Worldwide practice and impact of digital currency of central bank’s implementation

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Introduction As the world becomes increasingly digital, central banks are taking a bold step into the future by introducing digital currencies. This innovative move has the potential to revolutionize the way we think about money, transforming the financial landscape and redefining the role of central banks. In this study, we delve into the worldwide practice and impact of central bank digital currencies, examining the current state of implementation, its effects on the economy, and the opportunities and challenges that lie ahead. Over the recent past, the topic of central bank digital currency (CBDC) has evolved from a distant concept to a global economic policy agenda. One of the most discussed issues today concerns the implications for the financial system, particularly the impact on international payments, as well as access policies, legislation, privacy and security models, interoperability and integration. Digitalization has provided an opportunity to rethink the concept of money and the architecture of the monetary system. Over the past few years, digital transformation has led to a strengthening trend towards decentralized finance, which has raised concerns from the government. The merging of traditional financial systems with decentralized finance (DeFi) is an important trend, and financial institutions are expected to use DeFi innovations such as smart contracts and decentralized lending to improve their services. Increased international regulatory cooperation is likely to lead to a single global framework for digital assets, balancing innovation with financial stability and opening up new opportunities for the DeFi sector. The purpose of the study is to study the world experience and assess the global effects that digital currencies of central banks have on the global economy. Literature review The concept of decentralized cryptocurrencies, their volatility and lack of government control over transactions has led to increased regulatory oversight in many countries, and as a result has led to bans or restrictions on use. But the ability to use cryptocurrencies and other digital payment instruments has led to the risk of central bank money being replaced by other instruments in the future (Keister, 2019). In fact, central bank digital currency expands the functionality and utility of central bank money and promotes new uses for it. The COVID-19 pandemic has led to the emergence of new payment behaviors among users. The use of cards and other means of digital payments instead of cash has shown how quickly payment patterns can change (Brown et al., 2020). A central bank digital currency has high potential to complement existing central bank payment instruments as well as offer new approaches that will change the coverage and geography of central bank money. In addition, more efficient transaction processing methods may emerge. The programmability of the CBDC could also lead to new business models and applications that require smart money features and provide a driver for the deepening of payments markets. Although the new central bank digital currency will settle in a separate financial market infrastructure, integration with existing payment and core banking systems is considered essential for successful implementation (Auer et al., 2022; Auer, Boehme, 2021). However, discussions regarding the release of different forms of digital currency and their accessibility for ordinary users have only recently begun. Most attention has been paid to the role of central banks, the effectiveness of monetary policies, and the implications for financial stability (Auer, Boehme, 2021). Methods The research draws upon secondary data from publications such as journals, magazines, websites, and periodicals, in addition to a review of previous conceptual and empirical studies to assess the paper’s objectives. Development of national and regional central bank digital currency projects To date, the central bank digital currency project is being developed to varying degrees by 114 countries with a combined GDP of 95% of global GDP. According to a survey conducted in late 2020, 86% of global central banks are performing CBDC research, and as of July 2021, 56 central banks have publicly reported their studies and developments (Boar, Wehrli, 2021; Castren et al., 2022). It is interesting to note that most developed countries have until recently been cautious about the development of CBDC, which is not the case with developing countries. Particularly, the US FRS, the Bank of Japan and the ECB have not developed unified concept for the development of a digital central bank currency, but at the same time they do not deny the importance of its development (Glavina, 2023; Vaganova, 2022). We can see that today most of central banks are at different stages of implementing national digital currencies. Most regulators around the world have taken initiatives to start their CBDC journey, either by contacting industry experts to explore different models or are in the testing phase. Some countries like Cambodia and Bahamas have already launched CBDC. The chart below depicts the geographic location of the existing central bank digital currency projects in the world today and their stage of development (Fig.). Global effects of central bank implementation of digital currencies Central bank digital currencies, depending on geography, have the potential to provide significant benefits to individuals, businesses and governments, but they also pose the threat of a major transformation of the global financial system. “Programmable money” carries a wide range of new use cases, including spending limits, triggers and usage restrictions. CBDCs also help meet the need to expand access to financial services in the face of limits, costs, and under coverage of existing payment systems. The use of digital distribution channels and infrastructure can provide a broad new level of global access to central bank money and payment services. Geography and status of central bank digital currency launch initiatives as of 2023 Source: compiled by S.G. Glavina based on Atlantic Council, CBDC Tracker (2023). Reduction of monetary dependence. In other words, it is about the share of cash to GDP in a country’s economy. The anonymity of cash makes it possible for being used in money laundering and financing illegal and terrorist activities (Fernandez Villaverde, 2021). In general, countries around the world are striving to reduce the share of cash in the country, for example China has achieved 9.2% and Korea 2.1%. It is estimated that the annual social and private cost of the cash processing in the European Union is about 1% of