Steady movers keep pace

UK, US, Europe and Japan are favouring a slow and steady approach to central bank digital currency

There has been steady progress in central bank digital currency developments from the more conservative central banks, such as the European Central Bank, the Federal Reserve, the Bank of England and the Bank of Japan. These banks share an affinity toward physical notes and coins, while they leave the gradual improvement of digital payment methods and banking to established service providers like Visa and Mastercard.

Strong policy motivations for financial inclusion create more powerful organic demand for digital means of payment in emerging markets than in developed economies. The need for emerging markets to boost financial inclusion means the case for digital currency is stronger, while the marginal benefit of leapfrogging traditional real-time gross settlement and other interbank payment systems is also much bigger. However, consumers’ payment behaviours are changing. The Covid-19 pandemic created a surge in digital and contactless payments in all countries and cash use was cut by half or more. In the US, stimulus payments exposed a broken banking system which had limited population coverage, prompting debate around a digital dollar alternative.

Japan resumed its CBDC research and evaluation plans and is seeking a contingency plan if the demand among its aging population for a digital payment option changes. The ECB has moved at varying speed, as national central banks in the euro area, such as France and Lithuania, power ahead with wholesale CBDC and retail CBDC prototypes, respectively.

The UK remains conservative. It continues to gather industry perspectives on different aspects of CBDC design, with a strict focus on minimising financial stability risks. The BoE is, however, undertaking an update of its RTGS systems, adding greater efficiency and functionality for participants, likely creating end-user benefits with more competitive options and lower costs.

While these regions may be making slow and steady progress compared to others, it is notable that they are still powering ahead with research. That speaks to a bright future around the world for CBDCs.

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