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A Horse Race: Toward Central Bank Digital Currencies
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Most people tend to confuse the word “digital currencies” with the word “cryptocurrencies,” and generalize them to mean Bitcoin-like currencies. In reality, the digital currency world is much more complicated than this. To explain why, it is first necessary to define the underlying difference between a digital currency and a cryptocurrency.

While every cryptocurrency is a digital currency, the opposite is not true. In fact, a digital currency is defined as any currency or virtual money that exists only in the digital world and not physically. On the other hand, a cryptocurrency is a type of digital currency that is not controlled by any central authority (like a government or central bank), and its distribution, minting, and regulation of transactions are enabled by cryptographic standards. There are further differences between independent coins and stablecoins, which we also must address.

Independent coins are all cryptocurrencies like Ethereum, Bitcoin, or Ripple. They are solely driven by the law of demand and supply and of free market economics. As a result, they are naturally subjected to market volatility.

On the other side of the coin, there are stablecoins. Stablecoins are cryptocurrencies built to constrain the innate volatility of cryptocurrency, thus making them more useful for larger audiences who may find the price swings to be untenable. The most popular stablecoins at the time of writing are the following:

  • Tether, the most traded digital currency in circulation, backed by a portfolio of stable fiat currencies such as the US$, the euro, and the Japanese yen, which has each coin exchangeable with one US$.
  • Libra, the cryptocurrency proposed by the Facebook platform, backed by a reserved composed by 50% by the US$ and for the remaining half by the euro, the Japanese yen, the sterling, and the Singaporean dollar.
  • JP Morgan coins, the digital currency minted by the financial giant for internal smart contract purposes, which is redeemable to the US$ on a one-to-one ratio. Libra will be discussed more extensively in the following paragraphs of the paper.

CBDCs: Central Bank Digital Currencies

CBDCs are fiat digitized monies that are worth exactly the same as its paper counterpart, with the exception that they exist in cyberspace.
In more detail, Central Bank Digital Currencies are different than cryptocurrencies because the latter lacks legal tender status declared by the government. In other words, even a stablecoin cryptocurrency that is backed by USD does not qualify as a real USD unless the United States Government accepts it as legal tender.

To ensure their per-unit value, CBDCs are backed by physical reserves in central banks. They are part of the money supply issued by central banks and, as such, they figure within the liability side of central banks’ balance sheets. However, CBDCs are pure fiat currency in digital form. In no way are their distribution and supply driven by cryptographic primitives. On the other hand, like physical fiat currencies, Central Bank Digital Currencies are regulated by governmental entities and central banks. They are digital bearer instruments that can be utilized to store and transfer money, with each unit of digital currency uniquely issued by the central bank and perfectly identifiable, in order to prevent minting and distribution of counterfeit money and illegal transfers out of thin air. Furthermore, removing the physical limitations of the digital currency enables much faster money transfers between entities.

Dyson and Hodgson [22] further list a number of benefits brought by CBDCs, among which:

  • Widening the range of options for monetary policy.
  • Making the financial system safer.
  • Encouraging competition and innovation in the payment systems.
  • Addressing the decline of physical cash (and the consequent natural shit toward electronic methods of payment).
  • Improving financial inclusion.

Although extremely appealing, Central Bank Digital Currencies seem to be struggling to become a reality. This is likely due to two factors. First, and likely to the greater extent, the digital aspect of CBDCs is still regarded by many as (supposedly) not being “safe enough” with respect to the physical option. Second, the introduction of a digital currency in the regular money supply and distribution provided by central banks requires a lot of re-thinking regarding existing monetary policies.

However, in 2006 the US Treasury announced in a press release report [1] the approximate amount of counterfeit money in circulation at that time, just in the United States, is estimated to be around US$70 million, which is one dollar every 10,000 bills, with an upper cap estimate of about $200 million fake dollars circulating. So, is physical currency really safer than its digital equivalent? With increasingly complex cryptographic techniques to grant the security of digital systems, the answer is an easy no.

In addition to uprooting counterfeiting, the ease of money transfers both in terms of complexity and latency make Central Bank Digital Currencies quite appealing, especially when taking into consideration the ever dynamic and growing global commerce landscape.

