Central banks around the world, most notably in China, the United States and United Kingdom, are actively considering whether to adopt or create their own Central Bank Digital Currency (CBDC). The geopolitical pressures are high, with China far enough along in trials that it plans to roll out this new currency for international visitors as early as the 2022 Winter Olympics in Beijing. Other countries, keen to embrace the "tech revolution," are vying to be early adopters of CBDCs. South Korea, Sweden, Cambodia, the Bahamas and Hong Kong are among various countries with pilot programs. Jurisdictions such as the U.S., U.K. and the Eurozone are in the exploratory stages, and risk being left behind if they do not move quickly.
CBDCs offer an opportunity for central banks to embrace the crypto revolution while retaining control over monetary policy by making changes to current frameworks and methods. CBDCs are not, and are not intended to be, just another electronic token that happens to have been created by a central bank. Instead, they should be seen as their own type of product, different in nature and subject to centralized control.
CBDCs benefit from some of the features of other crypto assets, including the ability to achieve instantaneous transfers, or "delivery versus payment," thereby de-risking the financial system by avoiding the payment delays inherent in traditional fiat currency arrangements. Several central banks are already seeking to test these benefits for the international settlement of financial transactions. At the same time, the element of central bank control over CBDC issuances gives them stability and predictability that is often absent from crypto products.
Cryptocurrencies like Bitcoin are growing in popularity. Although China has banned these currencies, the situation is different elsewhere, with Bitcoin now constituting legal tender in El Salvador. Yet, for a currency controlled by a central bank, new arrangements will be needed, which must be tested for security and financial soundness. The role of commercial banks and the traditional banking system could be affected. Privacy is also a consideration, with centralized control and an immutable record of transactions raising sensitive issues relating to the collection and use of citizens' data.
The most significant concerns, however, are law and regulation. Ideally, authorities would address, on the international plane, the critical unresolved issues of how to secure clear legal and regulatory arrangements for CBDCs. However, there is currently no meaningful international agreement on such matters. The OECD and IOSCO have noted the lack of global consensus on regulating crypto tokens. There is thoughtful discussion on how to regulate cryptocurrency issuers, and some nations, such as Germany and Liechtenstein, are developing regulations for crypto trading. However, these domestic measures address matters in isolation, which is not the same as creating a global CBDC system that is workable and safe.
This leaves us with no agreement on what these forms of currency actually are and how they are regulated. Legal and regulatory systems can take very different views of how to treat them, and the ensuing confusion creates opaqueness and possible legal and regulatory challenges. Some countries may view the development of their own CBDCs as creating a competitive advantage over other countries, further undercutting attempts at an agreed-upon legal framework. As things stand, even if a country can create a CBDC that works within its current, domestic legal scheme — itself no small task — the cross-border capabilities inherent in CBDCs mean that a clear, international legal and regulatory path still needs to be found to allow for their widespread adoption.
