Central bank digital currencies (CBDCs) are back in the headlines, thanks in large part to former U.S. President and current Presidential candidate Donald Trump, who recently vowed to block the creation of a digital dollar if re-elected.
Trump is not alone in his disdain for blockchain-based fiat, as multiple state legislators have submitted bills seeking to block CBDCs from being considered money. Fellow Presidential candidate and Florida governor Ron DeSantis also holds a low opinion of digital fiat and has already enacted legislation in Florida limiting their potential use.
Despite the pushback, many analysts think that a world with multiple CBDCs is inevitable, as data from the Atlantic Council shows that “130 countries, representing 98 percent of global GDP, are exploring a CBDC.”
“There are about 130 countries already in advanced stages of central bank digital currencies development, and this number will rise,” said Angie Ong, general counsel and head of policy at Partior, in a note shared with Kitco Crypto. “Within five years, 40% of central banks are expected to have adopted some form of a CBDC, as they continue to complement fiat money while bolstering cross-border payments resilience and enhancing payment efficiency.”
She noted that multiple countries have already introduced various forms of CBDC, and that number is rising.
“Among them are the Sand Dollar from the Bahamas, Cambodia’s remittance-focused cross-border CBDC, and Nigeria’s e-Naira,” she said. “Additionally, several cross-border projects have also been introduced, including the wholesale CBDCs-focused mBridge project by the Bank for International Settlements (BIS) and Project Dunbar; and retail-focused Project Sela and Project Icebreaker.”
“There are several key drivers behind the growing interest in CBDCs globally. CBDCs may potentially address current challenges such as high transaction costs and ensure financial inclusion,” Ong said. “In addition, the programmable features of CBDCs could help enhance the effectiveness of monetary policy tools by offering the ability to program specific conditions for use or to automatically execute payments based on preset conditions.”
But that doesn’t mean it will be smooth sailing for CBDC rollouts around the world as a lot of development and collaboration still needs to take place.
“Any successful implementation of CBDCs will be highly dependent on a strong collaboration between the public and private sectors,” she said. “Such partnership will be crucial to navigate challenges and capitalize on respective strengths, including the ability to ensure confidence when introduced to society.”
“Achieving interoperability internally, between CBDC systems, and establishing global standards are also important priorities,” she added. “Collaboration among different regions to develop common protocols and frameworks can further facilitate seamless integration between CBDCs and is necessary to achieve inclusivity in financial markets.”
Ong said that achieving a high level of interoperability is a priority as it “will not only reduce friction in cross-border payments and settlements but also achieve the ultimate goal of better, cheaper, and faster payments globally. This comes amid an evolving liquidity landscape where new asset classes emerge and non-tokenized and tokenized assets eventually co-exist.”
“Supporting CBDC adoption will complement other digital money and payment innovations as we move towards an increasingly digital and decentralized future,” she said. “Regulatory policy will continue to focus on data privacy, consumer protection, financial crime, and cybersecurity risks. But these concerns are neither new nor unsurpassable.”
“The global financial sector has a history of positive progress when the right policies, well-designed implementation tools, and an openness toward global coordination and cooperation are embraced across borders,” she concluded. “Unquestionably, appropriate and sensible policy-making will be imperative to ensure market stability and end-users safety in the race to offer faster and better access to money.”
David Kemmerer, CEO of CoinLedger, told Kitco Crypto that he thinks CBDCs will “continue being a topic of conversation among financial institutions and consumers, and potentially even in Congress or the Fed as we head into 2024,” but said that he is not convinced that the “adoption of a digital dollar is a sure thing.”
“The Federal Reserve has stated it has no intention of issuing a digital currency itself (or at least not prior to congressional approval), and while different banks have experimented with the idea of a digital currency, I wouldn’t expect to see any major moves yet in 2024,” he said. “I think banks see CBDC as both a potential threat and a potential advantage, which could explain why many major banks like Wells Fargo, US Bank, and more have weighed the benefits of this type of currency.”
While banks weigh the positives and negatives, Modulus CEO Richard Gardner thinks the downsides outweigh any benefits.
“CBDCs are touted for efficiency, reduced transaction costs, and security, but there are warnings we should heed,” he said in a note to Kitco Crypto. “CBDCs are spawned by the government, thus allowing bureaucrats to hold absolute power over personal assets, including as a pawn in a battle over censorship.”
“This Orwellian form of financial control should be alarming, especially for those using CBDCs, regardless of their national origin,” he said. “In 2022, in progressive Canada, a spontaneous organization of truck drivers sought to protest Covid-19 restrictions and took to GoFundMe, a platform which eventually shut down the truckers' campaign, freezing millions contributed to their donation fund. An alternative to these invasive 'solutions' is decentralized finance.”
“Cryptocurrencies, most popularly Bitcoin, have just seen a bounce thanks to the approval of the first spot Bitcoin ETC,” he noted. “Why? Bitcoin, for example, is available and less reliant on centralized oversight, despite regulatory oversight.”
Stablecoins and non-US dollar CBDCs
The pushback against the creation of a digital dollar has been fierce, but other jurisdictions, including China and the European Union, are also exploring CBDCs, and are further along in the process than the U.S.
