CBDC pioneers: Which countries are currently testing a retail central bank digital currency?

Authors: Jonas Weisbrodt, Jonas Gross

Central bank digital currencies (CBDC) are currently a hot topic. A study by the Bank for International Settlements (BIS) from January 2020 shows that 80% of worldwide central banks are engaged in CBDC-related research (Boar et al. 2020, p. 3). The percentage of central banks that run experiments or proofs-of-concept is also growing, reaching almost 50%. 10% of the surveyed central banks plan to introduce a generally available (retail) CBDC in the next three years and 20% in the next six years (ibid., p. 7). Therefore, CBDC efforts are very dynamic and are expected to even increase in momentum within the next few years.

This article discusses current CBDC initiatives and explains the motives and the progress of these projects. Our analysis shows that China, Sweden, the Bahamas, the Eastern Caribbean Currency Union, and the Marshall Islands can currently be seen as pioneers in the CBDC space. Note that this article does not focus on the definition and the design principles of a CBDC. If you are interested in details about these aspects, please see Klein, Gross, and Sandner (2020).

Retail CBDC projects in practice

China: DC/EP

China’s central bank (PBoC) was one of the first central banks focussing on the development of a CBDC, forming a special task force already in 2014. In April 2020, the project gained traction as the testing of a CBDC prototype was announced. Currently, the prototype of the Chinese CBDC, called DC/EP (digital currency/electronic payment), is tested by the private and also by the public sector. 50% of the mobility subsidies for employees in the public sector are being paid out directly onto the digital DC/EP wallet. Further testing was announced to take place during the Winter Olympics in 2022.

The role of cash in China is declining. In 2016, only 40% of all payments were carried out with cash (Statista 2019) — in 2018, only 20% (Bundesbank 2019). In the Euro area, this share amounts to 79% (Esselink, Hernández 2017, p. 4). China is consequently one of the few countries worldwide where currency in circulation (CIC) as a share of gross domestic product (GDP) decreased (see figure 1).

Figure 1: Development of cash usage in China; Source: van der Knaap, de Vries 2018, p. 145.

Lower use of cash can imply risks, as pointed out by Mu Changchun from the PBoC. Changchun points to the high dependency on private sector companies with a risk of bankruptcies of private platforms offering wide-spread digital payment methods (Goh, Shen 2019). A CBDC that substitutes cash could support the development towards a less cash-dependent society without the default risk that accompanies private platforms as a CBDC is issued and backed by the public sector.

Furthermore, the PBoC aims to protect its monetary sovereignty by curbing demand for private cryptocurrencies (Wilmoth 2018) and preventing Libra, the Facebook-initiated digital currency project, taking root in China. Wide acceptance of Libra by Chinese citizens would threaten PBoC’s sovereignty because Libra will not be backed by Renminbi (RMB) (Bartz 2019).

A Chinese CBDC is also motivated by driving the internationalization of the RMB. Although efforts to internationalize the RMB already take place, the U.S. dollar remains dominant (Wood 2019). By improving the possibility and convenience of cross-border RMB payments and RMB payments abroad, a CBDC could strengthen the international use of the RMB and thereby help to internationalize the Yuan (Bloomberg 2020). If the digital Yuan falls under capital controls, the restrictions could constrain a successful internationalization of the RMB. At this point, it is unclear whether the PBoC will focus on the internationalization of the Yuan or capital controls.

The non-interest-bearing digital Yuan will allow instant transactions, offline usability, and will not require a bank account (Jinze 2019). It is likely to be interoperable with WeChat Pay and Alipay (Goh, Shen 2019). Jinze (2019) reports that the PBoC wants to implement a two-tiered operating structure with the central bank issuing and redeeming the digital Yuan exclusively to selected firms. This covers banks as well as other large companies such as Alibaba and Tencent. The PBoC might transact its CBDC with those firms via distributed ledger technology (DLT). As firms need to be capable of meeting the target of 300,000 processed transactions per second, they are unlikely to use also a DLT infrastructure to conduct transactions with end-users (Jinze 2019).

