The US and the UK have taken the slow lane for central bank digital currency (CBDC) adoption. Of the Group of Seven (G7) economies, they are the furthest behind on CBDC development, even as “105 countries, representing over 95 percent of global GDP, are exploring a CBDC. A new high of 50 countries are in an advanced phase of exploration (development, pilot, or launch),” said the Atlantic Council Geoeconomic Center’s Central Bank Digital Currency (CBDC) Tracker.

In May 2020, only 35 countries were considering a CBDC. Today 19 of the Group of Twenty (G20) countries are exploring a CBDC, the tracker further added.

CBDC and its benefits

CBDC is government-issued digital legal tender or digital currency backed and issued by a central bank. In essence, it is a digital version of an existing national currency. 

CBDCs are gaining traction globally because central banks envision them as a store of value and a medium of exchange for the sale of goods and services and settlement of financial transactions. They can also be used as vehicles for financial inclusion, monetary policy, and financial regulation and stability.

CBDC promises increased efficiency, lower costs, safer, cheaper, and faster payments (including cross-border payments). In addition, this form of digital money is expected to be widely available and convenient for peer-to-peer payments.

Central banks are exploring CBDCs for either retail or wholesale purposes. Wholesale payments will be between financial institutions and businesses, and retail payments would constitute the everyday payments between consumers and businesses.

CBDC: latest research and key findings

The Atlantic Council GeoEconomics Center’s latest research presents the advancement of CBDC and why concerns over interoperability could influence global adoption. We summarize the six key findings of the new research:

105 countries exploring a CBDC. The US and the UK are lagging behind

105 countries are far ahead of the US and the UK in developing CBDCs. The US and UK are noticeably behind in the global CBDC race.

In March 2022, the US administration placed the highest urgency on research and development efforts into the potential design and deployment of a US CBDC. In In June, US Federal Reserve Chairman Jerome Powell said the US really needs to explore a CBDC.

Last week, the Digital Dollar Project (DDP) announced the launch of its Technical Sandbox Program to jumpstart further exploration of technical implementations of a US central bank digital currency. The program is slated to begin in early October with the inaugural cohort focused on cross-border payments.

"The launch of our Technical Sandbox Program marks the next step in our effort to convene the private and public sector in exploration of a central bank digital currency in the U.S.," said Jennifer Lassiter, executive director of the DDP.

A nonprofit organization, the DDP is a partnership between Accenture and the Digital Dollar Foundation, and was created to encourage research and public discussion on the potential advantages and challenges of a U.S. CBDC — or a "digital dollar."

The above developments are encouraging, however, the US is falling behind the 50 countries that are serious about CBDCs and are in the development, pilot or launch phases. This is because the US is still in the research stage or early stages of considering a digital dollar and also for the reason that it has privacy concerns.

Nations around the globe are making significant strides in the development of CBDCs, considered the digital future of money, and they aren’t waiting for the US to lead the CBDC charge, a view that is corroborated by the Atlantic Council.

“As part of our work, we convene a working group of fintech leaders from central banks every six weeks to discuss their progress. The overarching message we hear from all of them: They’re eager to see a US digital currency model—one that protects privacy and ensures cybersecurity—but their countries will press ahead with or without US guidance,” explains the Atlantic Council’s Geoeconomic Center.

The US is not the only one moving slowly on the CBDC front. The UK’s progress on a digital pound lags far behind the 50 countries that are in an advanced phase. The Bank of England is assessing the case for a UK CBDC, and will also “look at the merits of doing more work to develop an operational and technology model for one,” its website says.

10 countries have fully launched a digital currency. China’s pilot set to expand in 2023 

The Bahamas became the first country in the world to adopt a CBDC, the Sand Dollar, in October 2020. This was followed by Nigeria, which launched eNaira, Africa’s first CBDC, in October 2021. The Caribbean nation, Jamaica is the latest country to launch a CBDC, the JAM-DEX.

