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  • Kaloyan Gavrilov

Central Bank Digital Currencies: From Theory to Reality

In this article, contributor Shane Gravel gives a detailed analysis of CBDCs (Central Bank Digital Currencies) and how they may come to shape international economic policymaking in the near future. This article was edited by Kaloyan Gavrilov.


The concept of CBDCs- once considered speculative- has evolved into practical discussions and in some cases, even full implementation, in multiple regions globally. The United States has demonstrated interest in CBDCs for the first time as well, with President Joe Biden urging various government departments to expedite their research on CBDCs and provide their findings in a March 2022 executive order, signifying a shift from once theoretical discussions to active consideration and exploration of these digital currencies. As CBDCs enter a stage of growing salience and their use is realized, serious implications and regulatory frameworks (or lack thereof) stand to be questioned, particularly in terms of personal financial autonomy and maintenance of the international sanction regime. 

In most cases, central bank digital currencies (CBDCs) are defined as digital forms of currency issued by a central bank, utilizing a distributed ledger (e.g. a blockchain) for transaction processing, validating, and recording. In essence, a distributed ledger acts as a digital, decentralized database and record book of all transactions, managed by a group of dispersed participants. These digital currencies using the distributed ledger can take various forms by introducing an entirely new currency, establishing a peg (tying its value) to another currency, or serving as a digital representation of traditional fiat currencies that we already use like the United States dollar (referred to as a "digital dollar"). 

According to the Atlantic Council’s CBDC Tracker, the 11 countries that have launched a CBDC are: the Eastern Caribbean Currency Union (7 members), the Bahamas, Jamaica, Anguilla, and Nigeria. 21 more countries are in what they deem the “pilot” stage, primarily in Asia. Most countries are at least in the research or development stage, with far fewer having canceled projects entirely.

Additionally, many countries around the globe have partnered to research and develop CBDCs of their own. Many are working with the Bank for International Settlement (BIS), who historically has been a key player in the provision of cross-border payments through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payments network. These partnerships not only signal the possible emergence of regionally-aligned trading blocs, but a partnership between innovative technology and an existing system (SWIFT) that has been criticized as antiquated and inefficient. Often, SWIFT payments take several working days to settle and are costly for all actors involved. SWIFT’s involvement also adds significant credibility to the CBDC projects and signals that perhaps, a complete overhaul is not desired but rather innovative, cooperative reforms. 

The SWIFT network has been able to successfully show that CBDCs could be used with their infrastructure and have specifically highlighted three models that they are interested in. Model 1 uses a mCBDC arrangement based on compatible CBDC systems with transfers offered by competing private companies and governance determined by separate CBDC systems. This version is particularly worrisome because with separate systems and a lack of standardization and enforceable rules, there is a greater risk of decoupling between countries. Model 2 uses mCBDC arrangement based on interlinked CBDC systems with joint agreements and separate governance. France and Switzerland are working on a similar model with Project Jura. Model 3 uses a single mCBDC multi-currency system where central banks agree on governance and support the infrastructure.

One of China's CBDC initiatives fulfills the outlined Model 3 and as such incorporates distributed ledger technology to establish a shared system for a multi-CBDC payments infrastructure known as mBridge, alongside Thailand, the United Arab Emirates, and Hong Kong. The Bank for International Settlements (BIS) is involved as well.  Notably, their pilot payments demonstrated remarkable efficiency, settling in an average of just 2 seconds and achieving a reduction in payment costs by over 50% compared to that of SWIFT.

One appeal of CBDCs is their ability to facilitate cross-border payments. Recent developments have shown that this may be a reality sooner than expected, even without a partnership such as mBridge. Back in October, PetroChina International reportedly made its first purchase of oil using their digital yuan. The seller was not disclosed. The watershed move is said to have come after the Shanghai Municipal Party Committee and its government explicitly requested for the digital yuan to be used in international commerce and arguably is part of a much larger effort to not only internationalize the yuan in foreign markets, but to encourage de-dollarization [8]. 

