Five more countries have abandoned CBDC
A growing number of countries seeking to introduce a central bank digital currency (CBDC) are abandoning the idea after conducting pilot projects. Either the use cases did not work or were recognized as inadvisable, or the CBDC did not receive support from citizens and businesses in certain countries.
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Nigeria has recently abandoned plans to commercialize CBDCs after more than 14 months of piloting. Only 0.5% of residents used the digital currency eNaira (the so-called local CBDC) during this period. The project was declared a failure. Nigerian officials abandoned any further CBDC implementation and decided to legalize bitcoin and other cryptocurrencies. This decision was positively assessed by the citizens of the country, who are already accustomed to using cryptocurrencies, which is why they were not interested in CBDC. We have already covered this issue previously.
In addition to Nigeria, a similar decision was made by four other countries.
For some reason, the governments and central banks of most countries have defined CBDC as a trend for the financial and banking sector (for what reason?) and, as it were, compete in throwing taxpayers' money down the drain, trying by all means to launch an instrument that no one really needs. At the same time, the central banks of some countries, based on the results of pilot tests, have decided to slow down or even close CBDC projects.
While motivated experts on all known media channels continue to insist on the urgency of introducing CBDC, some countries have realized that the launch of a state digital currency is not currently necessary, while spending a lot of time creating it and conducting a pilot to abandon these ideas. How much taxpayer money was wasted on this? Officials prefer to remain silent …
These decisions were due to different factors because each country has its own national characteristics and differences in the landscape of the financial and payment infrastructure, the citizens' mentality, and the perception of new technologies introduced under the state protectorate. That is why representatives of governments and central banks in media interviews gave completely different arguments as to why the CBDC project failed or, as it turned out, did not really need to be launched from the very beginning.
Denmark
Denmark is one of the leading European countries, the leader in the number of non-cash transactions since its citizens prefer cash much less than other European nations.
This Scandinavian state was among the first to become interested in issuing a CBDC. The Danish Central Bank announced its intention to launch a digital krone in 2016.
But a year later, they were forced to shelve the launch, concluding that this would do little to improve the country's payment infrastructure. This is because it already exists in Denmark, with instant B2B and C2C transfers available. So is it worth changing?
“It is not clear how retail CBDCs will create significant added value relative to the existing solutions in Denmark,” Danmarks Nationalbank stated in its CBDC report in June 2022. The Central Bank noted the need for additional costs associated with introducing CBDC and possible risks. Also, it did not rule out problems at the perception stage, which does not benefit citizens significantly. But officials assured that they will continue to monitor the global development of CBDC and do not rule out returning to this project in the future when other countries prove the feasibility and effectiveness of the instrument.
Japan
Japan is the third largest economy in the world after the United States and China and is also very loyal to digital assets and cryptocurrencies.
The Central Bank of Japan (BOJ) published its vision for the development of CBDC in October 2020 and started testing the digital currency in early 2021, planning to complete the first pilot phase by March 2022.
However, since January 2022, the Central Bank of Japan began receiving public proposals with requests and arguments not to use the digital yen as an instrument of the country's monetary policy, citing risks to financial stability and other factors affecting the competitiveness of the market.
After considering all the pros and cons, in July 2022, the Central Bank of Japan published a report in which it noted that it was abandoning its plans to issue CBDC, arguing the “strong preference for cash and high ratio of bank account holding in Japan.” The regulator also believes that CBDC on the free market should harmoniously complement and coexist with various payment instruments and not have government preferences over other systems.
Bitcoin and other cryptocurrencies are recognized as digital financial assets in Japan, so all merchants may accept them without restrictions. Apparently, CBDC in this scheme is really redundant.
Ecuador
In 2014, the Central Bank of Ecuador (Banco Central del Ecuador) officially announced the creation of its own electronic currency, dinero electrónico (DE). The main drivers of DE were increasing financial inclusiveness and the desire of the central bank to reduce the cost of storing and transporting significant amounts of fiat currency in cash (currently, the US dollar serves as the national currency in Ecuador).
DE Pilot Announcement
As of February 2015, Ecuador managed to adopt DE as a practical means of payment, allowing registered users – citizens of Ecuador – to transfer funds and manage their DE balance through a mobile application in real time. Citizens can register in the application and open an account in DE using a national identification number and then deposit or withdraw funds through transaction centers throughout the country.
As a result of this experiment, the DE digital currency in Ecuador operated from 2014 to 2018. The maximum number of CBDC users was 500 thousand people. Considering Ecuador's population of 17 million, less than 3% of citizens used CBDC. Such indicators can hardly be called impressive.
According to the official report, the project was curtailed in March 2018 due to changes in legislation that abolished the central bank's electronic money system. But, most likely, the results of the CBDC experiment did not satisfy the officials, so they decided to change the legislation to avoid answering the public for the funds spent on this project.
After the refusal of the Central Bank of Ecuador to support digital money, members of the government and bankers of this country treat the topic of CBDC with a significant degree of skepticism. In August 2022, Andrés Araus, a former CEO of the Central Bank of Ecuador, warned eurozone politicians and bankers that the digital euro could potentially violate not only citizens' right to privacy but also the very principles of democracy. Perhaps we should listen to someone with practical experience implementing a central bank digital currency.
Finland
In 2020, Finland's central bank published a report entitled “Lessons learned from the implementation of the world's first CBDC,” which describes the Avant smart card system created in the 1990s. The Central Bank of Finland believes that Avant is not only a project that “can be considered the world’s first CBDC” but also the only one that fully functioned, unlike the digital yuan in China.
This is what an Avant smart card looked like
The project, launched in 1993, was based on smart cards similar to those already widely used in most countries. “A key difference between Avant and the CBDC systems being designed today is that for modern CBDC systems cards would probably be an additional feature. In Avant, cards were the main component,” the Bank of Finland noted in the report. The bank also suggests that the project represents a “token-based retail CBDC” in modern digital asset terminology.
The project became obsolete and was canceled in 2006 since producing one Avant card had already begun to exceed the cost of a conventional debit bank card. High bank fees also played a negative role, which did not contribute to a significant expansion of the user audience. In contrast, even with EMV technology, standard bank cards had significantly lower fees.
However, the Avant card also had some advantages that were competitive with debit cards of the time and with current CBDC solutions. According to the Bank of Finland, the Avant system allowed users to carry out anonymous transactions since it offered the possibility to avoid opening or using a classic bank account.
Conclusion
There are many more examples of refusal or “freezing” of CBDC projects in different countries for an indefinite period. Considering that no central bank can boast of a positive experience of long-term operation of CBDC in full-scale commercial operation, it would be essential to consider the experience of these five countries that have curtailed CBDC projects. All of them have faced dissatisfaction from users who see CBDC as signs of violating their rights to confidential transactions and private transfers, as well as encroachment by the state on its citizens' democratic rights and freedoms. This is evidenced by the low support rates for CBDC among the populations of the five countries. Other central banks should study this experience and draw the correct conclusions to avoid making the same mistakes.
Perhaps, to avoid giving up on the project, it is worth not starting it. So far, cryptocurrencies, including stablecoins (direct competitors to state-owned CBDCs), are far ahead of any central bank digital currency in terms of their capabilities and openness to citizens of any country.
So, is it worth wasting taxpayers' money if the result is already known beforehand?
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