The Future of Money: Around the World in Central Bank Digital Currencies

The People’s Bank of China (PBOC) began piloting its retail CBDC, e-CNY, from the end of 2019. The pilots started in Shenzhen, Suzhou, Xiong’an, Chengdu. Scenarios in the 2022 Beijing Winter Olympics followed. Since the pilot began, the value of transactions made using e-CNY has surpassed 100 billion yuan. The PBOC has expanded the pilot to include 26 areas in 17 provinces/cities as of April 2023 . At the end of 2022, the PBOC reported that there was 13.61 billion yuan of e-CNY in circulation, representing 0.13% of the total volume of yuan in circulation.

As for the design of e-CNY operational system, it adopts a two-tier operation.  “Tier 2.5 Operators” are involved.

In this system, the PBOC doesn’t directly provide services for the general public, but is responsible for issuance and disposal, inter-institution connection and wallet ecosystem management. It prudently selects commercial banks with certain strengths in capital and technology as Authorised Operators to take the lead in providing e-CNY exchange services.

Under the quota management of the PBOC, the Authorised Operators open different types of digital wallets for customers based on the strength of customer personal information identification and provide e-CNY exchange services. There are ten Chinese banks currently entitled as Authorised Operators. All other banks or payment service providers are classified as Tier 2.5 Operators who can participate by linking their customers’ bank account with the e-CNY wallet of the Authorised Operators, for top ups and cash-out.

There is no current date for a nationwide launch of e-CNY, however companies including Alibaba and Tencent have integrated e-CNY into their systems as a payment option. Alipay and WeChat have e-CNY functionality, greatly expanding the use case for the digital yuan. The PBOC has developed a digital wallet app in which e-CNY is stored. The app can be installed on smartphones to enable payments via QR codes, near-field communication tapping and other methods.

At this stage the pilot has mainly been used for domestic retail payments, however PBOC has indicated that it intends to encourage use in corporate and personal business transactions, as well as finance, taxation, and government spending. There are reports that e-CNY has been used to buy securities.

PBOC has identified several benefits of e-CNY:

• reducing transaction costs and times for domestic and international payments
• reducing the costs associated with printing, circulating, and eventually replacing damaged physical money
• enhancing its control of money supply and currency circulation
• increasing the usage of renminbi to price and settle global trade transactions and financing
• increasing the visibility of its uses, which can help to decrease money laundering, tax evasion, and allow PBOC better data to base policy decisions on
• improving financial inclusion by allowing digital payments in rural areas that have more limited infrastructure.

The PBOC has also considered the application of a wholesale CBDC alongside the Hong Kong Monetary Authority.

The Federal Reserve has made no decisions on whether to pursue a US CBDC, however it has been exploring the potential benefits and risks of CBDCs more generally. Its key focus is on whether a CBDC could improve an already safe and efficient domestic payments system.

In January 2022, the Federal Reserve released a discussion paper examining the pros and cons of a potential retail CBDC.

The initial analysis found that a US CBDC, if one were created, would best serve the needs of the United States if it was:

A CBDC could potentially serve as a new foundation for the payment system and a bridge between different payment services, both legacy and new, according to the research.

The current Federal administration has highlighted its support for the Federal Reserve’s work in reviewing a potential CBDC. The Treasury will lead an interagency working group to consider the potential implications of a CBDC. In March 2022 President Biden signed Executive Order 14067 Ensuring Responsible Development of Digital Assets, placing a high level of importance on research and development efforts into a potential CBDC.

The White House released a technical evaluation report in September 2022. This report evaluated some potential design options against the priorities that the US Government has for a potential CBDC, which includes expanding equitable access to the financial system, preserving the role of physical cash, only collecting data that is strictly necessary, remaining sustainable and providing a good customer experience. The US is considering the application of both wholesale and retail CBDCs as a part of this work.

In November 2022, the Federal Reserve Bank of New York and its New York Innovation Centre initiated a 12-week pilot project (known as Project Cedar) to test the feasibility of wholesale CBDCs in the US. The future use of CBDCs in the US is not, however, without controversy. US Senator Ted Cruz introduced a bill in March 2023 to prohibit the US Federal Reserve from introducing a retail CBDC. Similarly, Governor Ron DeSantis has announced legislation to ban the use of CBDCs in Florida.

• Regional efforts: The Federal Reserve Bank of Boston in collaboration with the Massachusetts Institute of Technology Digital Currency Initiative published the Project Hamilton Phase 1 report in February 2022. Project Hamilton aims to explore the use of existing and new technologies to build and pilot hypothetical CBDC platforms.  The Phase 1 report presented initial technological research into CBDCs and resulted in the production of research and code in relation to a high-performance transaction processor. Phase 2 will explore high-security issuance, systemwide auditability, programmability, privacy and compliance, resilience against denial-of-service attacks and the technical roles for intermediaries.

If the US pursued a CBDC, there could be many possible benefits, such as facilitating efficient and low-cost transactions, fostering greater access to the financial system, boosting economic growth, and supporting the continued centrality of the US within the international financial system. However, a US CBDC could also introduce a variety of risks, as it might affect everything ranging from the stability of the financial system to the protection of sensitive data.” – US, White House Office of Science and Technology Policy, September 2022

The Bank of England (BoE) has long explored the introduction of a CBDC, including considering how a CBDC might work. It was initially resistant to the idea of introducing one. The House of Lords released a report in January 2022 which found that there was no convincing case for introducing a retail CBDC in the UK.

However, the tide appears to have turned. While the Bank of England is yet to decide whether to introduce a digital pound it has explored the potential across a few initiatives, including:

• Digital Pound consultation. The Bank of England is exploring the policy case for a retail digital pound CBDC. As part of this process, in February 2023 the Bank of England published a joint consultation paper with HM Treasury, as well as a technology working paper. In that consultation paper, the BoE and HM Treasury conclude that ‘it is likely that a digital pound will be needed in the future’, representing a major shift in thinking as to the future of retail CBDCs in the UK. The BoE and HM Treasury now intend to move to Phase 2 of their work on the digital pound—the design phase—to evaluate the technological feasibility of a digital pound and determine the design architecture to implement it. The BoE and HM Treasury are inviting responses on their consultation paper with a deadline of 7 June 2023.
• Multi-jurisdiction trial: A wholesale CBDC collaboration between BoE, the Bank of Canada’s Project Jasper and the Monetary Authority of Singapore’s Project Ubin successfully tested the application of a cross-border, cross-currency settlement system using distributed ledger technology.
• CBDC Taskforce: Since April 2021, BoE has worked with HM Treasury as a part of the Central Bank Digital Currency Taskforce to explore a potential CBDC. It had previously released a discussion paper on the topic in March 2020, with the general feedback received supporting continued examination of CBDCs, however highlighting that the use case in particular needed further research, refinement and articulation. In June 2021 BoE released a discussion paper on new forms of digital money, which discussed the potential impact and use of CBDCs as well as systemic stablecoins.
• Ongoing consultations: In November 2021 BoE released a series of next steps for their work researching CBDCs, including the announcement of a consultation in 2022 to assess the use case for a CBDC and the merits of further work to develop an operational and technology model. The aim of this consultation is to inform the decision that the BoE and HM Treasury will make as to whether they would move into a development phase which would span several years. If it is decided to move ahead with a CBDC, the earliest launch date would be in the second half of the 2020’s. In February 2022, BoE announced that it was working with MIT on a 12 month research project related to CBDCs.