiative is part of a broader strategy to safeguard public money against the volatility of cryptocurrencies and to modernize Europe's financial infrastructure in response to the growing digitization of the global economy. Additionally, there is a growing perspective that central bank digital currencies (CBDCs) like the digital euro could be particularly well-suited for wholesale applications, streamlining large-scale transactions between financial institutions and enhancing overall financial stability.

China’s CBDC pilot has so far chartered a different course, initially aimed at seizing control of payment systems away from their domestic tech giants but now likely gearing towards cross-border trade with the ‘m-bridge’ initiative. The digital yuan (e-CNY), has seen significant progress and adoption since its inception. Launched initially in several cities and gradually expanding across the country, the digital yuan aims to modernize China's payment infrastructure and increase the yuan's global usage. Despite the significant number of digital yuan wallets created, actual usage and integration into everyday transactions have been more gradual compared to dominant private-sector alternatives like Alipay and WeChat Pay.

The m-Bridge project represents a substantial leap in CBDC applications, focusing on cross-border payments. This initiative involves central banks from China, Hong Kong, Thailand, and the United Arab Emirates, using blockchain and distributed ledger technology to facilitate real-time, peer-to-peer transactions. The first real value transaction through mBridge, completed in Guangdong, marked a critical milestone, demonstrating the project's potential to enhance the efficiency and security of international trade settlements.

These advancements highlight a broader trend where CBDCs, particularly in wholesale applications, can revolutionize cross-border transactions by providing a more efficient, secure, and transparent alternative to existing systems like SWIFT. As global adoption and technological capabilities expand, CBDCs could become pivotal in wholesale financial markets, offering benefits that go beyond retail applications.

Thoughts on CBDCs

The success of bitcoin and other crypto is largely due to their decentralized nature. It is true that they are highly volatile, something which CBDCs tackle due to their inherent linkage to fiat currencies, however this does not overcome the main hurdle at the crux of the Crypto vs. CBDC debate. CBDCs require users to have accounts linked to a central bank, that issues, distributes and controls said CBDC. This completely erodes the notion of anything other than a highly centralized currency. Imagine a society where you can’t buy anything without the consent of the state and every transaction is cached in a database that the government controls. This is an ominous hypothetical, but the reality is that CBDCs can enable exactly this situation. The low adoption rate of retail CBDCs could stem from concerns that they could serve as gateway to surveillance and control.

However, to citizens, CBDCs do not hold the same allure. A lack of understanding underpins this delta, with many potential users unclear on the concept of CBDCs and how they differ from traditional forms of currency. As such, a transition to a CBDC might be perceived as unnecessary and disruptive - especially when these citizens are satisfied with their existing financial infrastructure. Coupled with concerns surrounding trust and centralized spending control, critics might claim that retail CBDCs represent a wholly unattractive proposition to the target user base.

Moving forward we anticipate that there will be continued noise and buzz surrounding retail focused CBDC developments. Central banks and governments will push the digital currencies forward and it is likely that numerous other CBDCs will launch out of their pilot phases in the coming years. However, the true future lies in the adoption of these initiatives. So far, with currently available CBDCs such as the Sand Dollar, adoption is low, and speculation of their success is growing.

Comparing CBDCs with Traditional Payment Methods

Comparing Central Bank Digital Currencies (CBDCs) to traditional payment methods reveals a complex landscape. Retail CBDCs, like the digital euro and China's digital yuan, offer potential benefits such as enhanced security, lower fees, and increased financial inclusion. However, their slow adoption, as seen with Nigeria's eNaira and Jamaica's Jam-Dex, highlights challenges in trust and infrastructure. Traditional payment methods, including credit cards and bank transfers, continue to dominate due to their established infrastructure and user familiarity. These methods offer convenience and robust fraud protection but often come with higher fees and slower cross-border transactions.

In wholesale transactions, CBDCs show significant promise. Projects like mBridge facilitate real-time, peer-to-peer cross-border payments, enhancing efficiency and security in international trade. Despite these advantages, the adoption of wholesale CBDCs is hindered by regulatory, technological, and investment challenges. Furthermore, as incumbent payment technologies modernize, with improvements in speed, security, and cost, the unique value propositions of CBDCs may be diminished. The ongoing modernization of traditional systems, such as the introduction of faster payments and blockchain integration, could mitigate the distinct advantages that CBDCs are expected to bring.

Ultimately, while CBDCs hold promise for transforming financial transactions, their value is being questioned as traditional payment methods evolve. The balance between new innovations and the modernization of existing systems will be critical in determining the future landscape of financial transactions.

Conclusions

As the curtain rises on CBDCs, the script seems to be penned with a touch of uncertainty and caution. This digitized countermove to the crypto craze and the quest for technological prowess presents a narrative that is still finding its footing, as evidenced by the journey of the Sand Dollar in The Bahamas.

The Sand Dollar's modest three-year performance tells a story of aspirations meeting reality – the grand vision of financial inclusion and the phasing out of physical currency encounters speed bumps and detours. It's not a thriller; it's more like a slow-paced drama with intermittent bursts of interest that fade into stretches of indifference.

Surveying the global stage of CBDC implementations reveals a mixed bag of outcomes, with an overall cautious reception from the public. It's not just a matter of not getting it; it's a careful consideration of abandoning the familiar shores of traditional banking. For many, CBDCs feel like a solution in search of a problem.

Governments push forward in this digital experiment, yet the tangible impact is progressing slower than expected. Trust issues, worries about centralized control, and the looming spectre of state-managed transactions present areas for further discussion and reassurance. The promise of a digital revolution championed by CBDCs? It's still buffering.

‍

The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).