The global payment landscape has transformed remarkably over the past decade. Digital payments have increased exponentially and are gradually replacing physical cash transactions even in Low and Middle Income Countries (LMIC). Private digital currencies such as Bitcoin have also proliferated as an asset class (Bitcoin etc) and as a medium of exchange, like Diem.
While the goals of private cryptocurrencies such as Bitcoin differ dramatically from a sovereign currency, they have offered evidence of feasibility and technical ideas for retail deployment of central bank digital currencies (CBDC) (Brookings, 2020). At its simplest, a CBDC is cash but in digital form. Similar to physical cash, it is issued by the central bank and guaranteed as a claim on the central bank reserves, can be accepted broadly, and results in instant transfer of value.
The popularity of CBDCs among central banks has increased dramatically in the past few years. According to the Atlantic Council, 130 countries, representing over 98 percent of global GDP, were exploring a CBDC as of July 2023. At the time of writing, 64 countries were already in an advanced phase of exploration (development, pilot, or launch). Eleven countries had fully launched a digital currency– Jamaica being the latest, and China’s pilot, with the potential to reach 260 million people, was set to expand to most of the country in 2023. In 2022, India had also launched two CBDC pilot projects – one wholesale for settlement of transactions between financial institutions and one retail for general public use.
There are many reasons for the growing interest among central banks in issuing retail CBDCs including preserving monetary sovereignty in the face of increasing popularity of foreign currency-backed stable coins, potentially strengthening monetary policy pass-through, improving payment efficiency, strengthening competition for e-money payment providers and in countries where cash use is declining rapidly, ensuring continued access to “risk-free” central bank money (Auer et al, 2021).
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