Sweden: e-krona

In March 2017, the Swedish Riksbank started its CBDC project, the e-krona (Riksbank 2017). A pilot is planned from 2020 until February 2021. Afterward, the Riksbank decides whether to continue with issuing a CBDC. The pilot’s initial focus will be on a non-interest-bearing CBDC (Riksbank 2018, p. 38). The project intends to ensure instant payments at any time, and offline usability is examined in the project as well (Riksbank 2020, p. 3). When it comes to anonymity, the Riksbank underlines that anonymous payments would only be in line with regulation if e-krona transactions are happening peer-to-peer (Riksbank 2018, p. 16). For its pilot project, the Riksbank plans a two-tiered operational structure (see figure 2).

Figure 2: Planned operating structure for the e-krona pilot; Source: Riksbank 2020, p. 4.

A network consisting of the Riksbank and selected banks are implemented on a permissioned DLT. Additionally, a “notary node” helps to prevent double-spending. After activation, end-users would manage their e-krona in digital wallets (ibid., p. 5).

Besides China, also Sweden is experiencing low cash usage. In a survey including 50 countries, a majority of both industrialized and emerging countries show increasing CIC to GDP ratios, amounting to 9% on average (Bech et al. 2018, p. 71). In 2018, Swedish CIC accounted for only 1.4% of GDP (see figure 3), which is the lowest ratio worldwide (van der Knaap, de Vries 2018, p. 134). Moreover, only 20% of all payments in Sweden are conducted with cash (Statista 2019), and a growing number of merchants are expected to stop accepting cash in the future. Swedish businesses are not obligated to accept cash, and Sweden will be cashless by 2023, according to predictions by the deputy governor of the Riksbank, Cecilia Skingsley (Jones 2018).

Figure 3: Development of cash usage in Sweden; Source: van der Knaap, de Vries 2018, p. 169.

Facing a decreasing use of cash, the e-krona could counter the negative effects of an unimpeded marginalization of central bank money by offering continued access to (digital) central bank money (Söderberg 2019, p. 3). If cash is less and less accepted, an alternative to digital payments vanishes. Network effects could easily lead to oligopolies that lack competition. In the case of its marginalization, cash could not compete as a means of payment, resulting in higher fees of the dominant providers (ibid.). As an alternative, e-krona could indirectly cap the maximum fee private providers can charge.

The Riksbank also sees threats for financial stability in the form of less robust payment systems as profit-oriented private firms do not take as sophisticated measures to ensure the functionality of payment systems in times of crises as public institutions, such as the central bank (ibid.). A CBDC would offer a robust alternative in case of crises or turmoil of private payment service providers, ensuring the stability of the Swedish payment system.

Even if Swedes are using less cash than any other nation, there are parts of the population that struggle with technological innovations and rely on cash (ibid.). If cash acceptance further declines, those people find themselves increasingly excluded. The e-krona could target people that usually refrain from digital payments, countervailing their financial exclusion. Such an initiative can be rather expected from the public sector and not from the (profit-oriented) private sector.

The Bahamas: Sand Dollar

The Bahamian CBDC project is called “Sand Dollar” and its prototype had already been initiated in the district of Exuma in December 2019 and two months later also on the Abaco Islands. The Central Bank of the Bahamas (CBoB) plans to expand the project to all islands by the second half of 2020. Currently, around 380,000 people live scattered on the 700 islands that form the Bahamas. The national currency, the Bahamian Dollar, is kept at a 1:1 peg with the U.S. dollar.

Although 80% of Bahamian adults have a bank account — compared to a global average of 69% (Demirgüç-Kunt et al. 2018, p. 2) –, there are significant gaps in access to financial services (CBoB 2018a, p. 6). Opening bank branches on remote islands is often not cost-efficient for banks. Additionally, stricter anti-money laundering (AML) and counter financing of terrorism (CFT) standards made banking services more expensive and led to a further decline in bank branches (Island Crypto 2019). Surprisingly, this decline in bank branches did not lead to broader adoption of electronic payments but a higher cash usage (ibid., figure 4). Therefore, one goal of the Sand Dollar is to make digital payment services more attractive by increasing efficiency in the payment system (CBoB 2019, p. 4). A substitution of cash for Sand Dollars would lead to cost savings, e.g., related to storing and distributing cash.

Figure 4: Currency in circulation in the Bahamas; Source: CBoB 2018b, p. 7.

Stricter AML and CFT standards also excluded certain groups from banking services and led to a self-exclusion of people driven by new due diligence requirements (CBoB 2019, pp. 3, 6). Hence, financial inclusion is the primary goal of the Sand Dollar (ibid.). To achieve this objective, unjustified exclusion and self-exclusion from banking services need to be prevented.

