The declining use of cash and rising digitization are prompting many central banks to provide their customers with digital alternatives. Central bank digital currencies (CBDCs) are one of the main solutions on offer. The currency is backed by the issuer in the same way as banknotes and coins.
Besides local payments, CBDCs 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.