CBDC in 2022: new pilots and competition with crypto

It is estimated that 2022 will bring an increase in pilots and nations interested in CBDCs. Let's see together the opinions and comments of experts and observers.

• "In the long run, the dominant design of CBDCs will have a tangible impact on the function and usefulness of money."

• "More advanced trials and pilots for the adoption of CBDCs will likely be announced by developing countries in 2022".

• There are a variety of reasons for the use of CBDCs, with most of them falling into one of two categories: "financial stability and monetary policy", and "increased competition in payments and financial sovereignty".

• "There are questions about the purposes of some central banks / governments - mainly rooted in privacy, surveillance and centralization of control."

• "Private banks coming together to launch pilots and test solutions lay the groundwork for a public-private partnership for CBDCs."

• “In a good scenario, positive synergies can be developed between CBDCs and the blockchain space”.

Central bank digital currencies (CBDCs) have been one of the most relevant pages of 2021, when it comes to blockchains and cryptocurrencies, although CBDCs don't necessarily have anything to do with blockchain or cryptocurrencies. This is because for every new all-time high of bitcoin (BTC), ethereum (ETH), or any other cryptocurrency reached in 2021, it seemed that some central bank would come out with the news that it was working on its own CBDC.

However, while the growth of the cryptocurrency sector has spurred many central banks to consider or even launch a pilot of their own digital currency, 2021 has not brought any full CBDC launch (although the Bahamas have launched the digital dollar Sand Dollar in 2020). And while the expectation may be that 2022 will bring a full-fledged digital currency, commentators say we'll have to wait another year or two before seeing any permanent rollouts.

That said, industry figures estimate that 2022 will bring more trials and pilots, with more nations and central banks involved. At the same time, observers also expect more private banks and financial institutions to push with their digital currencies, providing cryptocurrencies with even more competition.

Move slowly, increasing research and trials

“It is true that CBDCs have gained a lot of appeal in recent years. More than 85% of central banks are moving forward with some initiative, usually in the form of research, early stage pilots, and in some extraordinary cases the development of CBDC solutions and even limited deployment, ”Lambis Dionysopoulos said. a researcher at the Institute for the Future of the University of Nicosia.

But while many central banks are dabbling with CBDCs in one way or another, Dionysopoulos says most intend to proceed cautiously and gradually, given the importance of the task at hand and the decisions to be made.

Currently, central banks are faced with various options regarding the technological infrastructure, management and monetary characteristics of CBDCs. Indicatively, CBDCs can use existing gross settlement infrastructure in real time, or a new network [distributed ledger technology] (blockchain), "he told Cryptonews.com.

Complicating matters further, Dionysopoulos also points out that CBDCs can be issued by a central bank alone, or in conjunction with private banks and other financial service providers. Then there are other characteristics to be decided, such as whether CBDCs should have a positive or negative interest, as well as their nature as liabilities and assets on the balance sheet of banks and individuals.

“Each option has its pros and cons, and there are no clear winners. Ultimately, the dominant design of CBDCs will have a tangible impact on the function and usefulness of money, as well as the future and role of the commercial banking sector, "he said.

Because there is such a wide range of variables in the design and development of a CBDC, a lot of research and experimentation is required, which is why Dionysopoulos suspects that we won't see any full launches (and certainly not many) in 2022.

“When it comes to the future of money, there are no shortcuts to take [...] Following China's example, we are likely to see some limited uptake within this year or two, however, paying in a local cafe with digital euros is probably still a few years away ”, he added.

Other commentators broadly agree with this analysis. Chris Caruana, the Vice President of Anti-Money Laundering Solutions at Feedzai, a platform

In the form of risk management powered by big data and machine learning, it also estimates that full implementation will be "unlikely in 2022", and that pilots and trials "will continue to be the norm".

"A barometer of the actual timing of development is the progress that China is making. There is a general consensus within the industry that China is likely to be the first to launch its CBDC, given how far ahead they are currently and given the signals coming from Beijing, "he told Cryptonews.com.

In fact, China has tested its digital yuan with around 140 million Chinese residents, and its central bank reported in November that total transactions using the digital currency amounted to around 62 billion CNY ($ 9.8 billion). ). It is therefore not out of the realm of the possibility that China will move forward with a full launch in 2022, and some estimate that this could happen during the Beijing Winter Olympics in February of this year.

Regardless, most observers say that, partly due to Chinese efforts, pilots and trials will increase in 2022.

"More aggressive CBDC adoption trials will likely be announced by developing countries in 2022. G20 countries that are more mature will take longer to adopt or engage with these digital currencies," said Jason Allegrante, Chief Legal and Compliance. Officer of Fireblocks, a depositary of digital assets.

For more developed nations, Allegrante expects they will organize more consultations, discussion groups, sandboxes and other activities in 2022, as their central bankers consider various options for digitizing currencies and / or cooperating with private issuers.

