Global adoption o CBDC is progressing very slowly

CBDCs: A look at the pioneers

Already in the year In 1992 Finland went with the Avant card a first step towards a digital central bank currency. However, this approach, which was essentially a physical card with a value guaranteed by the central bank, was not convincing and was privatized after three years. There was a lack of acceptance from both consumers and retailers.

The Bahamas and Nigeria are two of the first by now eleven countries who have introduced a CBDC. Despite government funding, the Bahamas sand dollar and Nigeria’s eNaira saw little acceptance. There is concern among users about privacy and safety of their funds. In China, where the currently largest CBDC project with the digital yuan is being driven forward, one can observe similar initial difficulties. Despite several pilot projects and government funding, many shops still do not accept the digital yuan.

On the other side of the Pacific, in the United States, the central bank is pushing ahead with the development of a CBDC, but it is still in the development phase. A major project is “Project Hamilton”, a collaboration between the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology. Blockchain technology was successfully used to achieve a high number of transactions per second.

In the European Union, the digital euro is also currently in the concept phase. The European Central Bank (ECB) is actively working on the development of a CBDC and is defining the responsibilities for implementation and administration. Although many questions remain unanswered, especially with regard to technical aspects and implementation, it is clear that the development of a CBDC also has high priority in the euro area.

Why is CBDC adoption slow?

Several obstacles are holding back the uptake of CBDCs by citizens. A major problem is the lack of knowledge and understanding of these new forms of digital money. Added to this are security and privacy concerns in an era where cyber crime is on the rise and trust in government institutions is declining in many countries. Additionally, handling CBDCs requires technical skills and access to the appropriate technology, which not all have.

The limited acceptance by retailers and an infrastructure that can still be expanded also prevent widespread use in everyday life. Finally, a general distrust of government institutions also plays a role in the cautious acceptance of CBDCs.

The example of China clearly illustrates these challenges: Although China can control and monitor its citizens like few other countries in this world, the adoption of the digital yuan is progressing only slowly. Despite extensive pilot projects in 26 cities, many shops are not yet ready to accept the digital yuan as a means of payment.

However, experts agree, broader adoption of the digital yuan could be achieved if the Chinese central bank seeks closer cooperation with popular services such as WeChat and Alipay. These services play an essential role in payment transactions in China and their integration could increase the acceptance of the digital yuan. However, in its current form, the digital yuan is too similar to a traditional bank account, which is neither particularly beneficial nor convenient for users.

Outlook and possible solutions

The acceptance of CBDCs will depend heavily on how central banks and governments address the challenges at hand. It is essential to establish trust in these digital currencies, which can be done through transparency, education and protection of user rights. Technical hurdles, such as scalability and interoperability with existing financial structures, must also be addressed. At the same time, the balancing act between user privacy and legal requirements, such as combating money laundering, must be successful.

CBDCs have the potential to transform finance and drive digital transformation. They could improve access to financial services for underserved groups and increase the efficiency and security of financial transactions. However, the way there is still long and paved with a number of difficulties.

What role do Bitcoin and Ethereum play in a world dominated by CBDCs?

Bitcoin could retain its function as a decentralized store of value (digital gold). Unlike CBDCs, which are controlled and regulated by central banks, Bitcoin remains decentralized and independent of government control. This could make Bitcoin an attractive alternative asset class, serving as a hedge against potential risk or instability of CBDCs.

Ethereum, on the other hand, could retain its role as a platform for decentralized applications. With the ability to host and manage smart contracts, Ethereum could serve as the basis for a variety of applications and services, or even CBDCs, beyond simple monetary transactions. This could offer a complement to CBDCs by enabling additional functionalities and services that may not be directly built into CBDC design and operational models.

Thus, both Bitcoin and Ethereum could help create a more diverse and resilient digital financial ecosystem, even in a world dominated by CBDCs.