Cryptocurrency is getting a central bank makeover

The cryptocurrency market is increasingly inspiring sovereign central banks to mint national digital fiats.

“Digital assets are not on trial. Frauds and organizations are on trial,” US Senator Cynthia Lummis said during a Senate Banking Committee hearing Wednesday (December 14th) on the collapse of cryptocurrency exchange FTX.

At the same time, interest in separating offshore crypto trading houses from federally regulated digital currency banking appears to be growing. Central Bank Digital Currencies (CBDCs) are being experimented with across global jurisdictions, and many leading central banking systems are beginning to pilot proof-of-concept exercises to test the potential of next-generation digital currency payment infrastructure, as well as hoping to uncover the preliminary knowledge needed to craft appropriate regulations. to use a government-approved digital currency.

More than a dozen countries, from India to Nigeria, Sweden, Japan, the United States and China, are now conducting pilot programs to explore the potential future benefits, pitfalls and use cases of establishing their own CBDCs.

The Atlantic Council found that the vast majority of the world’s central banks have shown interest in testing CBDCs, noting that 11 countries have already fully launched CBDCs and 17 others are currently in some stage of the trial process. In total, 72 nations are said to be in the research and development phase, while only two nations, Senegal and Ecuador, have canceled their efforts.

Pilots fly

On December 5, Spain’s central bank published an open call for industry proposals to participate in the digital currency experiment.

Separately, the New York Federal Reserve and a consortium of leading US banks and financial services firms also announced plans to launch a 12-week pilot program to test the feasibility of digital asset transactions linking deposits at regulated institutions.

Brazil also hopes to launch a national digital currency in 2024. This is the second delay for the project, which was originally planned for this year but was pushed back to 2023 in June. Brazil’s central bank officials said the project is focused more on financial innovation. , rather than researching specific benefits, such as real-time payments.

Nigeria launched its CBDC and corresponding currency, the eNaira, last year and has gone so far as to limit cash withdrawals at ATMs in the country to encourage its citizens to use the national digital currency. Nigerian traders said the appeal of using eNaira over traditional fiat options is the lower fees compared to the transaction processing margins of other payment methods.

Nigerian traders are not alone in this sentiment. According to a June PYMNTS report, “Paying with Cryptocurrency: What Consumers and Merchants Expect from Digital Currencies,” 77% of U.S. merchants that accept digital currency see the appeal of crypto transactions over standard payment methods.

The Bank of England is also entering the fray, despite the prospect that the so-called “digital pound” does not find much support in parliament. The cross-party Lords Economic Affairs Committee labeled CBDCs as “a solution in search of a problem” in a recent report. The board indicated a greater openness to wholesale CBDC for use between financial institutions (FIs), which is generally speaking the most common use case being explored in those countries exploring CBDCs.

India, however, is not making much headway with its wholesale “digital rupee” project. National bankers actually noticed the downside of the initiative. Each trade using CBDC needs to be settled individually, while transactions using the existing interbank network can be managed in bulk. India’s central bank is unfazed and is reportedly considering the potential for retail use of the digital rupee.

The Central Bank of Ukraine also detailed the CBDC project. The country is exploring the possibility of launching a digital version of its national currency, the eHrivnia, from 2018.

Further in the Eastern Hemisphere, the Bank of Japan is set to test CBDCs next year, while the Bank for International Settlements (BIS) and the Hong Kong Monetary Authority announced the results of their already completed CBDC experiment that showed CBDCs can work alongside private stablecoins.

Not everyone goes alone. Earlier this month, banks in France, Singapore and Switzerland announced a six-month experiment involving hypothetical CBDCs from each country. Called Project Mariana, the initiative is intended to test the viability of cross-border CBDC trading and settlement.

The Monetary Authority of Singapore has separately introduced its own program, Ubin+, a wholesale CBDC.

These CBDC protocols being piloted aim to prepare sovereign nations for a new generation of financial infrastructures, determining geopolitical effectiveness as well as revealing how other digital asset ecosystems might be affected — and regulated.

“We hope to learn how to transfer value, 24/7, using an industrial ledger that gives our customers flexibility and reduces latency while increasing security and speed — and operates within the two-tier, regulated banking system as it exists today ,” TD Bank’s Jon Prendergast told PYMNTS in a conversation earlier this month.

TD Bank participates in the New York Fed project.

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Convenience prompts some consumers to store their payment credentials with merchants, while security concerns give other shoppers pause. For “How We Pay Digitally: Stored Credentials Edition,” a collaboration with Amazon Web Services, PYMNTS surveyed 2,102 U.S. consumers to analyze consumer dilemmas and discover how retailers can win over the reluctant.

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