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CBDC Outlook 2023 - More than meets the eye

Kitco News

Welcome to Kitco News' 2023 Outlook Series. Uncertainty continues to dominate financial markets as central bank monetary policies push the global economy into a recession to cool down inflation. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2023.

(Kitco News) - 2022 was a very busy year for central bank digital currencies (CBDC), with the number of countries developing a CBDC rising to 114 by the end of December and representing 95% of global GDP. Some central banks, like those of Saudi Arabia and Tunisia, have chosen to focus their energies on the development of a wholesale central bank digital currency (wCBDC), designed to enable commercial banks and other financial institutions to settle transactions between one another. Others, such as Norway, Turkey and Russia, have opted for the more ambitious target of a retail CBDC (rCBDC) designed to be used at every level of the consumer economy.

Some countries, most notably China, advanced their CBDC programs dramatically over the course of the year, and are now solidly in the real-world implementation phase, while others like Indonesia have only begun to study their feasibility. As of January 2022, Ecuador is the only country to formally abandon their CBDC program to fully embrace the decentralized potential of cryptocurrencies like Bitcoin.

But as economist Richard Werner told Kitco News, much of the real action on CBDCs in 2023 will remain hidden from the public eye. "The CBDC project is a long-term project, and that means even if we don't see too many concrete, big moves forward in 2023, that doesn't mean nothing's happening right behind the scenes."

CBDC vs. crypto in Europe, UK

The European Central Bank began its CBDC project in October of 2021. The project is currently in the investigation phase which will last until fall of 2023 and will include the unveiling of the high-level design for the digital euro before July 2023. Finance Ministers for the European Union issued a joint statement on Jan. 16 backing the ECB process while acknowledging some important challenges and uncertainties.

"A digital euro should first and foremost meet the retail payment needs of the euro area," they wrote, making clear that their focus was on a retail CBDC rather than the less ambitious wholesale version.

Once the investigation phase has concluded, European lawmakers will decide whether to initiate the realization phase for a Europe-wide CBDC with both wholesale and retail characteristics.  

Things are moving more slowly in the United Kingdom, which has had its hands full with the still-ongoing Brexit processes and domestic political upheaval that saw them appoint three Prime Ministers in as many months in the second half of 2022. Current Prime Minister Rishi Sunak has spoken very positively about the possibility of a CBDC for the UK, and Andrew Griffith, the U.K.'s Economic Secretary to the Treasury, told Parliament on Jan. 17 that they plan to launch public consultations on a digital pound in the coming weeks. "I would rather be right than be first," he said. "It will be a long lead-time activity." Griffith also said the first use case of a digital pound would probably be in the settlement of wholesale (wCBDC) financial transactions.

The views coming from the Bank of England, however, have been much cooler, with BoE Governor Andrew Bailey telling the British Parliament's Treasury Select Committee on Jan. 16 that he didn't think a wholesale CBDC version of the sterling was needed right now, nor does he believe retail payments need any changes at the moment. "We have to be very clear what problem we are trying to solve here before we get carried away by the technology and the idea," he said, adding that they have no plans to abolish cash for retail use.

Werner, who was a longtime member of the ECB Shadow Council and currently teaches at Oxford, sees the possibility of two different attitudes emerging in the region, with some countries favoring CBDCs and others cryptocurrencies. "There's some domiciles like Switzerland […] where they've been very proactive and they have very good legislation for crypto currencies. As a result, there's a lot of crypto launches and crypto activities there," Werner said.

"But on the other hand, we have the ECB in the Eurozone and also the Bank of England looking at CBDCs." He thinks countries pushing CBDCs are more likely to constrain cryptocurrencies, and the ones that have already backed crypto could double down. "You could get a two-track system, crypto friendly versus getting increasingly crypto unfriendly."

Bank of England governor doubts digital pound as EU finance ministers support euro CBDC

Asia is diverse, pro-cash

The number-two global economy is number one when it comes to CBDC development. China's ongoing pilot program for the digital yuan now involves 26 large cities and 5.6 million merchants and saw an accumulated transaction value of 100 billion yuan ($12.2 billion) from consumer spending, bank lending and cross-border payments by the end of August 2022.

Exploration of the digital yuan initially began in 2019, and the public pilot program for the e-CNY launched in April 2020. In December, the PBoC revealed its intentions to once again expand the program to include the cities of Jinan in the Shandong Province, Nanning and Fangchenggang in the Guangxi Zhuang Autonomous Region, Kunming in the Yunnan Province, and the Xishuangbanna Dai Autonomous Prefecture in the near future.

The Reserve Bank of India (RBI) launched its retail e-rupee pilot program on Dec. 1 after running a wholesale CBDC pilot since Nov. 1, which received a lukewarm reception from participating banks who said they saw no advantages and some key drawbacks.