The U.S. dollar has been used as a petrodollar for decades- in other words, most international oil transactions are denominated in USD. This is illustrative of the USD’s role as a global reserve currency and hegemonic power and has presented nations using it with particular advantages. One such advantage is the ability to place economic sanctions on actors that the U.S. and its institutional allies deem untrustworthy. For example, following the Russian invasion of Ukraine in recent years, the US, EU, and close allies extended economic sanctions on Russia and SWIFT cut out selected Russian banks from the network, effectively rendering it rather difficult for cross-border payments to be made to and from the country. 

With use of a CBDC, it would theoretically be possible to circumvent such economic sanctions. A sanctioned country could send and receive money to allies, fund projects, or sell its goods and services abroad. With a CBDC, there is not necessarily an intermediary like SWIFT to approve and facilitate the transaction- rather, there are nodes that process and validate it- and it can cross the border in seconds on the blockchain. While it is true that actors could perhaps be excluded from a CBDC system if all actors involved are using the same system, current developments and a lack of regulatory framework and standards suggest that may not be the case. As mentioned, many countries have teamed up separately to create their own CBDC systems, either making use of digital versions of their own fiat currency, or considering creating a new shared digital currency entirely. Without effective economic sanctions, institutions will likely have to find a new way to evoke a norms-based consensus and incentivize what they deem good behavior in the international arena. 

For those within a country, domestic use of a CBDC could pose some threats as well. With a digital currency issued by a central bank, the central bank controls the money supply directly. As it can be issued on the blockchain into a proprietary digital wallet, it is fully programmable at the discretion of the issuer (the central bank, in this case). In this light, the central bank could theoretically place expiration dates or negative interest rates on money to incentive and stimulate prompt spending. In one study, Nabilou explains that such a move would grant central bank issuers more monetary policy influence in a domain that is otherwise limited in a cash-based fiat system- at the expense of individual users. This would arguably be in the interest of any government, particularly in times of economic crisis when consumer demand is dampened. And of course, with both the currency and digital wallet being issued by the same party, tracking of transactions and surveillance is possible as well, which raises significant privacy concerns for users. 

This is not to say that CBDCs are all threatening, however. There are a significant number of people around the globe who are unbanked entirely or underbanked, so it follows that there is something within the patchwork of interconnected traditional financial systems that is preventing further inclusion. More people own a mobile phone than a bank account, so logically, a retail CBDC that makes use of a mobile, digital wallet could perhaps create more financial inclusion. Without a basic bank account, one cannot “fully function” in society according to some EU officials, and as such one’s consumer and human rights are arguably threatened. And as the aforementioned tests and launches have alluded to, use of a CBDC for cross-border transactions can be faster and cheaper- which is only likely to be a benefit to those that use it over more traditional networks like SWIFT. 

While the benefits of a CBDC for its domestic stakeholders remain more clear, much remains to be discovered about the effects of a CDBC on the international level. If a coalition of actors, such as the BRICS nations- some of whom, it should be said, intend to circumvent long-held use of the USD- or a group of sanctioned countries manage to develop and effectively execute a viable CDBC payments system of their own, the international monetary order is at the very least slated to be disrupted. Actors can be excluded and individuals could be stripped of personal autonomy depending on how the system is designed. 

While some countries like the U.S. have acknowledged CBDC development and other actors like the BIS have contributed to certain projects, most international institutions seldom have proposed any sort of standard framework or regulations for their use in international political economy. Following the March 2022 American executive order, there are no significant CBDC developments to date, but the government has begun using FedNow, which has been described as an instantaneous payment platform that works any time, beyond working days, and as such helps to quell criticisms of traditional financial architecture. 

China’s recent purchase of oil and the growing number of countries ultimately illustrates that a ‘sit and wait’ approach is no longer sufficient, and that action must be taken to prevent disruptive decoupling and theorized, harmful consequences. CBDCs have been tested and used with impressive results compared to their traditional fiat counterparts and time will tell whether they are here to stay. CBDC development is accelerating and countries that have largely remained on the sidelines, like the U.S., will therefore need to decide whether they would prefer to be a leader or a laggard in the space and take direct, targeted action. 

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