- “Ultimately the dominant design of CBDCs will have a tangible impact on the function and utility of money.”
- “More aggressive CBDC adoption trials are likely to be announced by developing countries in 2022.”
- There will be a variety of motivations behind CBDCs, with most of these falling into either one of two categories: financial stability and monetary policy, and increased competition in payments and financial sovereignty.
- “There are questions about the motives of some central banks/governments – mainly rooted in privacy, surveillance, and centralization of control.”
- “Private banks coming together to test and pilot solutions lay the foundations for a public-private partnership on CBDCs.”
- “In a good scenario, positive synergies can be developed between CBDCs and the open blockchain space.”
Central bank digital currencies (CBDCs) were one of the biggest stories of 2021 as far as blockchain and cryptocurrencies were concerned, even if CBDCs don’t necessarily have anything to do with either blockchain or decentralized cryptocurrencies. Because for each new all-time high bitcoin (BTC), ethereum (ETH), or any other cryptoasset attained in 2021, it seemed that some central bank would come out with news that it was working on its own CBDC.
However, while the growth of the crypto sector has spurred many central banks into considering or even piloting their own digital currency, 2021 failed to bring any full CBDC launches (although the Bahamas launched the digital Sand Dollar in 2020). And while the expectation might be that 2022 will finally buck this trend and deliver a fully-fledged digital currency, commenters say that we’ll still have to wait another one or two years before witnessing any permanent deployments.
That said, industry figures estimate that 2022 will bring a ramping up of trials and pilots, with more nations and central banks getting involved. At the same time, observers also expect more private banks and financial institutions to push through with their own digital currencies, providing crypto with even more competition.
Moving slowly, increasing consultations and trials
“It is true that CBDCs have gained a lot of traction over the past years. More than 85% of central banks are moving forward with some initiative, usually in the form of relevant research, early-stage pilot, and in some extraordinary cases development of CBDC solutions and even limited deployment,” said Lambis Dionysopoulos, a researcher at the University of Nicosia’s Institute for the Future.
But while many central banks are dallying with CBDCs in one way or another, Dionysopoulos says that most intend to proceed cautiously and gradually, given the scale of the task at hand and the decisions involved.
Currently, central banks are faced with several options concerning the technological infrastructure, management, and monetary characteristics of CBDCs. Indicatively, CBDCs can utilize existing real-time gross settlement infrastructure, or a novel [distributed ledger technology] (blockchain) network,” he told Cryptonews.com.
Complicating things further, Dionysopoulos also notes that CBDCs can be issued by a central bank alone, or in collaboration with commercial banks and other financial service providers. Then you have other features to decide on, such as whether CBDC should bear positive or negative interest, as well as its nature as a liability and asset in the balance sheet of banks and individuals.
“Each option has its own merits and pitfalls, and there are no clear winners. Ultimately the dominant design of CBDCs will have a tangible impact on the function and utility of money, and even the future and role of the commercial banking sector,” he said.
Because there are such a wide range of variables in design and developing a CBDC, a lot of research and experimentation is necessary, which is why Dionysopoulos suspects we won’t see any (and certainly not many) full launches in 2022.
“When it comes to the future of money, there are no shortcuts to be taken ]…] Following China’s example, it is likely that we will see some limited deployment within this year or two, however, paying at a local coffee shop with digital euros is most likely a few years away,” he added.
Other commenters largely agree with this analysis. Chris Caruana, the Vice President of Anti-Money Laundering Solutions at Feedzai, a big data and machine learning-powered risk management platform, also estimates that full deployments will be “unlikely in 2022,” and that pilots and trials “will continue to be the norm.”
“A barometer on the actual deployment timeline is the progress China is making. There’s a general consensus within the industry that they’re likely to launch first, given how far along they are currently and the signals coming out of Beijing,” he told Cryptonews.com.
Indeed, China has now reportedly tested its digital yuan with around 140m Chinese residents, with its central bank reporting in November that total transactions using the digital currency sum to around CNY 62bn (USD 9.8bn). It’s therefore certainly not out of the realm of possibility that China does move ahead with a full launch in 2022, and some estimate that this might happen during the Winter Olympics in Beijing in February this year.
Regardless, most observers say that, partly because of Chinese efforts, pilots and trials will increase in 2022.
“More aggressive CBDC adoption trials are likely to be announced by developing countries in 2022. G20 countries that are more mature will take longer to adopt or commit,” said Jason Allegrante, Chief Legal and Compliance Officer at Fireblocks, a digital asset custodian.
For more developed nations, Allegrante expects they’ll organize more consultations, discussion groups, sandboxes, and other activities in 2022, as their central bankers consider various options for digitizing currencies and/or cooperating with private issuers.
Motivations for CBDCs becoming complex
Speaking on why governments and central banks will want to trial and develop their own CBDCs, most commentators say that motivations will vary according to the corresponding country.
