Central banks in more than 50 countries are at least in the early stages of studying or developing a central bank digital currency, including in the U.S., according to John Kiff, former senior financial sector expert at the International Monetary Fund.
A central bank digital currency is a widely used digital representation of a country's sovereign currency issued by and as a liability of a jurisdiction's central bank or other monetary authority, explained Mr. Kiff, who retired from the IMF last month and is based in Round Hill, Va., in an interview prior to his retirement.
The reasons for adopting a central bank digital currency vary depending on the maturity of a country's financial system, the percentage of its population with access to a bank account and the number of financial transactions that are already virtual, but central banks in both large and small countries are leading the way on implementation.
The Central Bank of the Bahamas started a pilot version of the sand dollar, a digital version of the Bahamian dollar, in 2019 and officially launched the sand dollar in October. And in China, which has been working on a digital currency since 2014, its central bank in 2020 launched pilot projects of its digital yuan in a few cities.
The declining use of cash, especially in China where a majority of transactions are completed via apps like WeChat Pay and Alipay, has motivated central banks to explore digital currencies, Mr. Kiff said.
"Declining cash usage reduces somewhat the central bank's ability to conduct monetary policy because people aren't actually using the central bank's money to transact," he added.
In the U.S., the Federal Reserve Bank of Boston announced a partnership in 2020 with the Digital Currency Initiative at the Massachusetts Institute of Technology to perform technical research related to a central bank digital currency.
The Boston Fed and MIT have structured the research collaboration into work phases that extend over two to three years. The first phase involves jointly building and testing a hypothetical central bank digital currency for wide-scale, general purpose use. The objective in this phase is to determine how to build a scalable, accessible cryptographic platform to meet the needs of a theoretical U.S. dollar central bank digital currency, including stringent design requirements for speed, security, privacy and resiliency, according to a Boston Fed statement.
In later phases, researchers will assess technology trade-offs by coding and testing various architectures to see how they impact the central bank digital currency's design goals, the Boston Fed added.
In discussing central bank digital currencies in a speech last month at a virtual Basel Committee on Banking Supervision conference, Federal Reserve Chairman Jerome Powell cited a report from the Bank for International Settlements and a group of seven central banks that includes the Fed. One of the report's three key principles is that "a CBDC needs to coexist with cash and other types of money in a flexible and innovative payment system," Mr. Powell said, according to a transcript posted on the Fed's website.
As with conventional cryptocurrencies like bitcoin, a central bank digital currency is stored on distributed ledger technology, like blockchain. "In an institutional setting, that might mean faster settlement for certain types of transactions," said Tom Jessop, New York-based president of Fidelity Digital Assets.
Some stakeholders have raised privacy concerns with respect to central bank digital currencies because the transactions would all be tracked, Mr. Kiff said. On the flip side, "If you made it totally anonymous, it becomes a financial integrity nightmare for money laundering and tax evasion," he added.
Also, there are cybersecurity concerns. "The risk of failure of a CBDC would be like the ultimate counterfeiting operation if someone cracked the code or something," Mr. Kiff added.
Those concerns are why central banks across the globe are taking years to study the topic. But more central bank digital currencies are on the way. "It's more about getting it right than being first," Mr. Kiff said.