The reasons for adopting CBDCs become complex

Speaking of why governments and central banks will want to try and develop their own CBDCs, most commentators say the reasons will vary by country.

"In my opinion, there is no unified target regarding CBDCs [...] The targets set in China are most likely very different from those set in the EU, for example," said Vytautas Zabulis, CEO of H- Finance, a digital asset trading solutions company.

Zabulis adds that the main motivation for governments and central banks in the current landscape is to implement national and international policies, as opposed to the use of CBDCs in order to primarily benefit individuals. Although he suggests that CBDCs will ultimately benefit ordinary people greatly in the more distant future.

In particular, many central banks will try to have their own digital currencies to improve the efficiency and speed of payment systems and networks.

For Jason Allegrante, one of the main reasons is "the realization that there are real benefits of adopting these technologies in core central bank functions, such as payments, settlement and currency distribution. There is also probably a legitimate fear of falling behind, both compared to other countries that are quicker to adopt financial innovation, and to the private sector itself, "he said.

Lambis Dionysopoulos also suggests that there will be a variety of motivations behind the adoption of CBDC, with most of these falling into one of two categories: "financial stability and monetary policy", and "increased competition in payments and financial sovereignty". .

"Specifically, central banks are always trying to improve the efficiency and security of payments. CBDCs could provide marginal benefits in both of these areas by extending central bank guarantees to the broader private sector, ”he said.

At the same time, financial exclusion, especially considering the decreasing use of cash, is fast becoming a serious problem, notes Dionysopoulos. According to him, CBDCs can "bankrupt" individuals who do not use "fintech-style" banks, extending banking and financial services to those who only have access to their smartphones.

Some central banks and governments may have less noble goals, however, when it comes to developing their CBDCs in 2022 and beyond.

"There are questions about the motivations of some central banks / governments - mainly rooted in privacy, surveillance and centralization of control through the disintermediation of the existing financial system structure," Chris Caruana told Cryptonews.com.

In fact, much of the reporting on China's digital yuan found the currency to be programmable, with the central bank being able to set deadlines on its spending, for example. This could certainly be an increasingly popular motivation for CBDCs in nations less liberal in 2022.

Digital currencies of private banks

With a Japanese consortium of private banks and corporations testing their digital currency right now, and planning a full launch in 2022, private banking digital currencies could become a broader trend in 2022.

“Private banks coming together to test solutions and launch pilots lay the groundwork for a public-private partnership on CBDCs. It is reasonable to expect that we will see more in the future, ”said Lambis Dionysopoulos.

Likewise, Vytautas Zabulis suggests that banks that have their own currencies are no longer a big surprise, and that others will follow suit in the future.

"If you look at JPMorgan's JPM Coin currency, which they have been using for a while, it is an extremely relevant use case for transfers. It saves a lot of time - which means capital can be used much more effectively - settlement times are faster and there is no need for a third-party clearinghouse, "he told Cryptonews.com.

International settlements and foreign exchanges will be the first to benefit from the use of central or private bank digital currencies, adds Zabulis. Other industry figures also expect more private banks and financial institutions to be involved with their digital currencies next year.

“For first movers, such as BNY Mellon, Citibank and State Street, efforts to transition to digital asset services will materialize in 2022, particularly with regards to their cryptocurrency offerings. It is also estimated that more private companies will prioritize digital currencies, and possibly implement their own in the near future, ”said Jason Allegrante.

The effect of CBDCs on cryptocurrencies in 2022

Significant news towards the end of 2021 was the Indian government's publication of legislation that, in addition to setting the framework for a central bank digital currency, also sought to ban private cryptocurrencies. (Read more: New Delhi poised to back down on cryptocurrency regulation, says an unnamed government source) This ominous development raises the possibility that the development or deployment of CDBC could go hand in hand with a crackdown on cryptocurrencies.

“Yes, the competition risk is very high. If you look at it from this perspective, countries with national legislation can always hinder the adoption of decentralized currencies and protocols that are not covered by a regulation, "suggested Vytautas Zabulis.

However, despite the risk of competition, commentators expect any crypto regulation stemming from CBDCs to be relatively moderate.

Lambis Dionysopoulos says it is “reasonable to expect that new legislation will be needed to delimit what private actors can and cannot do in [terms of issuing their own currencies]. The recent European regulation on cryptocurrency markets (MiCA) is a good indication of what we should expect ”.

That said, Dionysopoulos also explains that decentralized cryptocurrencies such as bitcoin are "simply not suitable for regulation similar to traditional financial service providers," insofar as their decentralization would make it difficult for governments to prevent anyone from using them. Therefore, more balanced governments could try to embrace cryptocurrencies within reasonable limits.

Dionysopoulos said: “In a good scenario, positive synergies can be developed between CBDCs and the blockchain space, facilitated through regulated intermediaries. Countries that follow this approach can benefit from the innovations and growth of the DeFi space and cryptocurrencies ”.


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