Lastly, economic surveillance could be enhanced by the implementation of a CBDC (BCoB 2019, p. 17). As digital money, Sand Dollars would allow for tracking. With obtained information, the CBoB could gain a better knowledge of the allocation of money that would allow for better tax collection and policy-making (ibid.).

To reach unbanked parts of the population, the private usage of Sand Dollars will not require a bank account (ibid., p. 12). Additionally, a card-based version updatable through POS devices will allow to use Sand Dollars without a mobile device (ibid., p. 14). Sand Dollars will not bear interest, and limits will be introduced on the held amount (ibid., p. 12). Transactions with Sand Dollars are intended to be low priced, nearly instantaneous, and do not require an internet connection (ibid., pp. 10, 17). This is especially important in a region prone to hurricanes. Furthermore, the Sand Dollar payment system will be interoperable with other payment systems of classical financial intermediaries (ibid., p. 10). Sand Dollar transactions will not be anonymous, but the CBoB underlines “strict attention to confidentiality” (ibid., p. 9). The Bahamian central bank plans a two-tiered operational structure for the Sand Dollar (ibid., p. 12). Transactions will be restricted to domestic use (CBoB 2019, p. 10).

As the Sand Dollar constitutes an additional digital variant of the Bahamian Dollar, i.e., belongs to the same currency, capital controls might apply to the Sand Dollar as well. This is necessary to keep a fixed exchange rate and also engage in independent monetary policy. As stated by Fleming (1962), it is impossible to allow for free capital flow, additionally. As it is impossible to unite all three elements, namely fixed exchange rate, sovereign monetary policy, and free capital flow, this concept is known as the impossible trinity.

Eastern Caribbean Currency Union (ECCU): DXCD

In March 2019, the Eastern Caribbean Central Bank (ECCB) initiated its CBDC project called DXCD. Since March 2020, the CBDC is being tested in selected pilot countries for six months. The ECCB issues the Eastern Caribbean Dollar (ECD) that is the legal tender in eight of the eleven member states of the Organisation of Eastern Caribbean States (OECS), together forming the Eastern Caribbean Currency Union (ECCU). The islands that constitute the OECS are located in the Caribbean Sea and are inhabited by more than 1.4 million people. Since 1976, the ECD is pegged to the U.S. dollar.

The economy of the OECS is mainly paper-based; 80% of payments are carried out with cash or cheques, which are both deemed inefficient (St. Luca Times 2019). Current digital payment services are costly (ibid.). Furthermore, they usually request a minimum spending amount, excluding small-value transactions from being carried out digitally (ECCB n.d.). According to the ECCB (n.d.), established payment services do not address the needs of certain groups of the population. As long-term objectives of the DXCD, the ECCB mentions “financial inclusion, growth, competitiveness, and resilience” (ibid.).

To reach financially excluded parts of the population, transactions in the CBDC will not require a bank account. Furthermore, there will neither be a minimum balance of CBDC to maintain an account nor a minimum spending amount (ibid.). Transactions with digital ECD will be free and processed in real-time (ibid.). However, maximum thresholds in the form of limits on transactions and holdings of digital ECD will be implemented (ibid.). While the ECCB promises “privacy and confidentiality of all transaction information” (ibid.), it remains unclear how large the degree of data privacy will be in the end. Internet access will be required to fully use the digital ECD. As the CBDC “is just another form of cash” (ibid.), it would not bear interest. As an operating structure, a two-tiered system is tested that relies on a DLT network on the first layer (ibid.). As the digital ECD serves as a digital equivalent to cash, it will likely be subject to the same capital controls (O’Neal 2020).

Marshall Islands: SOV

In February 2018, the Republic of the Marshall Islands (RMI) revealed plans for the issuance of a digital currency, the Sovereign (SOV). With a population of only 58,000 inhabitants, the costs of a physical national currency are currently exceeding its benefits. This is why the U.S. dollar currently serves as the legal tender in the RMI. With the SOV, the RMI plans to introduce a second, exclusively digital, legal tender. It is motivated by expensive and inefficient payment methods that prevail in the RMI. For instance, the cost of remittances amounts to 10% of total funds transferred (SOV Foundation 2019, p. 7). Further, only “very few people have bank accounts or debit cards” (ibid., p. 7). Consequently, the country’s payment system is dominated by cash. With the SOV, the RMI wants to offer an attractive digital payment service to the unbanked (ibid.).