GDP[1]. “The transition to digital payments and digital currency can reduce reliance on cash. This is the function primarily highlighted by BIS, a public good that in digital form offers the unique advantages of central bank money: settlement finality, liquidity and integrity”[2]. A project of Sweden’s central bank, the Riksbank, the ekrona, provides a template for using digital currency as a digital alternative to cash and electronic money that is issued directly by the government[3]. Increasing resilience and overcoming infrastructure constraints. However, 100% digitalization of payments will put a strain on the existing financial and banking infrastructure, which may pose a threat to national security. In addition, the transition to a digital payment system, which is a crucial economic infrastructure, increasing the risk of terrorist attacks and its vulnerability. A distributed ledger system will significantly increase the resilience of the system and its security. In this case, the example of India is interesting, where the new umbrella organization (NUE) for digital rupee payments can provide an alternative instant settlement mechanism. The introduction of the digital rupee will contribute to greater diversification of India’s payment system by offering alternative payment methods. It will also enhance the resilience and security of the entire payment infrastructure. Fraud Prevention. According to CVC’s Top 100 Fraud Report[4], one of the main causes of nonlegitimate transactions is improper enduse of credit funds. While the current system relies on postfacto checks such as audit reports, inventory reports, etc. that are partially reviewed by various creditors, digital currency could proactively address these issues with builtin programmability and regulated traceability. CBDCs have the potential to promote financial accessibility by providing more competition for consumers and allowing transactions to be more direct by reducing mediation, thereby lowering the cost of financial services and making them more affordable. Unlike commercial banks, a central bank’s lack of profit motive can also help reduce costs. Facilitating faster and cheaper crossborder payments. Today, with digital transformation, rapid growth in online commerce and international tourism, disruption of global supply chains, and increasing global instability, crossborder payments are a vital function of the global financial system. It is estimated that crossborder payment volumes could reach $250 trillion by 2027. At the same time, growing risks and increasing sanctions pressure on international relations complicate the development of the industry, opening up “weaknesses” in the existing system. Global supply chains have led to an increase in the number of payments between companies in different countries. Increased migration usually leads to an increase in the number of credit transfers made by migrants to family members in their home countries (called money transfers), which represent a significant inflow of funds for many countries compared to gross domestic product (GDP). In addition, crossborder payments and national calculations are costly, slow, and lack transparency. And this significantly raises the importance of economic and national security at both national and regional levels. Coordination of national CBDC projects can lead to more efficient crosscurrency and crossborder payments. This could further lead to the creation of a regional system to realize crossborder payments using the central bank’s digital currency (Kulakova, 2023). It is interesting that there are already several successful projects in operation today, such as Jura, which provides the transfer of euros and Swiss francs in wholesale CBDC between French and Swiss commercial banks on a single platform[5]. Improving the distribution of wealth. In our current monetary system, cash issued by the central bank is only a fraction of the total money supply in circulation. The bulk of the money supply is in the form of deposits in commercial banks (Andolfatto, 2021; Kim, 2019). A central bank digital currency could potentially strengthen the distribution of wealth and make it more reliable by eliminating leakages, for example, by preventing welfare money from being diverted to unrelated bank accounts. By doing so, it would ensure that funds are used for their intended purpose, such as using allowances or scholarships exclusively for their intended purpose (Gimelstein, Godvan, 2021). Increasing the speed of government decisionmaking. The central bank’s digital currency is primarily designed in response to the development of decentralized finance. As such, the idea of being able to capture real data about the state of the economy is at the center of the CVCB. The use of programmable money provides data that helps us understand more clearly the dynamics and value of each account. It also allows for more effective monetary policy interventions, more effective spreading of information throughout the economy, and more effective achievement of policy goals (Sitnik, 2020; Gorbacheva, 2023). Global experience in the implementation of central bank digital currencies Let’s take a look at the most successful projects: 1. Nigeria. The first African country to successfully launch a central bank digital currency, eNaira. However, this initiative was subject to many criticisms, largely due to a rather sluggish development. In the 2 years of operation, the app was downloaded more than 700 thousand times - which corresponds to 0.35 %, while it is worth considering that not all downloads of the app were made by Nigerian residents. The appearance of eNaira was intended to strengthen the role of the national currency and reduce the use of cryptocurrencies in the country. However, this has not been achieved - in 2022[6], approximately 33.4 million Nigerians, trade or own cryptocurrencies or digital assets. 2. Bahamas. In 2020, The Bahamas became the first country to launch the CBDC Sand Dollar, issued by the Central Bank of The Bahamas as legal tender. All residents can access the digital wallet through a mobile app or physical payment card[7]. Records collected during daily transactions, such as income and expenditure information, can be used to apply for microcredit. The project aims to improve the efficiency of Bahamian payment systems through more secure transactions and faster processing speed. It is the world’s second largest retail central bank digital currency. 3. China. China is one of the leading countries in the experimental stage. Their CBDC, e-CNY, is currently being tested in 15 major cities. The country has also started another trial during the 2022 Winter Olympics in Beijing (Sedunova, Kuvaeva, 2023). At the end of 2022. 