Predictions and Challenges of CBDC for 2024
Peter Johnson- Jan 5, 2024
- 5 min read
Presently, 44 nations are in the inquiry stage, including 19 in Africa plus those in lesser-developed economies spread out in Central America, South America, and Asia (except New Zealand). These nations tend to have unsteady currencies, unsteady governments, and a scarcity of faith in governmental bodies. Furthermore, they usually lack the essential digital economic and technical facilities.
Madagascar, whose population is 28 million and poverty rate is at a staggering 75%, is facing problems in terms of weak governing, inadequate human and physical capital growth, and lack of structural transformation. Even though the central bank is intending to boost financial stability and inclusion, the essential elements necessary for successful implementation of CBDC are not present.
The political & economic stimulus and competition among nations drives the research of CBDCs. This highly complex endeavour requires professional advisors & tech vendors, ample finances, and teams of individuals that are able to devote their energy to these projects for a period of 2 years.
Sadly, most of theses projects are facing financial difficulty and the lack of teams to work on them. These issues can only be resolved if international organizations like the World Bank, International Monetary Fund, or similar ones support these projects with monetary assistance. On the other hand, the uncertain political and economic environment can lead to postponements or even the discontinuation of these projects.
India is showing signs of taking the initiative in the field of CBDCs, hinting at their dedication to modernizing their monetary system by embracing digital money.
By late 2022, India had kicked off a test of its Retail Central Bank Digital Currency (CBDC). During the initial half year, the project had seen more than a million users, two hundred thousand retailers, and ten banks join up. India had the greatest CBDC market engagement outside of China, which was extraordinary. India has a plan to quickly apply extra retail and wholesale usages.
India has the right circumstances in place, such as a secure government, satisfactory governance, a reliable financial structure, a respected central bank, and sound public backing, to make it an excellent place for CBDC adoption. Should no drastic alterations take place in the federal government after the upcoming elections, then India is on-track for continual success as it strives to become a powerful player with reduced dependence on the West or China.
The European Union, among developed economies, appears to be in the best position to advance its work on CBDC, while the United States may be hindered by its electoral cycle, hindering efforts to fully develop its own CBDC.
The European Central Bank (ECB) has been laying the groundwork for Central Bank Digital Currency (CBDC) implementation over the past few years. As they move forward to the preparation phase of the digital euro project, which is projected to last two years, the Bank of England has been making headway in their CBDC efforts. However, they have encountered difficulty advancing quickly due to political resistance and inadequate public backing.
The U.S. administration has made efforts to promote CBDC initiatives through presidential orders and partnerships with think tanks. The Federal Reserve has further taken steps to improve the FEDNOW payments system to make interbank payments faster and cheaper, lessening the need for CBDCs. Unfortunately, the banking sector's recent financial difficulties, the tech sector's own issues and a lack of commitment have caused the U.S. to fall behind in this race. This means the country risks losing the opportunity to become a leader in digital currency and risk weakening the U.S. dollar’s standing as a global reserve currency.
Developed countries select modular, exclusive CBDC solutions that are jointly created by present market actors, utilizing commoditized and open-source technologies.
The nations that are advanced and looking to modernize their financial systems are being careful with it due to issues involving national defense, security, tech, and being able to work together easily. They like to take their time and make the switch to CBDCs gradually over the course of 10 years in order to prevent any potential problems.
Their financial ecosystems, consisting of banks, payment service providers, card issuers, and fintech firms, are growing steadily. They prefer a CBDC platform that is jointly owned by ecosystem members and is able to integrate smoothly with existing systems.
The success of India and China in developing their own CBDC systems can serve as an example to other developed countries. Therefore, the United Kingdom, European Union, and Japan are implementing open-source technologies in order to develop their own CBDC systems, breaking them down into smaller components which can be used in conjunction with partners in the associated ecosystem to lessen the need to rely on a single software provider.
The CBDC market will possess fewer providers of comprehensive solutions.
In the past 5 years, Bitt, R3, Ripple, and G+D -- along with Accenture and many other regional and global service providers -- have been instrumental in developing the CBDC market; however, those with knowledge of multiple CBDC projects have come to understand that the existing business model is not sustainable, as the majority of projects are not generating a profit.
Central banks are focusing on CBDC projects that have cost-effective solutions that are characterized by low license and maintenance fees, limited professional services charges, and minimal transaction fees. Unfortunately, it is common for many of these projects to lack budgets or attempt to draw in unpaid contributions from providers, and this makes it difficult for them to be sustainable unless they have extensive financial resources.
Limited profitable chances in the CBDC market exist, with 70% of projects found in economically challenged areas being unable to cover the cost of the necessary technology and services. Developing countries, which represent 10%, predominantly focus on regulation and the creation of private answers. Therefore, only a few CBDC initiatives offer prospects of profitability for those offering solutions.
In the near future, solution and service providers may not experience much of a revenue increase. Nonetheless, those with abundant resources and a long-range vision may consolidate the market and create an advantageous standing for themselves when key CBDC adoption objectives are met.
Nations that have already introduced their own Central Bank Digital Currencies are still facing the issue of garnering vast acceptance.
Though no country has been able to achieve critical CBDC adoption as of yet, there are several ongoing projects in China, India, Nigeria, and the Eastern Caribbean that are currently underway. For success with CBDCs, a country must have a dependable governing system, credible institutions, tangible uses, adequate resources, technical proficiency, and a resolution to see it through. Nevertheless, countries that have already started to launch their CBDCs often have difficulty meeting these requirements, which has hindered their adoption rates.
It is essential to solve these issues quickly, particularly within the first 12 months of CBDC implementation, as delays will only result in more complex problems in the future. In 2024, India will be at the forefront of CBDC adoption, thus putting other nations under pressure to resolve their own difficulties in accepting it.
In conclusion, CBDCs are having a large impact on the international monetary system, although the transformation is happening at a slower rate than anticipated. So far, only a handful of prosperous, smaller nations have been able to make headway, while others are struggling with issues or searching for external influences to move forward.
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