2020 is a year of vigorous development for CBDC. Whether it is the pilot landing in China or the change in attitudes of the United States, Japan, South Korea and European countries, the exploration and R&D of CBDC are undergoing unprecedented “global resonance” in history.
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In 2020, the central bank digital currency (CBDC, Central Bank Digital Currency) winds spread in the global economy. Whether it is the landing of the pilot project in China or the changing attitudes of the United States, Japan, South Korea, and European countries, CBDC has started an unprecedented ” global resonance “.
To trace its origin, the concept of CBDC was proposed by economist James Tobin in The Case for Preserving Regulatory Distinctions as early as 1987 . However, no substantive progress was made in the subsequent two decades. It was not until 2013 that some countries and economies began to pay attention to CBDC and gradually deployed it. It was not until this year that the CBDC concept ushered in a real “burst”.
What are the motivations for implementing CBDC in various countries? What are the basic principles and characteristics of CBDC? Where are the CBDCs of various countries? What’s the difference? The chain reviews the latest developments of CBDCs in various countries, and guides readers to understand the CBDCs that have developed so far.
Image source: dgen.org
Motivations for countries to implement CBDC
2020 is a year of booming central bank digital currency. According to the recent work report of the Bank for International Settlements (BIS), as of mid-July 2020, at least 36 central banks have announced the progress of their digital currency work. Among the 66 central banks participating in the survey, about 80% of the central banks are engaged in research, experimentation, or development of digital currencies. This value was only 65% in 2017 and 71% in 2018.
Judging from the new statements of the above-mentioned central banks and organizations on CBDCs, the sense of urgency for countries to launch CBDCs is mainly due to external shocks . Lianwen classified it into three main reasons:
The global popularity of digital assets led by Bitcoin ;
The super-sovereign currency ” Libra ” proposed by Facebook brings new boundaries to the supervision of various countries;
With the outbreak of the new crown epidemic in 2020, the demand for cash payment has dropped sharply, and the transformation of digital payment methods has accelerated.
In the context of constant changes in the external environment, central banks of various countries are actively exploring the construction of financial and payment systems that can cope with CBDC, and effectively improve the efficiency of domestic and cross-border payments, and enhance the stability of the financial system in the payment field.
In addition to the main reasons mentioned above, there are some subtle differences in the motives of various countries to implement CBDC:
From the perspective of the overall concept of CBDC launched by some early countries (Marshall Islands, Venezuela, etc.) , it is more hoped to use legal digital currency to increase economic sovereignty and resist economic sanctions from foreign countries;
For countries with stable domestic situation and economic development (China, Singapore, Sweden, etc.) , legal figures are more conducive to reducing external shocks, reducing costs and increasing efficiency in pursuit of more optimized development.
The basic principles, characteristics and classification of CBDC
CBDC usually refers to a digital tool issued as a central bank liability for payment and settlement. Due to the differences in the R&D background, objectives, and design of CBDCs of various economies, their CBDCs are also slightly different.
On October 9, the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada, the Swiss National Bank, the Riksbank and the Bank for International Settlements jointly issued a report entitled ” Central Bank Digital Currency: Basic Principles and Core Features .” Although the use of cash varies greatly among the seven economies, the seven central banks still reached a consensus on the necessary features of CBDC and the principles to be met for issuance.
The three basic principles and characteristics of CBDC
The above seven central banks believe that in order to achieve common public policy goals, central banks need to consider some basic principles when issuing CBDCs and reach an international consensus on the core features required for CBDCs. This means that if the central bank issues CBDC in the future, its related ecosystem should be based on this principle. These three basic principles emphasize:
Central banks should not damage currency or financial stability by issuing CBDCs;
CBDC needs to coexist and complement existing currency forms;
CBDC should promote innovation and efficiency .
Based on these principles, CBDC must have the characteristics of convertibility, convenience, ease of use and low cost . The underlying system should have instant settlement, 24/7 availability, high throughput, scalability, interoperability, and high security, flexibility, and flexibility, and be based on appropriate standards and a clear legal framework.
From this, we can see the difference between CBDC and other currency forms .
