China to Continue Dominating CBDC Race, Take-Off Pace to be Faster Than Elsewhere
China is likely to continue to dominate the central bank digital currency (CBDC) race even as central banks around the world speed up their existing research and launch pilots, a new follow-up report on digital currencies by Deutsche Bank Research says.
Despite recognising The Bahamas as the first to launch a nationwide CBDC last October while both Sweden and China launched pilots in early 2020, The Future of Payments: Series 2. Part II. When digital currencies become mainstream report maintains that the Chinese adoption rate of the government’s CBDC—influenced by existing consumer habits and demographics—will take off at a faster pace than in most other countries.
“The Covid-19 pandemic has accelerated an ongoing shift among younger populations away from cash and towards digital payments, particularly in Asia and specifically in China,” it states, noting how internet users in China have grown in their use of online payment services (from 18% in 2008 to around 73% in 2018) and higher than in other emerging economies.
CBDCs, cryptos rising worldwide
A 2021 Bank of International Settlements survey revealed that 86% of central banks are developing a CBDC – 14% already running pilot projects; 60% experimenting proof-of-concept and, in all, central banks representing about a fifth of the world’s population are likely to issue a general purpose CBDC in the next three years.
The Deutsche Bank research suggests that CBDCs will be widely discussed and cryptocurrencies become more mainstream as 2021 has so far seen the Covid-19 pandemic hasten the decline of cash by four or five years.
“The world has shifted from asking whether digital currencies will succeed, to how and when they will become mainstream,” it states, touching on how the pandemic has hastened the need for a digital cash and heightened competition between companies and governments for a digital currency solution.
Facebook and PayPal are expected to be pivotal in bringing cryptocurrencies into the mainstream. With its over 2.7 billion users (one-third of the world’s population), it says Facebook has the potential to compete with traditional online payment platforms and advance digital currencies into the mainstream with its shifting emphasis on cheapening payments once Libra is launched. PayPal last year opened up its platform for users to buy, hold or sell cryptocurrencies.
It notes that in the long run, CBDCs will displace private cryptocurrencies – except for Libra whose use of FastPay is expected to make its transaction speeds surpass Visa’s by fourfold – and become the norm.
Adoption challenges remain for CBDCs, cryptos
Cryptocurrencies’ use for payments will accelerate with time but “energy consumption could hinder widespread use” and create negative press.
Another challenge cited is the low transaction speed for most cryptocurrencies especially when compared to card providers. The report shows that China’s CBDC will allow 300,000 transactions per second followed by Facebook’s Libra with 80,000 tps and Visa at 65,000 tps but Bitcoin is at 7 tps.
Despite the convenience, a key concern for CBDCs is the ability to trace their transactions. The Deutsche Bank report however notes that perspectives on the two poles—privacy vs. convenience—of these digital currencies vary from culture to culture. It states:
“Our survey showed that citizens in advanced economies are more worried about privacy than people in emerging economies. Only a tenth of Chinese survey participants reported concerns about anonymity and traceability, well below the Americans (22%), British (21%), French (29%), Germans (42%), and Italians (19%).”