From the Backburner to a Ban
About two years ago, Reuters reported that more than 130 countries were exploring central bank digital currencies (CBDCs), with nearly all G20 nations in advanced stages of their programs. However, only three—Nigeria, Jamaica, and the Bahamas—have officially launched CBDCs so far, while many other programs have halted.
According to Joel Hugentobler, a Cryptocurrency Analyst at Javelin Strategy & Research, several factors have led to this shift away from government-issued, fiat-backed tokens. He noted in his research that shelving these programs could significantly impact the digital assets industry.
A Risky Proposition
The initial push for CBDCs was partly due to the declining usage of cash, with card networks and crypto and digital assets increasingly dominating. The pandemic accelerated these initiatives as digital payments became more prominent, while the Russia-Ukraine conflict further underscored global financial instability.
Despite President Joe Biden requesting an assessment on CBDC feasibility for the United States, no firm plans were made to issue a retail digital dollar. Instead, there was interest in a U.S. CBDC for bank-to-bank payments.
However, with a change in administration, CBDCs moved from the backburner and even faced bans. The House of Representatives passed a bill prohibiting the Federal Reserve from issuing a CBDC without explicit congressional approval, though it remains pending in the Senate.
Hugentobler noted, “For now, there’s no significant movement expected over the next three to four years, which wasn’t surprising given Trump’s support for private sector innovation.”
The Anointed Coin
While CBDCs face these setbacks, stablecoins have gained prominence. The USD-backed stablecoins from firms like Tether, Circle, and Paxos now dominate a market worth over $272 billion.
Hugentobler observed that the leading stablecoins have outpaced CBDCs because “a government-issued dollar is backed by the government’s good faith, whereas a stablecoin’s value relies on its issuer’s reserves and transparency.” Stablecoins also offer real-time, transparent payment settlements.
Despite these benefits, concerns about privacy persist. Both CBDCs and stablecoins allow issuers to monitor transactions, which can be seen as intrusive by some. For instance, Tether has had to freeze funds suspected of being involved in illicit activities, raising questions about transaction oversight.
The recently passed GENIUS Act aims to regulate stablecoins but has faced criticism for potentially giving the government too much oversight into citizens’ transactions.
Not Counting It Out
While concerns about CBDCs and privacy remain, they are unlikely to overshadow their potential benefits. Hugentobler stated that while stablecoins currently dominate the market, CBDCs may make a comeback under different circumstances.
“I’m not ruling out CBDCs,” he said. “A new administration interested in promoting them or major events like the one during the pandemic could drive their development for faster, more efficient payments.” However, Hugentobler also admitted to uncertainty regarding their future.