Four categories of CBDC
From the perspective of type, CBDC can be divided into retail type and wholesale type . The former is for the general public and is used for daily transactions, and the latter is for specific institutions and is used for large-amount settlement. From the perspective of operation mode, CBDC can be divided into single-tier operations and dual- tier operations. layer operations, issued by the former central bank directly to the public, the latter first by the central bank to banks and other institutions CBDC Exchange, and then redeem these institutions to the public; from system design look, CBDC can be divided based on the account (accountbased) or on behalf of the Token -based , the former refers to transactions through digital currency accounts opened in central banks or commercial banks, and the latter refers to transactions using tokens between digital wallets through a centralized or decentralized settlement system; In terms of interest calculation rules, CBDC can be divided into interest-bearing type and non-interest-bearing type .
BIS believes that economies with larger informal economies tend to retail CBDCs, while economies with higher levels of financial development tend to wholesale CBDCs. The use of wholesale CBDCs is limited to the central bank and financial institutions , not open to the public, while retail CBDCs are open to the public. For example, the digital renminbi of the People’s Bank of China is retail, and the Jasper project of the Bank of Canada, the Ubin project of the Monetary Authority of Singapore, the Stella project of the Bank of Japan and the European Central Bank are all wholesale .
At this stage, the potential impact of CBDC varies greatly due to its type, operation method, and interest calculation mechanism. Retail CBDCs that use a single-tier operation model or interest-paying have a greater impact on monetary policy transmission and financial disintermediation , while wholesale CBDCs and retail CBDCs that use a two-tier operation model without interest-paying have less impact on the financial system .
Data show that as of mid-July 2020, at least 36 central banks around the world have announced retail or wholesale CBDC work. At present, Ecuador, Ukraine and Uruguay have completed retail CBDC pilot projects, including China , Bahamas, Cambodia, Eastern Caribbean Monetary Union, South Korea and Sweden, and six retail CBDC pilot projects are in progress .
Data source: Bank for International Settlements
The latest developments in CBDC of major global economies
The BIS report pointed out that among the 66 central banks that participated in the survey, 20% of the banks will issue digital currencies in the short term , and nearly 20% of the banks are likely to issue digital currencies in the next one to six years . This ratio is twice that of last year. .
Lianwen sorted out the current progress of CBDC in various countries one by one:
CBDC launched: limited results
The countries that launched CBDC before 2020 are mostly small countries with low economic status in the world, with unstable domestic economic situation , strong dependence on the US dollar or subject to US economic sanctions. For example, Ecuador (South America) , Uruguay (South America) , Senegal (Africa) , and Venezuela (South America) . The final implementation of these CBDCs launched internationally and regionally is not satisfactory and has limited results.
In 2014, the Central Bank of Ecuador launched a project called “Dinerolectrónico” (electronic money) . In this system, citizens who have passed the qualification certification can complete payment and transfer operations in supermarkets, shopping malls, banks and other places through mobile apps. But in the end, its circulation only accounted for less than 0.3% of the currency of the entire economy, so it ended in scribbling in 2018.
In the case of landing in 2020 or having started the pilot program, Lithuania ’s LBCoin was issued to commemorate the 100th anniversary of Lithuania’s independence, which is more of a commemorative significance ; Cambodia ’s Bakong is its new generation payment system aimed at improving the efficiency of the payment system And security to promote financial inclusion. However, it is worth noting that the local media “Phnom Penh Post” reported that the country’s central bank governor Chea Serey had emphasized at the press conference that Bakong is not a central bank digital currency.
CBDC in closed beta: launching more cautiously, positive closed beta
On the other hand, despite paying close attention to CBDC, mainstream economies are still cautious about the formal implementation of digital currencies. Economies including China, Singapore, Sweden, France, and other economies are still conducting a wide range of CBDC landing tests to continuously optimize and improve Features.
China’s digital renminbi and Sweden’s electronic krona can be said to be relatively active and prominent projects in the CBDC. November 12, Deutsche Bank Research Center (Deutsche bank research) released a new economic assessment report. The report pointed out that the epidemic has accelerated the ” digital cash revolution .” In the long run, this revolution will eventually enable CBDCs such as China’s digital renminbi or Sweden’s E-Krona to replace cash. Deutsche Bank also warned European policymakers in the report that if it does not develop its own central bank digital currency project in response to the positive progress of China and Sweden in this field, there will be risks in the future.
