Argentina is at a crossroads, with two competing visions for the future of its currency. On one side, the Central Bank of Argentina is pushing for the introduction of a Central Bank Digital Currency (CBDC). The director of the Central Bank believes that a digital peso could help address the country's economic issues, including high inflation and a volatile currency. The introduction of a CBDC could provide a more stable and secure alternative to traditional fiat currency, potentially improving financial inclusion and reducing transaction costs. However, the success of the CBDC project hinges on the outcome of the presidential elections, as the new government will need to prioritize its implementation.
On the other side, economist Javier Milei is advocating for dollarization, which involves adopting the US dollar as legal tender. Milei argues that dollarization would protect Argentina against rocketing inflation and sharp currency drops. However, it would also make the country more vulnerable to internal devaluation and would require the exchange of all pesos for US dollars, effectively disbanding Argentina's central bank.
The upcoming presidential elections in Argentina will determine which path the country takes. The frontrunner, Javier Milei, is a strong advocate for dollarization, while other candidates, such as Sergio Massa, are more inclined towards the CBDC project. The outcome of the elections will have significant consequences for Argentina's wrecked economy and divided nation.
Regardless of the outcome, the interest in CBDCs and digital currencies is growing worldwide. Many countries are exploring the potential benefits of digital currencies, including improved financial stability, increased efficiency, and enhanced monetary policy tools. As the global financial landscape continues to evolve, the adoption of CBDCs and the debate around dollarization could reshape the future of money and banking.
China is also at the forefront of the global race to develop a Central Bank Digital Currency (CBDC) with its digital yuan project. The digital yuan, also known as Digital Currency Electronic Payment (DCEP), aims to modernize the economy, improve transaction efficiency, and reduce monetary costs. The Chinese government sees the digital yuan as a tool to combat corruption and illegal activities due to its traceability and transparency. The development of the digital yuan began in 2014, and pilot projects were launched in key cities in 2020 to test its reliability and usability. The tests have shown the digital yuan's ability to support a wide range of financial transactions. However, the project is still in the expansion and gradual adoption phase. The People's Bank of China (PBOC) is working on interoperability with traditional payment systems and providing standardized APIs for integration. The introduction of the digital yuan has sparked international reactions, with some countries accelerating their own CBDC projects and others expressing concerns about surveillance and data control. The digital yuan has the potential to challenge the dominance of existing fiat currencies and transform international payment dynamics. Its impact extends beyond China's borders and into the global financial system. As the PBOC continues to refine its project, the world watches and anticipates the waves of change that the rise of the digital yuan could bring in the coming decades.
A study by the U.S.-based Atlantic Council think tank revealed that 134 countries, representing 98 percent of the global economy, are exploring digital versions of their currencies. Over half of these countries are in advanced development, pilot, or launch stages. All G20 countries, except Argentina, are in one of these phases. However, the United States is falling behind, with its progress on a digital dollar for the wider population described as 'stalled'. The risk of the U.S. lagging behind could result in a more fractured international payments system and a loss of global finance clout. China, Europe, and Japan are significantly ahead in the development of central bank digital currencies (CBDCs). China's digital yuan is the largest and most advanced pilot, while the European Central Bank (ECB) is six months into digital euro 'preparation' work. The report also highlighted the doubling of work on wholesale CBDCs since Russia's invasion of Ukraine in 2022. Thirteen cross-border wholesale projects are currently underway, and all BRICS member states are at advanced stages. The study predicts a potential avalanche of major CBDC launches by 2027.
New Zealand has also joined the conversation, as the Reserve Bank of New Zealand (RBNZ) has started consultation on phase two of its work on a central bank digital currency (CBDC). The RBNZ is exploring high-level design options for digital cash and is seeking feedback on the proposed design features. The next stages involve prototyping and the eventual launch of the CBDC, expected to be around 2028 to 2029. However, the idea of a digital currency raises concerns about privacy and security. The introduction of a CBDC would involve the collection and storage of personal financial data, raising questions about how that data would be used and protected. Additionally, there are concerns about the potential for cyberattacks and hacking, which could compromise the security of the digital currency system. These privacy and security concerns will need to be carefully addressed and mitigated for the successful implementation of a CBDC in New Zealand.
