The Rise of Bank-Issued Digital Currencies



The declining use of cash and rising digitization are prompting many central banks to provide their customers with digital alternatives. Central bank digital currencies (CBDC) are one of the main solutions being investigated. CBDC’s have the same backing from the issuing bank as banknotes and coins.

Besides local payments, CBDC may also be useful for international banking, but there isn’t much research into this use case as yet. According to Fabio Panetta, Executive Board member of the European Central Bank (ECB), “Depending on its design, a central bank digital currency may support the use of a currency in cross-border payments.” However, it’s the fundamentals, such as economic policy and market depth, that are the most important factors, he added.

Several countries are experimenting with CBDCs. Some projects are ready while others are still in the testing or discussion phase. Here are some recent examples of CBDC initiatives:

The Digital Yuan

China is leading the way in digital currency development. Since 2014, the people’s Bank of China PBOC has been developing the digital yuan (officially called the Digital Currency Electronic Payment (DCEP)).

The digital yuan has the status of legal tender in China. The CBDC is expected to provide competition to local mobile payment leaders such as WeChat and AliPay, because, unlike these payment solutions, there is no service fee and no edge for competitors in terms of transaction speed.

PBOC is conducting real-world trials in different cities across the country. The latest trial is taking place in Beijing and involves a digital currency lottery of over $6 million. Each of the 200,000 winners will receive around $31 in digital yuan.

The E-Krona

Sweden’s central bank, Riksbank, has completed the first phase of its E-Krona CBDC project. The central bank is currently working with the country’s largest bank to test commercial integration of the digital currency.

The e-Krona tested in the first phase is a token-based currency exchangeable on a 1 to 1 basis with the Swedish krona.  Riksbank started the trial in February 2020 with Accenture as its technical supplier.

One of the variables the bank will test is “integration of the payment flows developed during the first year of the pilot with the participants’ internal systems,” said the bank.

The Sand Dollar

The Bahamas is an example of a country that has launched its CBDC. The Sand Dollar was launched in October 2020 by the Central Bank of the Bahamas CBOB.

“We’ve had very good progress…our financial institutions today, the payment providers, quite a number of them have already put their mobile wallets out which are connected to the Sand Dollar platform,” said CBOB Governor John Rolle.

The currency currently has nine authorized financial institutions (FIs) that have completed the interoperability process, adds the report.

The U.S. CBDC

The concept of a U.S. CBDC is still in the discussion stage. The Federal Reserve announced last month that it will release a research paper this summer on the introduction of a central bank digital currency.

The nonprofit Digital Dollar Project announced last month five pilot programs to test the potential of a U.S. CBDC.



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