Current State of CBDCs worldwide

On November 10 2019, global newspapers announced that a great milestone had been reached for the first time ever in history: the day would be forever marked as the day when the very first Central Bank Digital Country was ever launched to the public. The winner of this race was claimed to be Tunisia, a country populated by about 11.6 million inhabitants in Northern Africa, bordering with the Mediterranean sea. The economy had issued the digital currency, which was labelled E-Dinar, already in 2016.

On November 12, two days later, the news was turned down as fake [23][24]. The Russian blockchain startup going under the name Universa clarified that the E-Dinar (or U-Dinar, as later claimed), the digital currency that was claimed to be a CBDC is in fact not so, while it would only be a digital currency backed by the Tunisian dollar, therefore a stablecoin, not an equivalent to fiat. The Central Bank of Tunisia is considering options for opening to a digital currency, however nothing has been finalized yet.

Tunisian Dinars

Although the news was later reported to be falsely spread by blockchain startup Universa, probably with the purpose of boosting the value of the internal coin, it is relevant to look at the underlying driving forces that were claimed to be stirring the direction of the decision. In fact, the following have a much wider scope, as they represent the core motivations for countries worldwide to be considering the implementation of a CBDC.

The motivation to look for implementation ways of a digital currency in Tunisia is driven primarily by the difficulty of making cross-border payments. Specifically, Tunisia would hope to reduce, if not completely eliminate, the need to rely on the US dollar [2] and the European SWIFT system for cross-border transactions.

Relevant gains in transparency and cost savings [4] are also to be expected as a consequence of the adoption of a national CBDC in monetary policies. First and foremost, a digital currency lacks the physical support, therefore no printing is required and logistics costs are reduced to virtually zero. A Central Bank Digital Currency is claimed to be 100 times cheaper than its physical counterpart [24]. In relation to the safety characteristics of the digital currency, advanced cryptographic techniques create an impediment for digital banknotes from being counterfeited, therefore risk is reduced. Gains are also to be considered on the taxation front, as digital tracking of the currency would almost completely impede non-recording of transactions. Finally, money laundering would be greatly reduced.

As the Tunisian failure was announced, the world is wondering who will be the winner. Will China be able to secure an early position in this ongoing horse race?

In fact, China had already announced in September 2019 [5] its intention to become the very first country in the world to publicly launch its Central Bank Digital Currency.

Jack Lee, managing partner of HCM Capital, an investment company backed by Foxconn, announced on November 11, 2019 [6] that the Chinese CBDC should be ready for use in 2 or 3 months, i.e. by the beginning of 2020. It will be issued by the Chinese central bank and will be available for commercial banks and several widely used third-party payment processors, such as Alipay or WeChat. The digital currency will be used as a partial, not total, replacement of physical currencies and will be backed by reserves in the central bank. Some sources [7] claim that this move from China may be equally driven by a desire to innovate and the will to increase control over movement of money within and outside the super power.

At the Singapore Festival on Monday November 11, 2019, Jack Lee claimed that “they already have all the system and the network ready. I think you will see it very soon, in the next maybe two to three months.”

However, specifications have not been released yet, and the precise characteristics of the Chinese digital currency are still far from being clear. In time, further information will be released and the overall picture will become clearer.

In June 2018, Estonia [8] proposed a plan to launch its own CBDC, however the plan was immediately rolled back as a consequence of the criticism of Mario Draghi [9], president of the European Central Bank. The driving force against the Estonian initiative was that the European Union is to be recognized as the sole issuer of currency among its members. This extends to the issuance of digital currencies.

Geographically neighboring however substantially different is the case of Sweden, another country being part of the Europen Union. Differently from Estonia, Sweden falls outside the euro adoption sphere, as it adopts its own currency, named the krona. As a consequence to the extremely rapid decline in usage of physical cash, which is now in some commercial locations no longer accepted, the country started working on its CBDC as early as 2016. The Riksbanks published the first official report [27] in September 2017 and hopes to launch the E-Krona by mid 2020 [26]. As the Swedish bank points out [25], the increasing rise of private digital payment systems implies that most of the control over payments is shifting away from the government hands. In other words, states are to an increasing extent facing the threat of losing competitiveness against private payment processors. CBCDs like the E Krona represent an optimal solution to address the problem.

A similar situation is being registered in England, another European country adopting its own currency. However, at the time of writing the most urgent matter in the country seems to be represented by the Brexit topic, therefore the Bank of England has put a temporary stall in the construction of a local CBDC.

