Why are central banks pursuing digital coins? Relevance

Central banks around the world — including those of China, the U.S. and Sweden — have been pursuing blockchain-based central bank digital coin projects over the past few years. A recent report polling these central banks on the topic found that a full two-thirds are planning to adopt a CDBC within the next ten years. The poll also found that the most common reason for doing so is to maintain central banks' primacy over monetary provisioning.

The paper, produced by the Official Monetary and Financial Institutions Forum — an independent think tank concerned with central banking, economic policy, and public investment — asked central banks their main objective in pursuing a CBDC. They chose between "Preserve the central bank's roll in money provision," "Boost financial inclusion," "Improve transmission mechanisms for monetary policy," "Aid cross-border payments," "We are not pursuing a CBDC," or "Other."

At just shy of 45%, "Other" was the most common answer by far, indicating that there is no clear consensus as to why central banks are doing this. However, "Preserve the central bank's roll in money provision" was the highest among the actually named options, at around 27%. Following this was "We are not pursuing a CBDC" at around 17%. Below this, "Boost financial inclusion" hovered just over 10%. The final two options, "Aid cross-border payments" and "Improve transmission mechanisms for monetary policy" had nearly no support, with only 0.5% between them both.

Those who chose "Other" often said they had more than one objective and that they flowed into each other.

Whatever the motivations, the survey found that we will be seeing CBDCs sooner rather than later. Researchers found that 24% of central banks intend to launch their digital currency within the next one to two years; a further 12% had a three-to-five-year time horizon; and 29% expect to launch within six to 10 years. Meanwhile, 35% said they do not intend to issue a digital currency at all, meaning their projected time frame, so far, is "never."

Much of the interest has been sparked over the past year. The survey found that nearly 40% of central banks said they have become more inclined to issue a CBDC this year than the last, while virtually zero said they have become less inclined.

The poll also showed mixed feelings towards stablecoins, digital currencies designed to be less volatile that exist mainly as a bridge to facilitate other payments (whether or not they are successful in doing so is another story). Almost 90% of central banks said such tokens can make cross-border payments more efficient; meanwhile, about 75% also said they are a risk to financial stability due to poor quality standards. Presumably, on this particular poll question, people could pick more than one option, given the numbers involved. This may be why interlinking CBDCs for cross-border payments was more heavily favored by central banks to a global stablecoin, about 33% to about 14%.

The paper said that, as of now, 105 countries are now exploring a CBDC, a dramatic increase from the 35 countries found in 2020. The countries that have officially launched a CBDC include the Bahamas, Jamaica, and Nigeria.