“In my opinion, there is no one, unified goal for CBDCs […] Goals set in China are most likely very different from those set in the EU, for example,” said Vytautas Zabulis, CEO of H-Finance, a digital asset trading solutions company.
Zabulis adds that the major motivation for governments/central banks in the current landscape is to implement national and international policies, as opposed to deploying CBDCs in order to mostly benefit individuals. Although he does suggest that CBDCs will eventually benefit ordinary people in a big way in the more distant future.
Most notably, many central banks will seek to have their own digital currencies in order to improve the efficiency and speed of payment systems and networks.
For Jason Allegrante, one of the chief motivations is “the realization that there are real benefits to adopting these technologies in core central bank functions, like payments, settlement, and currency distribution. There is also likely a legitimate fear of being left behind, either by other countries who are more swift to adopt financial innovation, or by the private sector itself,” he said.
Lambis Dionysopoulos also suggests that there will be a variety of motivations behind CBDCs, with most of these falling into either one of two categories: financial stability and monetary policy, and increased competition in payments and financial sovereignty.
“Specifically, central banks always seek to enhance payment efficiency and security. CBDCs could provide marginal benefits in both of those areas, by extending central bank guarantees to the wider private sector,” he said.
At the same time, financial exclusion, especially considering the declining use of cash, is quickly becoming a serious problem, Dionysopoulos notes. According to him, CBDCs can bank the unbanked ‘fintech-style’, by extending banking and financial services to those that have access only to their smartphone.
Some central banks and governments may have less noble aims, however, when it comes to developing their CBDCs in 2022 and beyond.
“There are questions about the motives of some central banks/governments – mainly rooted in privacy, surveillance, and centralization of control via disintermediation of the existing financial system structure,” Chris Caruana told Cryptonews.com.
Indeed, much of the reporting on China’s digital yuan has noted that the currency is programmable, with the central bank able to set deadlines on its spending, for example. This could certainly be an increasingly popular motivation for CBDCs in less liberal nations in 2022.
Private bank digital currencies
With a Japanese consortium of private banks and companies trialing their own digital currency at this very moment, and planning a full launch in 2022, private bank digital currencies may become a wider trend in 2022.
“Private banks coming together to test and pilot solutions lay the foundations for a public-private partnership on CBDCs. It is reasonable to expect that we will see more of that in the future,” said Lambis Dionysopoulos.
Likewise, Vytautas Zabulis suggests that banks having their own currencies isn’t really a big surprise anymore, with more likely to follow in the future.
“If you analyze JPMorgan’s JPM Coin, which they have used for a while now, it makes an extremely weighty use case for transfers. It saves a lot of time — which means capital can be used much more effectively — the settlement times are quicker and there is no need for a third-party clearinghouse,” he told Cryptonews.com.
International settlements and foreign exchange will be one of the first things to benefit from the use of central or private bank digital currencies, Zabulis adds. Other industry figures also expect more private banks and financial institutions to get involved with their own digital currencies next year.
“For first movers, like BNY Mellon, Citibank, and State Street, efforts to transition to digital asset services will come to fruition in 2022, specifically with respect to their cryptocurrency offerings. It is further estimated that more private enterprises will prioritize digital currencies, and perhaps implement their own forms in the near future,” said Jason Allegrante.
The effect of CBDCs on crypto in 2022
One significant news story towards the end of 2021 was the Indian government publishing legislation that, on top of laying the framework for a central bank digital currency, also sought to ban private cryptoassets. (Learn more: New Delhi Ready to Back Down on Crypto Regulation, Claims Anonymous Gov’t Source) This ominous development raises the possibility that the development or deployment of CDBCs may go hand-in-hand with a crackdown on crypto.
“Yes, the risk of competition is very high. If you look from this perspective, countries with national legislation can always hinder the adoption of decentralized currencies and protocols which do not fall under one regulation,” suggested Vytautas Zabulis.
However, despite the risk of competition, commentators expect that any crypto regulation arising from CBDCs will be relatively moderate.
Lambis Dionysopoulos says that it’s “reasonable to expect that new legislation will be required to delimit what private actors can and cannot do in [terms of issuing their own currencies]. Europe’s recent markets in crypto assets (MiCA) regulation is a good indication of what we should expect.”
That said, Dionysopoulos also explains that decentralized cryptocurrencies such as bitcoin are “simply not fit for regulation akin to traditional financial service providers”, insofar as their decentralization would make it difficult for governments to stop anyone from using them. As such, more balanced governments may seek to embrace cryptocurrencies within reasonable limits.
He says, “In a good scenario, positive synergies can be developed between CBDCs and the open blockchain space, facilitated through regulated intermediaries. Countries that follow this approach stand to benefit from the innovations and growth of the DeFi and crypto space.”