However, this is just part of the story. As a matter of fact, central bank digital currencies are just one very special implementation of the million forms a national digital currency can take.

In the Marshall Islands, a small atoll composed by 29 coral islands and not much more than 53,000 inhabitants out into the open Northern Pacific ocean, the official currency is the US dollar. In early 2018, the governmental body of the country, whose heads were by the time Hilda Heine and David Paul, announced work in progress on a national digital currency named SOV. The SOV would not be a CBDC, while it would represent a legal tender cryptocurrency, i.e. a cryptocurrency which must be accepted by law as repayment for any debt [28][29]. The idea of building a national digital currency came from a number of reasons. First, it would constitute a profit source for the atoll. Second, it would allow the Marshall government to increase competitiveness, and specifically in the light of the threat posed by the embitternment of money laundering policies in the United States around the time, which naturally led international banks to become more reluctant to cooperate with small governments [28]. Finally, a digital currency represents a much more environmentally sustainable way of minting money and a stronger weapon to fight climate change, which is a concern especially immediate in the Marshall Islands, which are only 2m above sea level [31]. The SOV will be launched via a token pre-sale and is expected to be available to the public between 2021 and 2022 [30][31]. It will be released with a TMRI, i.e. a Timed Release Monetary Issuance [32].

Not long before, in December 2017, the Venezuelan president Nicolas Maduro launched a legal tender cryptocurrency named Petro, a stablecoin backed by the country’s reserves of oil, diamonds and gold, in order to offer a less volatile solution to the fluctuating bolivar [33].

It shall nevertheless be underlined that when they are not CBDCs, national cryptocurrencies do not offer an equal level of control and ownership over money issuance, distribution and monetary policies as the former counterpart. This may also include lower safety levels with respect to anti money laundering and combating financial terrorism practices, i.e. AML and CFT as referred from the IMF.

Aside from the examples mentioned above, an increasingly high number of countries worldwide a number of countries are taking their first steps to implementing a similar technology.

Why all of a sudden the huge interest in Blockchain Based CBDCs?

So why has every country started taking the first steps toward their own CBDC exactly now, out of nowhere? The answer is that this is all not really happening out of nowhere.

During the past several years, academic, enterprise, and public confidence in distributed ledger technologies has continued to grow. Many of the previous scaling concerns related to blockchain performance have been largely solved with new system designs, such that DLT can now out perform centralized counterparts like Visa. Recent advancements in applied cryptography enhances the safety of the end-user and can grant greater privacy for all. Distributed Networks that leverage blockchains provide operators added security guarantees, more transparency, and the control they ultimately seek. This realization has been expedited by nation states recognizing its utility on a large scale.

Second and perhaps the most important trigger influencing the global race to CBDCs is the news announced by a number of big international corporations that they would launch their own stablecoin. First among them, Facebook’s announcement in June 2019 of the upcoming launch of their own cryptocurrency, Libra [11]. Libra is a stablecoin whose main purpose would be allowing payments on top of a blockchain designed by Facebook[12]. The major concern, however, comes from the fact that Facebook’s user reach, which is in the billions, is so large that overnight their currency would compete with other sovereign nation issued currencies. What’s more, Facebook’s track record on privacy violations is far from honorable.

As a result, regulators worldwide are reluctant to embrace the social media’s ambition to enter into the Consumer to Consumer payment industry via their own designed medium of exchange. Furthermore, regulators fear a technocratic competing currency which may give the corporation the type of power that is usually reserved for sovereign nations. As reported by [13], on October 4 2019 Paypal was the first among Libra’s partners to withdraw from the commitment taken. On October 11, the online payment processor leader was followed by Visa existing collaboration plans. Mastercard, Stripe and Mercado Pago, also have left the project which may be stuck in limbo indefinitely.

The financial giant JP Morgan rolled out in early 2019 the JPM coin, or JP Morgan coin. The JPM is again a stablecoin backed by the US$, allowing each digital coin to be redeemable with unit of the United States currency [15]. The financial institution claims that, in the future, the coin will be backed by a composition of a larger amount of fiat currencies and other assets, in order to grant its stability [16]. Coinshares reported in its Crypto Trend Report from November 2019 [14] that the stablecoin boasts today around 30,000 users in the middle market and about 1,700 in the corporate market. The JPM coin is today used only for internal purposes, and more in detail with the objective of settling smart contracts. However, the bank aims to expand its digital-based operations in the future.

