In recent updates from BIS studies, 80% of surveyed banks were progressing with Central Banking Digital Currencies (CBDC) and almost 40% had started developing proof of concepts. During World Economic Forum’s 2020 event, a similarly high number of countries announced they were underway with research or CBDC was prominently on the radar.
Last month, ZhongAn Insurance and China Construction Bank issued the country’s first insurance policy which was paid in digital yuan. People in cities piloting this new e-yuan can purchase ZhongAn policies on its app. The company expects to continue to extend digital yuan payment services for its main products, and conduct more research with CCB on the application of e-yuan in insurance.
The majority (90% or so) of money supply is already digital. What central banks propose is to transform the variant closest to retail consumers – cash – into digital form. CBDCs are essentially fiat money in digital form. E-cash serves as a store of value, being held at banks or on prepaid cards and digital wallets. It represents physical money, while CBDCs are complete replacements of notes and coins.
Key benefits of CBDCs:
- Enhanced security: As it works off a blockchain ledger, it is more secure and unlikely to be counterfeited. Every digital dollar or pound would have a trackable digital serial number and be auditable via an immutable ledger.
- Improved Financial Inclusion: Unbanked rural communities with lack of access to bank branches have difficulty in getting cash. CBDC can enable access to a range of financial tools.
- Efficient payments: Potential for more agile and efficient payments globally.
- Seigniorage: Central banks can expect to save up to 90% of costs involved in transporting, storing and replacing currency.
Six years in the making, the e-yuan, also known as Digital Currency Electronic Payment (DCEP), is gearing to be issued by China’s central bank to replace cash in circulation. The official launch date is still undisclosed, with little detail available on the blockchain-based digital currency. What seems certain is that digital payment leaders like Ant and Tencent stand to forfeit fee income, once consumers transact with DCEP. They may have little option but to adopt the digital currency, a contender to replace cash altogether. Nevertheless, one would expect that ecosystem stickiness, attractors such as online spending credit and poor traction of bank wallets, will keep consumers loyal to leading digital wallets even when they are transacting with digital yuan.
In pilots so far, a few million transactions were processed, totaling more than a billion yuan. Users were reportedly underwhelmed by the DCEP wallet UI. This is unsurprising, as central banks generally lack expertise in user facing apps, though these were reportedly designed with commercial banks, The Chinese CBDC uses a two tier system for distribution. The pilot is said to continue even until the Winter Olympics in 2022 and hints at a full launch not happening for the next two years, as the Government gets ready legal ground.
Meanwhile, in the Bahamas, after a successful 2019 pilot on the island conglomeration of Exuma, the digital B$ was launched. The sand dollar is the first ever nationwide CBDC in the world. Alongside the launch, an ecosystem of Authorized Financial Institutions has evolved to provide services to retail customers, such as KYC/AML checks, wallet services and custodial services.
As in few other nations, the central bank of France is beginning to conduct a series of experiments, broad focus of which covers testing regulation using digital currency and “to explore new methods of exchanging financial instruments for central bank money.” This, from one of the world’s leading central banks, shows how institutions are scrambling to master what cryptocurrency technology has to offer and the likely shape of the future that awaits us.
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