4.5 million merchant wallets and 260 million transactions worth more than 83 billion yuan were completed under the experiment. Given the relatively high penetration rate of electronic consumer payments in China, the digital yuan has the potential to enable a full transition to noncash payments[8]. In addition, crossborder payments between mainland China and Hong Kong, which has a separate legal and banking environment and infrastructure, are being actively tested on a pilot basis. The pilot launch was attended by 200 selected employees and business customers of Bank of China (Hong Kong), a subsidiary of Bank of China and the second largest commercial bank in Hong Kong. 4. Jamaica. In June 2022, JamDex, the first CBDC to be officially approved as legal tender, was launched. It aims to provide a digital alternative to cash that is convenient, secure and easy to use. Early examples of JamDex use cases include peerto-peer payments and payments to small and micro-e nterprises, including those without traditional bank accounts, thereby enhancing financial inclusion. 5. Russia. The digital ruble is a new form of Russian national currency that will be issued by the Bank of Russia in addition to the existing forms of money (cash and noncash rubles). The digital ruble will be stored on electronic wallets at the Bank of Russia. In general, the digital ruble represents a new stage in the development of Russia’s financial system, which is designed to improve the security, accessibility and efficiency of the national currency. 12 banks, 600 Russians and 22 companies took part in this. As of July 1, 2024, more than 27,000 transfers and over 7,000 payments for goods and services have been made in this system (Khoroshilov, Vasiliev, 2022). 6. India. The Reserve Bank of India (RBI) has launched a pilot project for a retail CBDC, the 2022 digital rupee. A key driver of the project is the changing global payments environment, including the rise of private digital currencies. and the vast majority of the world’s central banks are exploring potential CBDCs. In India, the widespread use of cash is characterized by high operational costs and risks associated with physical money, which are driving plans for CBDCs. A digital form of cash not only counteracts these risks, but can also stimulate innovation in the payments sector and increase financial inclusion. Comparison of existing digital currencies Let’s look at eight of the most developed central bank digital currency projects and compare their development according to the following characteristics: underlying form and technology, usability, existing usage limits and restrictions, issuance and distribution features (Table). Conclusion The introduction of a central bank digital currency could have serious geopolitical implications, especially given that most crossborder trade is currently conducted in U.S. dollars. Many countries are seeking to develop alternative payment mechanisms based on CBDC to improve the speed and efficiency of payments. However, the introduction of CBDCs involves risks such as data privacy, the risk of using CBDCs in the context of sanctions and antimoney laundering and counterterrorist financing regulations, and cybersecurity issues. The issuance of retail CBDCs may also lead to problems associated with the abandonment of bank intermediation, as customers may prefer to keep their money in CBDCs rather than in commercial banks. Considering the crossborder capabilities of CBDCs, cooperation between countries and regulators in their use is likely to be crucial. Most active central bank digital currency projects focus on crossborder payments (for example, Jura, mBridge, Dunbar, Mariana), as crossborder options are considered the most effective for transformation, including with financial system governance, antimoney laundering and countering the financing of terrorism, enhanced data security and privacy, and financial stability. More than one hundred countries, representing more than 95% of global GDP, are exploring the development and implementation of CBDC at various stages of development. The AsiaPacific region is a leader in this area, with China, India and Thailand at the forefront. However, despite China’s progress, the digital yuan (e-CNY) has not yet been widely accepted, due to low levels of citizen confidence and privacy issues. In addition, the spread of the new form of money has been limited by the availability of other developed digital and mobile payment solutions such as Alipay and WeChat Pay. For China, the digital yuan can be a tool to regain control over the development of decentralized finance and transaction tracking. Western countries are lagging behind in CBDC development, mainly due to the reliability and high level of development of existing payment systems. The US is the least advanced in this direction, partly due to the lack of government regulation. Some smaller countries, such as the Bahamas and Nigeria, have already introduced CBDC into their economies, but these projects have not been widespread due to a lack of internet access and training in the use of the new payment instrument. Emerging market and developing economies (EMDEs) such as China, Mexico and Nigeria are more enthusiastic about retail CBDCs and have clearer motives for issuing them compared to central banks in advanced economies. Engagement levels are high where financial inclusion is a national priority. Today, we see Central Banks of several countries cooperating under the CBDC cooperation to develop crossborder payments. The biggest problem with the concept of central bank digital currencies today is the lack of a clear sense of purpose. Some countries, such as Sweden, Canada, Palau and Bhutan, want to ensure the existence of a digital national currency in case if paper money goes out of circulation or becomes too expensive to print and has a negative impact on the environment. In addition, CBDC could potentially increase financial inclusion in the country. However, a complete transition to a new form of money requires community engagement programs, such as reduced credit card cashback, lower interchange fees, and other promotional tools. The pace of development of central bank digital currencies around the world will accelerate in the upcoming years, with more countries moving into pilot projects or trials. Whether used for internal economic purposes or for crossborder transactions, the utility of CBDCs will grow as implementation and use cases expand.

About the authors

Sofia G. Glavina

RUDN University

Author for correspondence.
Email: glavina_sg@pfur.ru
ORCID iD: 0000-0002-5174-8962
SPIN-code: 4511-1442

Candidate of Science (In Economics), docent of the Political Economy Department, Faculty of Economics

6 Miklukho-Maklaya St, Moscow, 117198, Russian Federation

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