Indonesia's central bank released a white paper on Dec. 1 outlining their approach to a possible CBDC for the fourth most populous country, with Governor Perry Warjiyo writing that central banks view CBDCs as "a prospective future-proof solution" to the challenges posed by cryptocurrencies, but that the issuance of a CBDC would not be easy.

Japan has also reaffirmed its intention to continue exploring the creation of its own CBDC, the digital yen. The next phase of the Bank of Japan's investigation will involve a collaboration with three megabanks and regional banks in the country to conduct a CBDC issuance pilot aimed at providing demo experiments for the issuance of a digital yen beginning in spring 2023.

Werner said many Asian countries still rely a great deal on physical money, and this could hold back the plans of central bankers. "Cash has always been quite important [in Asia], so it will still take a bit longer to have full-blown CBDC launches," he said.  That will mean a slower rollout of those plans, or a rollout that has to preserve the role of existing banks in being the intermediary for all of that cash that's being used."

And Werner said that includes Japan. "Japan has one of the highest cash uses of any major economy."

Latin America seeks escape from dollar domination

The digital currency news out of Latin America in 2022 and early 2023 has been largely focused on the decentralized cryptocurrency ecosystem. While El Salvador has garnered the most attention since their recognition of Bitcoin as legal tender in June 2021 and the passing of the Digital Assets Issuance bill on Jan. 11, Brazil recently moved forward on both fronts, announcing plans to launch its own CBDC in 2024 and enacting a crypto bill that legalizes Bitcoin on Dec. 22.

Werner said it's not surprising that Latin American countries are among the leaders in terms of cryptocurrency adoption, and may doubt the benefits of CBDCs because of their own governments' track records.

"In Latin America, the dominance of the US dollar, and also the macroeconomic policies that were introduced in countries in the shadow of the US dominance of Latin America, have resulted in weak currencies," he said. "Therefore, there are enough people to think [cryptocurrency] could be an alternative because it's not controlled by the US or their local government. The strong US dollar has not always been to their advantage, so they have another reason for kind of getting out from under the existing system."

Africa sees burgeoning crypto, bludgeoning CBDC implementation

Africa is providing some of the most extreme cases in the advancement of both cryptocurrencies and CBDCs. The Central African Republic was the second country in the world after El Salvador to recognize bitcoin as legal tender in April 2022, and the continent is one of the fastest-growing regions for cryptocurrency use. The growth has been so rapid that the IMF expressed concern that "widespread use of crypto could also undermine the effectiveness of monetary policy, creating risks for financial and macroeconomic stability."

Meanwhile, Nigeria is carrying out the most aggressive implementation of a CBDC to date, setting limits on cash withdrawals from ATMs in December after discovering that only 0.5% of Nigeria's 217 million citizens are using the central bank's eNaira while 35% of the Nigerians between 18 and 60 reported owning or trading cryptos in 2022. Nigeria was one of the first countries to roll out a CBDC on Oct. 25, 2021.

Werner said Nigeria's CBDC policy is a symptom of the continent's broader economic problems, and they won't be solved through more centralization of the currency.

"It's being introduced for the wrong reasons," he said. "Maybe that's always true but it's particularly blatant here. I think these countries should really focus on stabilizing their economies first, and also tackling their debt problem. Many countries have been trapped in this kind of World Bank-led debt, which has extracted resources from the country at a fast pace and has left very little."

The U.S. will tread lightly

The United States has a number of CBDC projects in the works. The New York Federal Reserve announced on Nov. 15 that it would be conducting a 12-week CBDC pilot project in collaboration with commercial banks to test an "interoperable network of central bank wholesale digital money and commercial bank digital money." And on Nov. 11, Project Cedar began Phase II of its study exploring the technical framework for a wholesale CBDC.

The Digital Dollar Project, a partnership between Accenture and the Digital Dollar Foundation, also released an updated white paper encouraging the U.S. government to take a more active global role in CBDCs, saying that the U.S. had been "conspicuously absent" from global CBDC discussions until 2022, which the DDP called an "unsustainable position."

And the government of Canada announced on Nov. 3 that it has begun consultations with stakeholders on digital assets including CBDCs, and also published an analysis of archetypes for a potential retail CBDC in October.

"The US will be a big battle," Werner said. "It could mean, and hopefully they won't, but it could mean that they go down the typical central bank route of saying, ‘okay, we're not getting what we want this way, we're going to have another crisis until people beg us to introduce it.' That's what we've seen before."

According to Werner, it's also not out of the question that the Federal Reserve decides they're not even going to try. "If the resistance is high and if you then push it, that resistance will gain attention globally and could set back what, from a central planner's viewpoint, is good progress," he said. "My guess would be that they're not going to push it very hard, and the US is not going to be in the forefront of CBDCs because of that thinking."

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