Another relevant example is represented by Tether, a cryptocurrency issued by Tether Limited which may be exchanged with US$ at a 1-to-1 ratio. Tether’s value is backed by a stable reserve composed by traditional currencies like the US$, the euro and the Japanese yen, and other cash equivalents [17]. Bloomberg reported in early October 2019 that Tether’s transaction volumes are overtaking Bitcoin’s counterpart by 18%, making the stablecoin officially the most traded digital currency on the market.


The three depicted cases are particularly outstanding in the global digital currencies panorama for a number of reasons.

The Libra case is especially overwhelming due to the (potential) size of its market: with over 2 billion users globally, the social media giant would scale to about twenty times the size of the biggest financial institutions worldwide, targeting one fourth of the world population, or over half of those with internet access. However, it shall be noted that regulators globally seem to have been creating serious impediments to the realization of the projects. This led to the abandonment of the project of four major players in October 2019.

Tether is not less worth the attention: while Bitcoin is often believed to be the most traded digital currency in the world, it is, in fact, not. As a matter of fact, not many know that the winner of the race is Tether, defeating the competitor with around 18% more transactions as reported by Bloomberg in October 2019 [17].

JP Morgan coin, on its end, with its about 30,000 users in the middle market and about 1,700 in the corporate market [14], may look like the smallest player. However, it shall be kept in mind that at the time of writing JPM coins are available for use only internally for smart contract purposes, and the company is hypothesising spreading use to external purposes during the next years[15] [16]. On top of that, it shall be noted that the financial giant is one among the biggest financial institutions worldwide and figures between the very few enterprises that did not register a drop in profitability during the 2008 crisis.

The notable rise of stable coin digital currencies upon termination of the so-called crypto winter in 2018 was clearly driven by consumers’ will to preserve the benefits from digital currencies, i.e. speed and low cost in (international) money transfer, cryptographic security, etc. while decreasing virtually to zero the volatility associated to the value of the currencies.

The latter motivation led to the creation of a number of digital currencies backed by a similar, if not completely identical, pool of stable fiat currencies. The pool is (usually) composed by the largest share by the US$, accompanied by a similar pool of other stable fiat currencies such as the euro and the Japanese yen. Furthermore, two out of the three stablecoins described in the above paragraphs are redeemable with the US$ on a one-to-one ratio.

This, however, clearly threatens to create a situation of competitive advantage and imbalance in the global currencies panorama in favor of the few, aforementioned fiat currencies, and in particular of the United States dollar. May global regulators allow such projects to takeoff, inevitable imbalances and consequent uprisings would be triggered at a political level in a great number of countries worldwide. The Bank of England governor Mark Carney went as far as suggesting that a “private or state-run digital currency could serve as a global counterbalance to the dollar” [19].

Faced with this looming issue, smaller countries are racing to offer digital, easy to use digital currency alternatives that allow for large reductions in cost and substantial gains in efficiency, whilst most importantly enabling cross-country inter-bank transactions at a much lower cost and faster pace. A survey on CBDCs conducted in 2019 [21] indicates that around 70% of the interviewed banks are considering implementing central bank digital currencies in the future.

Central Bank Digital Currencies (CBDC) represent a great solution for countries to preserve control on monetary policies, while at the same time increasing efficiency,decreasing latency and costs by adopting a digital currency that has exactly the same characteristics of the respective fiat currency, just digital.

However, it must be kept in mind that the introduction of CBDCs triggers huge modifications not only in legacy monetary policies, but also in the role banks and national currencies play in the global landscape. To provide an example, financial middlemen today retain 10 to 20% of any given amount to send money across countries [18]. This calls for a global need for supporting regulatory frameworks and developing flexibility and adaptability to the changing landscape, in order to safeguard the safety and privacy of citizens.

What is clear is that the world is moving fast, but the direction is yet to be seen.






















[21]Barontini, C., & Holden, H. (2019). Proceeding with Caution-A Survey on Central Bank Digital Currency.BIS Paper, (101).

[22]Dyson, B., & Hodgson, G. (2016). Digital Cash: why central banks should start issuing Electronic Money. Positive money.












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