Are CBDCs about to go mainstream?

What do Central Bank Digital Currency projects look like? A report from PwC looks into the state of Central Bank Digital Currency (CBDC) development and their potential.


Cryptocurrencies are a source of constant volatility in financial markets. The high percentage swings seen in the value of digital currencies like Bitcoin and Ethereum have propelled them into the limelight as legitimate, albeit highly risky, alternatives to traditional financial structures. Hoping to mitigate the influence of these blockchain-centred, distributed currencies, Central Banks are working towards the introduction of their own digital currencies.

Earlier this year El Salvador became the first country to introduce Bitcoin as legal tender. Whilst the process had some initial hiccups and confusion, the country’s citizens look set to benefit from this forward-thinking decision. Already, the use of a legitimate digital currency that can be traded via mobile phone has helped make the population more financially literate. Yet, for those countries not comfortable with the uncertainty and lack of control that cryptocurrencies present, do Central Bank Digital Currencies (CBDCs) offer an alternative solution?

What’s the difference between CBDCs and cryptocurrencies?

“The only thing they have in common is that each is a digital form of payment.” Denis Shafranik, Partner at Concentric, is rather blunt when it comes to comparisons between cryptocurrencies like Bitcoin and CBDCs. He explains that CBDCs “allow individuals to hold tokenised national currencies directly with the central bank of their country”, and as such they remain fundamentally different to currencies like Bitcoin which are decentralised in nature with no one ‘owner’. Lucia Della Ventura, PhD researcher on Decentralised AI at Trinity College Dublin, expands on Shafranik’s views, highlighting how decentralised cryptocurrencies were “specifically designed to work in the absence of governments and central banks and their monetary policies”. As all CBDCs are created in close collaboration with national governments and banks, any absence of these institutions would render CBDCs unviable for use and swiftly lead to their failure.

Crypto and CBDCs further differentiate themselves from each other when you examine how they create and hold value. Rohit Talwar, CEO of Fast Future, highlights how CBDCs “have a fixed value tied to national (fiat) currencies that depreciate with inflation”. As CBDCs remain controlled by their respective governments and national banks, there are no limits placed on how much currency is issuable. In comparison, one reason for Bitcoin’s recent and continued rally was in response to inflationary pressures caused by Covid-19. Whilst governments rapidly printed new money to protect their economies, Bitcoin remained a finite resource, allowing the cryptocurrency to hold its value whilst newly minted currencies purchasing powers weakened. As CBDCs are intrinsically linked to their parent fiat currencies, they are also subject to the same inflationary pressures.

Blockchain and distributed ledger technology has become integral to the effective use and transfer of cryptocurrencies between parties, yet it’s believed that central banks will refrain from using these technologies when implementing CBDCs. Ventura suggests that the majority of CBDCs will not run on traditional forms of blockchain technology because they will still be run through trusted intermediaries in the form of their central banks. However, Ventura does concede that because they remain digital currencies, they could still be exchanged in a decentralised fashion and used “for peer-to-peer transfers where transactions take place directly between the payer and the payee without the need for an intermediary”. Shafnarik goes further and argues that CBDCs are blockchain in name only; “They are not decentralised, so they are essentially just a database or centralised ledger subject to the whims of the controllers”.

What do current CBDC projects look like?

PwC’s Global CBDC Index 2021 highlights the traction that CBDC projects are gaining in 2021. Currently, 60 central banks have entered the race to create CBDCs. Most of these projects take one of two approaches, either a retail approach where CBDCs can be held directly by citizens and corporations as a form of digital cash, or an interbank approach where CBDCs are restricted to financial institutions and used for interbank transactions and financial settlements.

From a retail perspective, emerging economies seem to be showing the best results, with countries including The Bahamas, Cambodia, and mainland China currently the furthest along on their path to wider implementation. In the case of The Bahamas and Cambodia, their CBDC projects are already live, and the countries are currently collecting uptake data amongst their populations. 