In China, the adoption of the digital yuan is facing challenges as Chinese workers in Suzhou are rushing to convert their digital yuan CBDC payments into cash due to limited usability and privacy concerns. Despite the Chinese government's push for the adoption of the digital yuan, many workers prefer to convert it into regular cash because there is no interest if they leave it in the e-CNY app. Concerns about privacy and the limited functionality of the digital currency have also contributed to the slow adoption rate. The slow adoption rate raises questions about the future of the digital yuan. Standard Chartered Bank (China) became the first foreign bank to join China's CBDC pilot testing, offering digital yuan exchange services to its customers. In March, SWIFT announced plans to launch a new platform connecting central bank digital currencies with the existing financial system, which is expected to impact the evolving CBDC ecosystem.
Hong Kong has launched a pilot program for the digital yuan, the People’s Bank of China's (PBoC) central bank digital currency (CBDC). The pilot enables Hong Kong residents to facilitate transactions from their digital yuan wallets, which can be topped off through 17 retail banks using the Faster Payment System (FPS). However, the digital yuan pilot currently falls short on person-to-person (P2P) functionality, as it can only be used for cross-border payments and not for P2P transactions. The Hong Kong Monetary Authority (HKMA) and the Digital Currency Institute (DCI) plan to upgrade the e-CNY wallets to support P2P functionality in the future. The introduction of the digital yuan pilot aims to foster more merchant acceptance of the CBDC and bolster the use of the yuan in Hong Kong.
The National Bank of Cambodia (NBC) has successfully used its central bank digital currency (CBDC), Bakong, to reduce the dollarization of the local economy. Bakong, launched in 2020, has seen a significant increase in adoption, with riel payments up by over 50% since its launch. The NBC reports that there are 10 million active Bakong wallets out of a population of 17 million. Transaction volumes on Bakong have reached nearly $40 billion in the first six months of 2022. The NBC is exploring new strategies to attract more users, including cross-border transactions and reducing transaction fees. However, critics argue that the increased reliance on digital assets and stablecoins could further fuel dollarization.
The global interest in CBDCs and digital currencies continues to grow, with countries exploring the potential benefits and challenges of adopting these new forms of money. The mBridge project, a CBDC pilot initiative involving the Bank for International Settlements and central banks of Hong Kong, Thailand, China, and the UAE, aims to modernize cross-border payments using multiple CBDCs. This project offers a secure, cost-effective alternative to traditional banking and could reduce reliance on the U.S. dollar, although it is unlikely to replace it soon due to the dollar's dominance stemming from trust and liquidity. De-dollarisation is viewed as a gradual process influenced by geopolitical tensions, and Malaysia's potential alignment with BRICS could complicate foreign relations, especially as Malaysia aims to amplify the Global South's voice while chairing ASEAN in 2025.
As the race to develop CBDCs intensifies, it is crucial for policymakers and central banks to carefully consider the implications and address the concerns surrounding privacy, security, and financial stability. The future of money and banking is being shaped by these developments, and the decisions made today will have far-reaching consequences for the global financial ecosystem. Central bank digital currencies (CBDCs) are already being implemented by several countries, with 10 countries and the Eastern Caribbean Currency Union having launched their own CBDCs. Hong Kong and 39 other countries have CBDC pilot programs, and at least 65 other countries are researching CBDCs. The Cato Institute has been studying the risks and benefits of CBDCs, with Nick Anthony being a prominent figure in the research. Nick has a new book called 'Digital Currency or Digital Control? Decoding CBDC and the Future of Money'. CBDC advocates believe that a CBDC can be designed to protect privacy and individual freedom, but this is a misconception. A CBDC gives the government complete control over individuals' accounts, which is incompatible with economic and political freedom. The Chinese communist party has used CBDCs as a tool for control, and non-autocratic governments should avoid creating one. [05a734cb] [05c8d3cf] [440826dc]