Just two years ago, Reuters reported that more than 130 countries were exploring central bank digital currencies (CBDCs), and that nearly all of the G20 countries were in the advanced phases of their programs. However, only three countries—Nigeria, Jamaica, and the Bahamas—have launched CBDCs to date, and programs in many other countries have come to a standstill.
As Joel Hugentobler, Cryptocurrency Analyst at Javelin Strategy & Research, found in CBDCs Are Dead—for Now. What Comes Next?, several factors are behind the rapid shift away from government-issued, fiat-backed tokens. More important, shelving CBDC programs could have long-ranging effects on the digital assets industry.
From the Backburner to a Ban
One of the driving factors behind the initial CBDC push was the declining usage of the original central bank currency: cash. Because of the dominance of the card networks and the emergence of crypto and digital assets, many leaders believed their countries should consider alternatives.
These initiatives were accelerated by the pandemic—when digital payments gained rapid prominence—and the global instability caused by Russia’s invasion of Ukraine.
Even though former President Joe Biden requested an assessment on the feasibility of CBDCs, the United States had no firm plans to issue a retail digital dollar. Instead, a U.S. CBDC for bank-to-bank payments was being considered.
After a change in the administration, CBDCs have moved from the backburner to an outright ban. A bill barring the U.S. Federal Reserve from issuing a CBDC without explicit congressional approval has passed the House of Representatives and awaits action in the Senate.
“For now, the next three and a half years or so, nothing significant is going to come out of the U.S., and I think that this wasn’t a surprise,” Hugentobler said. “Trump was talking about it when he was doing his campaign, and I think his idea is to favor the private sector where all this stuff can flourish and where he thinks the real innovation takes place.”
A Risky Proposition
While the U.S. ban is notable, the United States was never at the forefront of CBDC innovation. Perhaps more revealing about the state of CBDCs is that many other countries are shelving their programs, too.
For example, the UK has long been an innovator in financial services, particularly in the open-banking model. However, the Bank of England is reportedly scrapping its plans for a digital pound.
Britain’s central bank cited concerns that a CBDC may not bring substantial benefits to the UK or its financial system. Instead, the regulator said it made more sense for the country’s banks to focus on payment innovations rather than on a CBDC and that there was no need to introduce a new form of money.
South Korea also recently suspended its CBDC trials after the initial phase, citing concerns that the cost of the trials outweighed the potential upsides.
Privacy is an overarching concern in these implementations. A CBDC could give government officials substantial insights into transactions and, therefore, personal data. One of the primary ways regulators would use this data is to identify money laundering or fraudulent activity.
However, many have argued that the potential for abuse makes CBDCs risky.
“That’s been one of the biggest concerns since their inception,” Hugentobler said. “Some argue that it would break the Fourth Amendment—that’s Trump’s point of view and that of his team, I think. They agree that the innovation is there, a CBDC would provide benefits, but the urge is too strong for policymakers to resist—to not overstep and take advantage of the technology.”
The Anointed Coin
As CBDC initiatives have faded, stablecoins have taken over the limelight. Although USD-backed stablecoins and CBDCs track the value of the dollar one to one, stablecoins are issued by crypto firms like Tether, Circle, and Paxos.
As CBDCs have languished in trial runs, the leading stablecoins have been circulating in what is now a $272 billion market. This dominance has left little room for CBDCs.
“We did a long report on CBDCs when things were gearing up, and the whole time I was writing it, I was thinking, ‘Everything that these can do, a stablecoin can do,’” Hugentobler said. “The difference there is that a dollar coming from the U.S. government is backed by the good faith of the government, whereas with a stablecoin issuer, as long as they have a strong balance sheet and the reserves are there, there’s no issue.”
Reserves are a concern, but the leading stablecoin issuers have been transparent in their quarterly reports about the status of the reserves that back their tokens. There is also a newly minted law passed to govern stablecoins, with U.S. lawmakers having passed the GENIUS Act just days before the anti-CBDC law passed the House.
Even though stablecoins have seemingly been anointed by lawmakers, industry players, and consumers, these tokens carry privacy concerns as well. Much like CBDCs, stablecoins allow their issuers to gain insights into transactions.
For example, Tether reported that it has frozen roughly $2.5 billion at the behest of global authorities after the funds were connected to illicit activities. While striking back against bad actors should be applauded, the crypto company’s ability to pinpoint the misused funds raised questions about its visibility into other transactional aspects.
The GENIUS Act has also received pushback. Some lawmakers have been concerned that a regulated stablecoin is no different from a CBDC in this framework and that it would give the U.S. government the power to surveil its citizens.
Not Counting It Out
These concerns will likely be amplified as the multitude of new stablecoins—including offerings from retailers, tech giants, and traditional financial institutions—flood the market. However, the substantial benefits of stablecoins, such as real-time, transparent payment settlement, mean that most concerns are likely to fade.
The onslaught of stablecoins may seem like the death knell for CBDCs, but this may not be true. Although there have been assumptions that a single payment type—whether it be stablecoins, real-time payments, or card transactions—will eventually win, the greater likelihood is that all of these payment types will coexist and find different use cases.
After all, despite all the hoopla about the demise of paper currency, recent legislation has been proposed to ensure that U.S. consumers can always use cash.
“I’m not counting CBDCs out,” Hugentobler said. “If we get a different administration in who wants to bring it back, or if there is a big liquidity event like we saw in COVID, I think they would use that as fuel to push a CBDC for quicker, faster payments directly to the people. I’m definitely not counting it out—but I’m also not counting on it.”
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