Among the world’s biggest economies, China has become the frontrunner in developing a CBDC. China’s digital yuan pilot is set to expand in 2023.

The list of countries with a fully launched CBDC is growing. What are the key motivations for implementing a CBDC? Atlantic Council Geoeconomic Center’s research shows that there are two main drivers. The first is cryptocurrency. “The rise and fall of not-so-stable algorithmic stablecoins such as TerraUSD, as well as full cryptocurrencies such as Bitcoin, have made central banks worry about financial stability in their own economies,” the Atlantic Council illustrates further.

The second driver is the COVID-19 pandemic. In the two years since Atlantic Council started the CBDC currency tracker project, authorities around the world have unleashed an unprecedented amount of fiscal and monetary support to offset damage caused by the pandemic. Governments and central banks realized they needed to get cash in their citizens hands in a cheaper, faster and safer way. It turns out CBDCs might be the answer.

Many countries are exploring alternative international payment systems

Following the series of economic sanctions imposed on Russia there has been an acceleration towards alternative international payment systems and the trend is likely to continue.

According to the Atlantic Council, there are nine cross-border wholesale (bank-to-bank) CBDC tests and three cross-border retail projects. Retail CBDCs get most of the headlines, however there are interesting developments brewing up in the wholesale CBDC space. Why does that matter? “Consider this: If you’re a bank in China, watching Russia being cut off from the international financial system, you might want a backup plan. A cross-country CBDC system could be the solution, avoiding any need for the SWIFT system,” explains the Atlantic Council.

Atlantic Council’s data show joint cross-border CBDC projects appearing all over the world, not only between China, Thailand, and the United Arab Emirates, but also between South Africa, Australia, Singapore and Malaysia. Expect more of these joint cross-border CBDC initiatives throughout 2022. 

The ECB-backed digital euro could see the light by mid-2025

The pound and the dollar are trailing the euro in the CBDC race, even as the UK and the US are the furthest behind on CBDC development among the G7 economies.

Given that the European Central Bank (ECB) has signaled that the digital euro could be ready for issuance by the middle of the decade, Atlantic Council’s Geoeconomic Center now expects a digital euro to be widely available within the next few years, a change from its last recent update in December 2021.

19 of the G20 countries are exploring a CBDC

China is seeking the first-mover advantage to win the race for digital payments innovation. It’s digital yuan, also called the e-CNY, is the world’s first truly large-scale CBDC pilot with hundreds of millions of users. They have used distributed-ledger technology and created digital wallets with different tiers.

“But’s it’s not all about China. Other major economies are making rapid progress too,” observed the Atlantic Council’s Geoeconomic Center.

Of the 19 G20 countries that are exploring CBDCs, 16 are already in development or pilot stage. This includes South Korea, Japan, India, and Russia. Each has made significant progress over the past six months.

The financial system may face a significant interoperability problem in the near future

The proliferation of different CBDC models is creating new urgency for international standard setting.

“The White House has taken notice of the problem with a recent executive order calling for digital assets with democratic values. But what does that mean in practice? A digital currency that protects users’ privacy, is safe from cyberattacks, and helps bring more people into the financial system,” noted Atlantic Council.  

The problem, however, is that most central banks worldwide are moving faster with CBDC than the US. For now the US may have been outpaced by its CBDC rivals, but that can change if the US steps up or speeds its digital dollar project.

“The US needs to be at the table to help ensure that the wrong kind of CBDC—one that is used to surveil citizens—doesn’t proliferate across the global economy. Otherwise, we’ll be facing a fractured global financial system with the strength of the dollar slowly eroded,” cautions the Atlantic Council.

Conclusion

The race for the future of money is entering a new era of competition. It will have implications for more than just faster, safer, and cheaper payments, financial inclusion, and economic stability.

CBDC may become synonymous with privacy and security supremacy, geopolitical ambitions, economic growth and financial power, and if that happens it could deal the dollar and the pound’s status a blow if the US and the UK do not make strides with their CBDC initiatives. For now, it’s not too late for them to catch up.