What the CBDC Terrain Will Look Like in 2021

Godfrey  |  Dec 25, 2020

The emancipation by the central banks around the world to launch a government-backed and functional digital currency is poised to take a new twist in the coming year 2021. The race to debut a central bank digital currency (CBDC) gained more grounds in 2020 as the advent of the COVID-19 pandemic made many of these banks to begin considering the launch of cash alternatives to payments.

The underlying motive to develop a cash alternative for some central banks predate the COVID-19 pandemic, but the highly contagious viral pandemic increased the pace and the urgency of the venture. The launch and issuance of a CBDC also have innumerable advantages as it can help drive innovation and sustainability in each country’s domestic payment ecosystem.

In its earlier released publication on the collaborative efforts of some central banks, the Bank of International Settlements (BIS) noted that on the part of its profiled apex banks, “the common motivation for exploring a general purpose CBDC is its use as a means of payment. Providing cash to the public is a core responsibility of central banks and a public good,” adding that “a CBDC could provide complementary central bank money to the public, supporting a more resilient and diverse domestic payment system. It might also offer opportunities not possible with cash while supporting innovation.”

But besides the feeling of responsibility to serve the general public as noted by the BIS, central banks may be developing their CBDCs in response to the threats posed by cryptocurrencies.

The Digital Currency Push

The digital payment network has been developing in the past decade with cryptocurrencies including Bitcoin (BTC), Ethereum (ETH), and Tether (USDT) to mention a few on top of the list. These digital currencies are virtual, encrypted, and bypasses the precepts of traditional payment systems in that it fosters secure, and fast person to person transactions at a reasonably lower fees to what banks and financial institutions had to offer.

These and more digital currencies have grown in their respective acceptance in the past decade and year respectively. In its State of the Network report, crypto market data analytics platform Coin Metrics noted that the number of Bitcoin wallet addresses has increased significantly in the past.

Coin Metrics report reads:

“Over the course of 2020 bitcoin added over $300B to its market cap. The amount of daily active addresses doubled, and the number of addresses holding at least 0.01 BTC grew by over 700k. While adoption grew, bitcoin veterans continued to hold strong.”

Following this growth, Coin Metrics is projecting yet a bigger boost for Bitcoin in 2021. This growth comes off as a threat to most Central Banks as the cryptocurrencies dwarfs their existing innovations in the digital payment ecosystem.

The best bet to combat the growing adoption of these cryptocurrencies is the development and launch of a CBDC possibly in 2021, a project only the Central Bank of the Bahamas has been able to launch its own CBDC, dubbed the Sand Dollars.

So What Is to be Expected of Central Banks and CBDC in 2021?

Bitcoin and altcoins are not controlled by any government agency, and central banks will do all within their powers to battle the dominance of these cryptocurrencies through a dogged pursuit of CBDCs in the coming year.

Countries like China that have recorded significant trials of its proposed Digital Yuan will intensify its trials and may eventually launch the new e-payment system in the coming year. Indecisive central banks such as the Bank of England amongst others are likely to change their conservative positions while joining the competition to develop and subsequently launch their own digital Pounds.

While the advent of these CBDCs is not meant to replace cash, there will likely be more collaborative efforts from central banks in 2021 as we have seen signs of some this year as duly noted by the BIS.

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