Central Bank Digital Currencies (CBDCs) in Practice – A Look at the Avant-garde

Central bank digital currencies (CBDCs) are becoming more and more popular. A study by the Bank for International Settlements (BIS) shows that 80 percent of the world’s central banks are researching CBDCs and almost 50 percent are developing specific proof-of-concepts or prototypes. 10 percent of the central banks surveyed go one step further: They are already planning the introduction of a CBDC for the general public (so-called retail CBDC) in the next three years. In this article, Jonas Groß and Jonas Weisbrodt present the currently most advanced CBDC initiatives in China, Sweden, Bahamas, the Eastern Caribbean Monetary Union and the Marshall Islands and discuss the motives and progress of the projects.

China’s CBDC: DC / EP

The Chinese Central Bank (PBoC) set up a special CBDC task force back in 2014 to investigate CBDCs. A prototype of the Chinese CBDC, called DC / EP (digital currency / electronic payment), is currently being tested in both the private and public sectors . Further tests are scheduled to take place during the 2022 Winter Olympics.

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Background: In China, cash is becoming less and less important. During 2016 40 percent of all payments were made in cash, two years later it was only 20 percent. Overall, China is one of the few countries where the share of currency in circulation (CIC, cash in circulation ) in the gross domestic product (GDP) has fallen in recent years (see Figure 1).

Figure 1 : Development of cash in circulation in China. Source: Source: van der Knaap, de Vries (2018)
According to PBoC central banker Mu Changchun, there is a reduced use of cash significant risks, for example greater dependence on digital payment platforms from companies like Alipay. A CBDC as the digital equivalent of cash could support the development towards a society that is less dependent on cash without being exposed to the risk of failure of private platforms.

In addition, the introduction of a Chinese CBDC is driven by the internationalization of the Renminbi (RMB). Despite intensive Chinese efforts to internationalize the RMB, the US dollar continues to dominate as the global reserve currency. A CBDC could strengthen the international role and spread of the RMB through simplified RMB payments to or abroad, or through the CBDC. However, if the digital yuan also falls under capital controls, these restrictions could make it difficult for the RMB to internationalize successfully.

Sweden’s CBDC: e-krona

In addition to China, Sweden is also one of the CBDC pioneers. In March 2017 the Swedish Riksbank started its CBDC project „e-krona“. The introduction of an E-krona prototype is planned for February 2021. The Riksbank will then decide whether to introduce such a CBDC across the board. In the pilot project, a non-interest-bearing CBDC is first tested. For its pilot project , the Riksbank is planning a two-stage operational structure in which banks distribute the CBDC units issued by the central bank to end customers.

Similar to China, Sweden also has less cash in circulation. Most recently, currency in circulation in Sweden was only 1.4 percent of GDP in relation to GDP (see Figure 2) and was the lowest figure in the world ( average of 50 countries: 9 percent). The number of cash transactions is also falling in Sweden. Most recently, only 20 percent of all payments in Sweden are made with cash settled. According to predictions made by the Riksbank’s Deputy Governor Cecilia Skingsley, Sweden will be cashless by 2023.