The Riksbank started the research and development of the electronic krona (E-krona) in 2017 . On February 21, 2020, the Riksbank began a test of the electronic crown. Over the past decade, Sweden’s cash usage had dropped so precipitously Riksbank development CBDC. According to the Riksbank’s statement, Sweden will first simulate the use of electronic crowns in an “isolated test environment”. It also stated that if the e-krona finally enters the market, it will be used to simulate daily banking operations, such as payments, deposits and withdrawals through digital wallets (such as mobile apps) .
The People’s Bank of China has been studying legal digital currency since 2014 , and at the end of 2017, it organized some commercial institutions to jointly develop the digital RMB system (DC/EP) . At present, the digital renminbi system has basically completed top-level design, standard formulation, function research and development, joint debugging and testing. It is following the principles of stability, safety, controllability, innovation, and practicality. It is first in Shenzhen, Suzhou, Xiongan, Chengdu and the future. The Winter Olympics scene conducts internal closed pilot tests .
Goldman Sachs recently released a report is expected in the next 10 years, the RMB traceable digital user (addressable users) will reach one billion, the issue is expected to reach 1.6 trillion yuan, total annual consumer payment will reach 19 trillion yuan , Saving 162 billion yuan in cost each year. With the popularization of digital renminbi, China’s banking industry is constantly eroding market share by financial technology companies, which is expected to be alleviated or even reversed.
The reason is that the Goldman Sachs report believes that as of 2019, China’s M0/M2 ratio is only 4% , which is one of the countries with the lowest cash use among major economies, and it is still declining.
In addition, the rate of off-counter business in China’s banking industry is also increasing year by year. Under the influence of the new crown epidemic, before February 2020, the rate of off-counter business in China’s banking industry has reached 96% . In the view of Goldman Sachs, these advantages will be the biggest help to promote the digital renminbi.
CBDC not yet available: feasibility demonstration, specific R&D plans vary
Among the CBDCs that are still on the market, some economies are still in the exploratory stage. Countries such as the Philippines and Japan have begun to consider the necessity of issuing CBDCs, while Lebanon, Russia, Brazil and other countries have put CBDCs on the agenda .
Judging from the new developments disclosed by various countries, the specific R&D plans of several large economies are different.
The Federal Reserve is evaluating the costs and benefits of CBDC, studying related legal issues, and conducting research and experiments on distributed accounting technology and its potential uses in the field of digital currencies (including CBDC) .
The Swiss National Bank has studied the necessity of issuing CBDC and related technical, policy and legal issues and determined the basic design ideas. It will decide whether to issue a wholesale CBDC in 2021, but it also pointed out that it will not issue a retail CBDC.
Japan stated that if digital yen is issued, the central bank may set an upper limit on the issuance and holdings of digital yen. Or it will start the first phase of the trial in April next year and move to the second phase in the 2021 fiscal year. The Bank of Japan views the central bank’s digital currency as a tool to strengthen the settlement system , not a monetary policy tool. In addition, even after announcing that testing will begin next year, Japan has not yet made a final decision.
Russia recognizes that the speed and adoption rate of encrypted assets are a clear challenge to the stability of the national payment system and the national financial system. It is believed that CBDC may be a ” worthy alternative ” in the encryption field, or it will eliminate the market’s demand for encrypted currencies. It is hoped that the digital currency (CBDC) that will be piloted next year can be used as a “response to the challenge formed by (encrypted assets) .”
summary
The interoperability between CBDCs in different countries is not only a matter of technical design, public standards and interface work, but also a major obstacle and challenge for CBDCs in cross-border payments . In addition, the impact of cross-border CBDC on a country’s monetary policy and financial stability must also be considered.
However, it is undeniable that the digital transformation of the world economy is the general trend, and the decline in the utilization rate of cash will also inevitably affect the legal currency reform and innovation of the central banks of various countries. The large-scale emergence of new technologies and new formats has profoundly affected the global technological innovation landscape and economic trends. However, whether to introduce digital currency issued by the country at the current stage , how to balance digital currency innovation with national conditions , and explore innovative technological development in line with national conditions are also problems that need to be solved urgently in front of countries.