The Bahamas project began its pilot phase back in December 2019 with the creation of the Sand Dollar, a digital version of the Bahamian Dollar. The currency was officially launched in October 2020 and issued by the Central Bank of The Bahamas through authorized financial institutions (AFIs). Today, all Bahamian citizens can access a digital wallet through either mobile applications or physical payment cards. With Sand Dollar, The Bahamas plans to increase the efficiency of its payments systems by delivering faster settlement speeds that can offer greater financial inclusion for its population. The currency also aspires to reduce incidents of money laundering, counterfeiting, and other illegal financial activities that are commonly associated with cash transactions. 

Cambodia’s exploration of digital currencies started even earlier than The Bahamas, with the country’s National Bank starting its investigation in June 2018. Project Bakong was tested extensively in 2019, before going live in October 2020. To date, Bakong’s main aim has been to improve financial inclusion amongst the population - large parts of the country are still unfamiliar with traditional banking and creating an account is usually quite a daunting task. Bakong helps overcome this challenge by leaning into the population’s high mobile literacy rate and allowing the population to use and trade CBDCs over their phones. The implementation of the project has also helped strengthen the Cambodian currency by encouraging users to pay with it rather than US dollars which make up the bulk of transactions in the country.  

Unlike The Bahamas and Cambodia, Sweden’s population and institutions are already financially literate and advanced. Instead, its exploration into the viability of CBDCs coincides with the decline of cash in the country; today, less than 10% of all payments in Sweden use cash. With a dedicated digital currency in the form on e-krona, Sweden hopes to increase the safety and efficiency of electronic transactions. The Nordic country is well into its research cycle - its initial e-krona pilot programme ended in December 2020 and a review of the programme by Riksbank is expected to conclude by the end of November 2022. Alongside this review, Riksbank is currently in the process of investigating how e-krona would affect Swedish legislation, and the effects a CBDC would have on the Swedish economy.

Currently, there are no live interbank CBDC approaches, in part due to the longer pilot stages that these schemes employ. Of the projects in preparation, Singapore, and a partnership between Hong Kong SAR and Thailand are the closest to reaching fruition.

A multi-year project, Singapore’s Project Ubin was a 5-phase undertaking that concluded in July 2020 that looked to explore the use of blockchain and distributed ledger tech for the clearing and settling of payments and securities. Upon completion, the project had successfully led to the creation of interfaces that could produce connections between blockchain networks, paving the way for collaboration and partnerships with other central banks. Moving forward, the Monetary Authority of Singapore (MAS) plans to encourage greater collaboration with other central banks and has already announced plans to work with the People’s Bank of China. Alongside this project, a new blockchain-based clearing and settlements network from institutions including DBS, J. P. Morgan, and Temasek is looking to use Singapore as a primary base of operations before expanding to other jurisdictions.  

Project Inthanon-LionRock began in 2019 to test the use of CBDCs in cross-border payments between Hong Kong and Thailand. Phase two of the project began in 2021 and aims to create a software prototype that can enable cross-border payments in CBDC form, whilst also attempting to discover more use cases for the technology. Adding complexity to the project are the countries’ aims to evolve any bilateral use cases they find into ones that can be used across multiple financial jurisdictions and across multiple currencies. Thanks to the project’s initial success and wider ambitions, Mainland China and the UAE joined the project in early 2021. In the future, the four countries hope that a successful partnership can ease financial interactions between themselves and present new opportunities for collaboration.

As retail and interbank CBDC projects complete their pilot programmes and become more widespread, it's possible that a digital currency will arrive that can compete directly with cryptocurrencies. However, these projects are likely years away from fruition, and many central banks and governments will want to see robust use cases for crypto-like CBDCs before committing their resources to a sustained challenge. Instead, it seems likely that countries will take their CBDC development plans down a different path, one that allows them to navigate today’s digital economies more effectively and meet the modern financial needs of their citizens.