Accounting for approximately 20% of the annual GDP, the RMI is highly dependent on U.S. aid (IMF 2018, p. 2). As the RMI plans to keep 50% of the initially issued SOVs, in the beginning, a continued sale of retained SOVs, as well as the annual growth of SOVs, will constitute a new source of revenue, once the financial support of the U.S. ends in 2023. Only low fees would be charged on SOV transactions that are processed in real-time and do not require a bank account (SOV Foundation 2019, p. 9).

The SOV will be based on permissioned DLT, whose protocol will also ensure a monetary supply with a stable growth rate (ibid. p. 12). This follows Friedman’s k-percent rule (Friedman, Schwartz 1963). After the initial issuance of 24 million SOV units, money supply will grow at an annual rate of 4%. The additional amount of SOVs is planned to be proportionately distributed to, inter alia, holders of the SOV (SOV Foundation 2019, p. 13), making the SOV practically interest-bearing. A fixed monetary policy might ensure trust, but it also implies that the RMI cannot counteract an appreciation or depreciation of the SOV with adjusting money supply. Therefore, a high volatility of the SOV’s price seems possible, especially as international access will be allowed. The impending high volatility of the SOV is one of the reasons why the IMF (2018) expressed concerns about the Marshallese project. However, a floating exchange also has its advantages, e.g., making a disintermediation of the banking sector less likely. If depositors excessively substitute their U.S. dollar-denominated deposits for SOVs, the SOV appreciates and makes a continued substitution less attractive.

So-called verifiers will onboard users, which will then be able to transact SOVs on the distributed ledger (SOV Foundation 2019, p. 18). Twenty-one “block producers” (ibid., p. 11) approved by the RMI would initially verify transactions, with more validators being selected later (ibid.). There are no limits of holding or transacting SOV units. Although transactions would not contain “personally identifying information” (ibid., p. 10), SOV users must be verified (ibid., p. 9).

Whereas all the presented CBDC projects would be digital variants of an existing currency, constituting central bank liabilities, the SOV would be a new, state-backed digital currency. Albeit legal tender, the SOV would not be a liability of a central bank — also as the RMI does not have an own central bank — and hence would strictly speaking not qualify as a CBDC.

Summary of current retail CBDC initiatives

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More and more central banks show interest in CBDCs. The presented pioneer projects are motivated by several reasons. Interestingly, a too dominant role of cash in the payment system, as well as decreasing cash usage, are mentioned as motivating factors. On the one hand, the CBoB and the RMI address inefficiencies from high cash usage and aim to promote financial inclusion with a CBDC. China and Sweden, on the other hand, see the importance of declining cash usage and stress negative implications of lower cash usage as a motivation for their CBDC. Other reasons are better surveillance (CBoB), an eased internationalization of the currency (PBoC), and creating an alternative source of revenue (RMI). Concerning their implementational design, CBDCs are quite similar. With the exception of the SOV, all projects would rely on a two-tiered operating structure, and none of them is planned to bear interest. However, these initiatives follow different approaches for CBDC limits, anonymity, offline usability, international access, and technology.

Note that the impact of a CBDC on the financial system could so far only be theoretically analyzed. Therefore, it remains to be seen how citizens would, in fact, react to the concrete implementation of a new variant of central bank money. Given the advanced status of the presented projects, we might soon be able to observe this reaction.

Further material

About the authors

Jonas Weisbrodt studies Philosophy & Economics (B.A.) at the University of Bayreuth. He became aware of the central bank digital currencies during a seminar at the University of Bayreuth. Besides macroeconomic issues, he is interested in game theory. In the course of his bachelor thesis, he deals with models that examine the stability of authoritarian governments in the face of potential protests. The best way to contact Jonas is via mail (jonas_weisbrodt@gmx.de).

Jonas Gross is a research assistant at the University of Bayreuth and project manager at the Frankfurt School Blockchain Center. His research and his Ph.D. thesis focus primarily on central bank digital currencies (CBDC) and stablecoin projects such as Libra. You can contact Jonas by mail (jonas.gross@fs-blockchain.de), LinkedIn (https://www.linkedin.com/in/jonasgross94/), and Twitter (@Jonas__Gross).

This article was written in the context of a seminar about cryptocurrencies and central bank digital currencies (CBDC) at the University of Bayreuth. The seminar was offered by the Chair for International Economics and Finance (VWL I).


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