At the Singapore FinTech Festival last week, International Monetary Fund (IMF) Managing Director Kristalina Georgieva highlighted the potential benefits of central bank digital currencies (CBDCs), including increased financial inclusion, faster cross-border payments and improved efficiency. She emphasised the need for national authorities to adopt an entrepreneurial mindset when designing and implementing CBDCs.
Despite the enthusiasm for CBDCs, many countries were still grappling with the question of whether or not to issue them. Given the limited benefits that CBDCs offer, the large investments required to develop and promote them may not be justified for many developed economies. However, CBDCs can play a role in niche applications, particularly in the wholesale space and in countries seeking to rapidly develop financial inclusion and digital payments.
Many central banks are still exploring the feasibility of CBDC. Some (e.g., China) are moving quickly, while others are more cautious. For example, the Bank of Japan has been conducting research for years, but has not yet decided whether to issue a digital yen. Similarly, the Bank of Korea has encountered challenges with blockchain technology in its digital won pilot. The Federal Reserve is also experimenting with digital dollars, but their issuance depends on strong support from the White House and Congress.
The Reserve Bank of India (RBI) is the central bank that started pilot testing CBDC (digital rupee). However, adoption has been slow and the RBI is now considering ways to increase its usage. Meanwhile, the Bahamas launched the world’s first CBDC, the ‘sand dollar’, in 2020, but has also struggled to gain widespread adoption.
The Bakong project, developed by Japanese blockchain firm Soramitsu, appears to be the most successful CBDC to date.Implemented in Cambodia, the Bakong project has been adopted by 70 financial institutions and processed more than 35 million transactions in the first half of 2023. Its success can be attributed to a number of factors, including integration with existing payment systems and the use of incentives to encourage adoption.
The prospects for CBDC adoption vary from country to country, depending on their unique financial situation and needs. The cross-border sector is an area of particular interest, with projects such as mBridge aimed at improving the speed, efficiency and transparency of international payments. However, it remains to be seen whether these projects will be significantly better than existing solutions from SWIFT, Visa, Mastercard and Ripple.
Meanwhile, the adoption of wholesale CBDCs is likely to be faster than retail CBDCs. the Monetary Authority of Singapore (MAS) plans to pilot wholesale CBDCs in 2024, with the aim of facilitating instant payments between commercial banks. While this sounds promising, it remains to be seen whether the benefits will outweigh the costs.
Overall, the CBDC landscape is still evolving and it is too early to tell which countries will ultimately succeed in implementing CBDC. However, the potential benefits of CBDC are clear and it is likely to play an increasingly important role in global finance in the future.