One of the hottest topics in the global finance industry in recent months has been recent efforts by governments around the world to develop Central Bank Digital Currencies (CBDCs). A CBDC is a virtual form of a fiat currency which is backed by a central government, and often incorporates blockchain technology. It is no coincidence that the increased interest that CBDCs have gained recently comes at a time when cryptocurrencies, such as Bitcoin, are rapidly increased in terms of value and adoption, as Bitcoin alone now has a market cap of over US$ 1 trillion. The Central American nation of El Salvador also became the first country in the world to legalize Bitcoin as an official currency in September 2021, which has also resulted in more countries exploring digital currencies. According to the International Monetary Fund, over 110 countries are now actively exploring how to develop a CBDC, which represents a majority of the world’s nations. Given the massive potential for innovation and disruption CBDCs may bring, enterprises should consider the future impact to their financial activities.
China is currently the world leader in terms of CBDC adoption, as its “digital renminbi,” known as e-CNY, has undergone several pilots around the country and has been used by more than 140 million people. China has also released an e-wallet application in most major cities in the country with which users can send money to various parties, as well as for e-commerce, in-store payments, transportation and government services, using smart contracts embedded in the application. The technology used in this initial phase is still relatively basic, as it uses a two-layer system where the People’s Bank of China controls the core centralized layer and interacts with banks and other third parties in the second layer. Obviously, scale, performance and security are tantamount if an entire nation’s financial activity is to be managed on a blockchain, and while China is exploring use cases, they believe more work needs to be done on issues such as blockchain interoperability before this can happen. China is also looking to set standards to facilitate overseas payments, as a large percentage of their overseas settlement fees are still denominated in US dollars.