The introduction and evolution of cryptocurrency and blockchain technology have spiked up interest in digital currencies and cashless societies. A central bank digital currency (CBDC) is the central bankers’ attempt at a digital form of a country's fiat currency. The stated aim for CBDCs is to promote financial inclusion and simplify implementing monetary and fiscal policy. All highly noble aims, we can agree.

Are central banks jumping on the crypto bandwagon?

Central banks have been slowly watching the gradual erosion of the dominance of a fiat-based monetary system. The cryptocurrency ecosystems developing for the past 14 years provide a glimpse of an alternative currency system in which cumbersome regulations don't govern each transaction.

Stablecoins are the crypto world’s present solution to reign in the inherent volatility of cryptocurrencies, while they also represent a safe haven for the storage of value and a mechanism for converting digital assets into everyday fiat money. This is achieved (to a varying degree of success) by tying their value to another currency, commodity, or a financial instrument with a globally-agreed value, such as the U.S. dollar.

CBDCs are similar to cryptocurrencies, except that their value is fixed by the central bank and equivalent to the country's fiat currency. If implemented, these state-issued digital currencies would have the full faith and backing of the government. The stated aim of CBDC introduction is to reduce the risks associated with using digital currencies which are understood to be highly volatile.

The slow & steady development of CBDCs

The people behind CBDCs further argue that cryptocurrencies’ volatility could potentially “cause severe financial stress in many households and affect the overall stability of an economy”. In their view, CBDCs, backed by a government and controlled by a central bank, “would give households, consumers, and businesses a secure means of exchanging digital currency.”

As of March 9th of 2023, 3 countries and territories have launched CBDCs for national use: The Bahamas, Nigeria and the Eastern Caribbean Currency Union, which comprises of Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, Saint Lucia, and St. Vincent and the Grenadines.

While not launched nor implemented yet, Sweden, China, Jamaica and Ukraine have been testing the feasibility of central bank digital currencies, while India, the Eurozone, and the United States of America remain to be in the earlier CBDC development stages.