“The digital yuan is gaining momentum, demonstrating rapid growth within its pilot phase (26 cities and counting) and increased transaction volume (1.8 trillion RMB), transaction count (945 million), and 118 million wallets,” said Pelli Wang, co-founder of Bracket Labs. “However, challenges and concerns related to privacy, limitations, and geopolitical implications remain to be addressed as the project progresses toward a wider rollout.”
“Parallel to this, I believe the confidential filing of Circle’s IPO (issuer of USDC) will spur additional activity for CBDC in the US and abroad,” she said. “USDC is the 2nd most widely used stablecoin after Tether but seems to have much more legitimate backers (i.e. Blackrock, Fidelity, Marshall Wace, Goldman Sachs, Accel) and operations that more institutions and professional traders use.”
“If the IPO fares well, then I can see it being a direct competitor to CBDC,” Wang said. “It will light a fire for governments to want to regulate the stablecoin industry as well as launch and distribute their own flavor of CBDC.”
“2024 could be the year that the digital Euro takes centerstage,” said Mel Mattison, a writer, founder, and fintech executive.
“Piero Cipollone, member of the Executive Board of the ECB, sent a letter on January 3, 2024, to Irene Tinagli, chair of the Committee on Economic and Monetary Affairs (ECON) of the European Parliament,” he noted. “In this letter, Cipollone states, ‘that the ECB will in the coming weeks start the selection process for potential providers of digital euro components and related services.’”
“This is just one more sign that, while not officially announced as final, the ECB will be releasing a digital Euro sometime in the not-too-distant future,” Mattison said. “This will most likely happen in phases with a ‘wholesale’ version being rolled out first. Generally, CBDCs are looked at operationally from both a ‘wholesale’ and ‘retail’ perspective, whereby wholesale involves payment among banks and between banks and their central bank. Conversely, retail involves consumer-level transactions.”
“In my opinion, 2024 could be the year that the ECB officially announces its intention to release at least a wholesale version of the digital Euro. Regardless of what they say, this will likely lead to a retail version eventually,” he said.
Regarding the release of a CBDC in the U.S., Mattison noted that “Fed Chair Powell has already stated that he’s interested in a digital dollar but doesn’t think it makes sense for the dollar to lead the way given its importance to global finance.”
“Hence, I believe he would be happy to see the ECB go first and work out any kinks before the dollar follows,” he said. “Indeed, one can look to the ECB for a playbook on future Fed moves for CBDCs. The ECB has already stated that they don’t want to disintermediate banks given the vital role in lending that they play in the economy. Thus, in my opinion, any digital Euro or dollar will be implemented in such a way as to protect big bank business models.”
“Given this anticipated ‘protection,’ I don’t think banks see CBDCs as a threat, but rather as their defense against privately issued stablecoins such as USDC,” Mattison said. “Indeed, one can look at banks as in cahoots with central banks to rapidly deploy CBDC alternatives to private coins in a gambit to protect their monopoly on money. Unfortunately for them, I think that genie has already left the bottle.”
“With the recent launch of spot bitcoin ETFs, digital assets have moved beyond a monetary curiosity to a real challenge to the status quo of currencies,” he concluded. “Also, look for CBDCs to be a relevant topic as the 2024 election cycle ramps up in earnest. The battle for the future of money is just beginning.”
Crypto vs. CBDCs
Slater Heil, founder and CEO of Composable Corp and co-founder of Blueberry Protocol, also sees a battle brewing for the future of money, but doesn’t think that CBDCs pose a threat to decentralized cryptos.
“The topic of CBDCs is important, with a crucial point being that CBDCs don't directly pose a threat to cryptocurrencies,” he said in a note to Kitco Crypto. “The fierce competition for a global reserve currency – which both Bitcoin and the US dollar aspire to – revolves around supply, demand, and security mechanics. CBDCs don't significantly alter this dynamic and might even weaken the US dollar's position against Bitcoin on the global stage.”
“However, within the United States, CBDCs could impede Bitcoin adoption, although the approval of ETFs makes this less likely,” he warned. “The downside is a sacrifice of privacy, as a CBDC economy essentially operates as a surveillance system.”
Heil also thinks that the public will be slow to adopt a CBDC, in part because humans are typically reticent to try new things, especially when it comes to untested technology that puts privacy at risk.
“The adoption of CBDCs might face resistance, especially in the absence of a government mandate,” he said. “Concerns about privacy and the potential for abuse of power make CBDCs a morally challenged technology. The likelihood of CBDC implementation could depend on the political climate, with a CBDC becoming more plausible under more centralized administrations.”
“Despite these considerations, CBDCs aren't seen as a direct threat to Bitcoin,” Heil said. “Instead, they might strengthen Bitcoin's value proposition. Voluntary adoption of CBDCs is expected to be modest, except in the case of strategic moves by governments, such as introducing yield-bearing CBDCs.”
“However, if adoption is forced through a government mandate, the primary goal could be to counter the threat posed by Bitcoin to the US Dollar's global dominance,” he concluded. “The true motives behind CBDCs involve controlling and preventing the shift of wealth into alternatives like Bitcoin.”
