Central banks around the world test their own electronic currencies

Central banks around the world studythe ability to issue a central bank digital currency (CBDC), and some are already testing their currencies for various purposes. China, Singapore, Canada, the Bahamas, Thailand, Uruguay, and Sweden have significantly advanced their digital currency projects, while India has included digital rupee in the country's cryptocurrency bill.

Chinese CBDC is «almost ready»

According to a recent claim, work on CBDCChina is nearing completion. According to media reports, the People's Bank of China (PBOC) is «almost ready» issue the country's own sovereign digital currency. Deputy Director of the NBK Payments Department Mu Changchun announced this at a forum in the northern Chinese province of Heilongjiang on August 10.

He explained that CBDC will usea two-tier system in which the central bank and financial institutions will be the legal issuers, Reuters reported, noting that "the digital currency will not rely solely on blockchain technology, as current blockchain technology will not be able to cope with transaction volumes in China." The publication added that PBOC began exploring the possibility of launching its own CBDC in 2014 with the goal of “reducing the costs of circulating traditional paper money and strengthening policymakers’ control over the money supply.”

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Testing between Singapore and Canada

Monetary Authority of Singapore (MAS) and Bank of Canadajointly conducted an experiment on cross-border cross-currency payments using CBDC. The two central banks have combined their experimental domestic payment networks — Project Jasper and Project Ubin — built on two different distributed log transaction (DLT) platforms, MAS reported in May. The experiment was conducted in collaboration with Accenture and J.P. Morgan. The first one supports the development of the Canadian network on Corda, and the second — Singapore network on Quorum.

«Cross-border payments today are oftenslow and expensive», — noted MAS, highlighting that they rely on a correspondent banking network "exposed to counterparty risk, poor liquidity management and cumbersome reconciliation." Therefore, the two central banks began to cooperate towards the use of CBDC, «to makemake the cross-border payment process cheaper, faster and more secure. MAS clarified:

This is the first such test between two central banks, and it has great potential to increase efficiency and reduce risks for cross-border payments.

Bahamas tests CBDC for payments

Another country testing CBDC isare the Bahamas. The International Monetary Fund (IMF) released details of its discussions with the Central Bank of the Bahamas in July, including work done on the country's CBDC framework. «By enabling peer-to-peer transactions, such as through e-wallets, CBDC can expand access to digital payment systems», — The IMF explained:

CBOB (Central Bank of The Bahamas)plans to test the digital version of the Bahamas dollar as a means of payment to increase the availability of financial services, especially on the small islands of the archipelago.

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Noting that the «issue of electronic currencymay create risks for financial stability, cybersecurity, as well as in the field of combating money laundering and terrorist financing», — IMF staff «recommended investments in human capital and technology to enable pilot and full-scale adoption of a general purpose CBDC that is compatible with and complements existing financial infrastructure».

CBDC Multiphase Testing in Thailand

Bank of Thailand (BOT) has completed the second phasetesting its CBDC, which was called Project Inthanon. The first stage was launched in August last year to verify the concept and aimed at developing a decentralized real-time gross settlement system (RTGS), which uses CBDC based on a distributed transaction log. The second phase was from February to the present with the aim of further exploring the possibilities of using DLT in two specific areas.

The first area involves «tokenizationdebt instruments issued by BOT based on a distributed transaction log to achieve their life cycle goals and delivery-versus-payment settlements. Second — «Integrate compliance and reconciliation capabilities into the distributed transaction log-based payments process to improve process efficiency and reduce operational and legal risks.» The results of the second stage of testing were published in July.

The bank will soon move to the third stage, with the goalwhich is testing a «DLT based RTGS prototype» which «will be expanded to connect to other systems to support cross-border funds transfer transactions», the BOT said. «The scope will also include regulatory and compliance issues in both Thai Baht and foreign currency.»

Uruguay, Sweden and ECCU

Last April, the Central Bank of Uruguaycompleted a retail CBDC pilot program as part of the government's wider financial inclusion programme. The pilot project began in November 2017 with the issuance, distribution and testing of the electronic peso, — reported by the Bank for International Settlements (BIS). «Transfers occurred instantly peer-to-peer through mobile phones using text messages or the e-peso application». However, blockchain was not used. Twenty million electronic pesos were issued, all of which were canceled when testing ended. The program is currently in the evaluation phase, after which a decision may be made on further testing and possible release.

In Sweden, the Riksbank began work on the projecte-krona in spring 2017 in response to years of declining cash use. «The electronic crown will provide access to the general public to a digital complement to cash, where the state will guarantee the value of money», — says the central bank's website. Although «no decision has yet been made on the issue of the e-krona», the Riksbank has confirmed that it «continues to explore the possibilities of issuing the e-krona to increase competence and thus be better prepared to meet the new digital payments market« 187;.

Eastern Caribbean Central Bank (ECCB)signed a contract with Barbados-based fintech company Bitt Inc. to pilot a CBDC within the Eastern Caribbean Monetary Union (ECCU). This experiment will involve a securely issued digital version of the East Caribbean Dollar (DXCD), which will be distributed and used by licensed financial institutions and non-bank financial institutions in the ECCU. DXCD will be used for financial transactions using smart devices between consumers and merchants. «For example, a person in St. Kitts and Nevis will be able to securely send DXCD from their smartphone to a friend in Grenada in a matter of seconds, at no cost to either party», — explained the ECCB.

India is open to digital rupee

The Government of India is currently discussingthe cryptocurrency bill entitled «On the Prohibition of Cryptocurrency and the Regulation of Official Digital Currency 2019». The bill proposes to allow the government to create a digital rupee as legal tender and currency, and defines digital rupee as «a form of currency issued digitally by the Reserve Bank and approved by the central government as legal tender».

The bill states that «CentralThe Government, in conjunction with the Central Reserve Bank Board, may approve the digital rupee as legal tender with effect from such date and to such extent as may be determined.

Why central banks study CBDC

In a June report, the IMF said that a number ofCentral banks are exploring the issue of CBDC, noting that in advanced economies that have seen a decline in the use of cash, this option is being considered as an alternative payment method. «The main reasons for considering a CBDC are to reduce costs, improve the efficiency of monetary policy implementation, counteract competition from cryptocurrencies, ensure competition in the payments market, and offer a risk-free payment instrument to the public». The report states:

Most central banks considernon-anonymous CBDC. Almost everyone prefers a hybrid approach, which allows relevant authorities to track transactions. Some focus on a two-way approach with anonymous tokens for small savings / transactions and a monitored currency for large ones.

At the same time, countries with underdeveloped financialsystem and a large number of citizens without bank accounts are considering CBDC «as a means of expanding access to financial services and supporting digitalization», — noted the IMF, adding that "several political and technical obstacles need to be resolved, and there is not yet a clear need for the issuance of CBDC."

At the end of June, BIS Director General AgustinAgustín Carstens said that «global central banks may have to issue their own digital currencies sooner than expected», — reports the Financial Times. According to Libra posts published on Facebook, a number of central banks have stepped up work on their CBDCs. Agreeing with the IMF, Carstens stressed that “there must be evidence of demand for central bank digital currencies, and it is not yet clear whether there is demand.” Here is a quote from his words:

Many central banks are working on this; WeWe are working on this by supporting them … And perhaps the market will emerge much faster than we think, and we should be ready to provide central bank digital currencies.

What do you think of central banks issuing their own digital currencies? Which country do you think will launch CBDC first? Write in the comments below.