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The Forces Behind CBDC Adoption: Accelerators & Obstacles Explored

Boaz Gam

Boaz Gam


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Article content
  1. What Are CBDCs & Why Are They a Hot Topic Nowadays?
  2. Top 5 Challenges in CBDC Adoption
  3. What Are Some of the Most Prominent CBDC Adoption Cases Nowadays?
  4. Final Thoughts: What Can Be Learnt from CBDC Pioneers?

The Fundamental Forces Driving & Slowing Down CBDC Adoption

In the realm of global finance, Central Bank Digital Currencies have emerged as a transformative force reshaping our attitude toward fiat currencies and the way we interact with money. As governments and central banks explore the adoption of CBDCs, it becomes crucial to delve into the key factors that are expected to drive and slow down the adoption of this financial solution.

Understanding this topic is essential not only for policymakers and financial institutions but also for individuals and businesses seeking to navigate the evolving digital currency landscape. In this guide, we aim to shed light on the main drivers behind the growing momentum around CBDC adoption and provide insights into their potential impact on the global economy.

What Are CBDCs & Why Are They a Hot Topic Nowadays?

The Fundamental Forces Driving & Slowing Down CBDC Adoption

Central Bank Digital Currencies are digital forms of national currencies issued and regulated by a country’s central bank. They are essentially digital representations of traditional fiat currencies, such as the US dollar or the euro.

CBDCs have gained significant attention in recent years due to the fact that, once fully functional and widely adopted, they can offer a variety of benefits, including:

  • Digital transformation. CBDCs are seen as part of the ongoing digital revolution in the financial system. As technology advances, central banks are exploring ways to leverage digital currencies to improve the efficiency, security, and accessibility of financial transactions.
  • Financial inclusion. Centralized digital currencies have the potential to enhance financial inclusion by providing individuals who may not have access to traditional banking services with a secure and convenient means of storing and transacting with digital money.
  • Payment system efficiency. CBDCs can potentially streamline payment systems, reducing transaction costs and settlement times.
  • Monetary policy implementation. With a digital currency, central banks can implement monetary policy more efficiently, have better control over the money supply, monitor economic activity in real time, and even introduce innovative measures like programmable money and smart contracts.
  • Enhanced security. The use of secure cryptographic technology in CBDCs can boost transaction traceability, help prevent fraud, and prevent counterfeiting while ensuring advanced data protection.
  • International interoperability. CBDCs are expected to significantly optimize cross-border transactions and boost international trade.

It’s worth noting that while CBDCs are a hot topic nowadays, their implementation and adoption vary across countries.

Some central banks, like the People’s Bank of China, have made significant progress in piloting CBDCs, while others are still in the research and exploration phase. This is due to the fact that such a major project as launching a centralized digital currency can prove to be rather challenging - read on to learn more about the most common obstacles faced in the process of CBDC implementation!

Top 5 Challenges in CBDC Adoption

The Fundamental Forces Driving & Slowing Down CBDC Adoption

The specifics of each CBDC that is being developed, including its design, underlying technology, and regulatory framework, will eventually differ based on the goals and priorities of the issuing country.

However, despite such nuances, practice has shown that central banks across the world face similar challenges when working on launching centralized digital currencies. Here are some of the most common ones:

1. Privacy Concerns

While the fact that CBDCs enable enhanced transaction traceability is generally considered an advantage, there are concerns about the extent to which personal data is collected throughout this process and how it is used.

Therefore, central banks must strike a balance between maintaining user privacy and complying with regulatory requirements, such as anti-money laundering (AML) and know-your-customer (KYC) regulations.

2. User Trust

The issue of privacy is intricately linked to the lack of trust the public may have in the novel digital currency concept. Building trust among users is essential for the successful adoption of CBDCs. Individuals need to be confident that their funds will be secure, the transactions will be reliable and fast, and the system will be resilient against cyber attacks.

Thus, central banks must implement advanced security measures, educate the public about the benefits and safeguards of CBDCs, and address concerns related to the possibility of data breaches and system vulnerabilities.

3. The Role of Commercial Banks

The Fundamental Forces Driving & Slowing Down CBDC Adoption

CBDCs have the potential to disrupt the traditional banking system, which creates challenges regarding the role of commercial banks. This is due to the fact that CBDCs would enable users to hold accounts directly with the central bank, reducing the need for intermediaries like commercial banks for everyday transactions.

This situation could impact the profitability and business models of commercial banks, which is why some of them may resist CBDC adoption. Central banks need to address these concerns and find ways to collaborate with commercial banks to ensure a smooth transition and maintain financial stability.

One possible solution to this issue that can also help address user trust issues is to enable commercial banks to contribute to promoting CBDC adoption by acting as authorized distributors, conducting onboarding, and acting as official representatives of central banks for individuals.

What’s more, commercial banks can integrate CBDCs into their existing payment systems and apps. By doing so, they can offer a user-friendly and familiar experience to their customers, which in turn can accelerate the adoption of CBDCs.

4. Merchant Acceptance

For CBDCs to gain widespread adoption, merchants and businesses on a large scale need to accept them as a form of payment. To achieve this, central banks must incentivize and educate merchants to integrate CBDC payment systems, ensuring a seamless and user-friendly experience.

This involves addressing technical challenges, setting up a convenient and scalable infrastructure, and ensuring compatibility with existing payment systems. Overcoming these hurdles will be crucial in enabling CBDCs to be used for everyday transactions and not just as a store of value.

5. Accessibility

Although CBDCs are expected to be accessible to a wider range of individuals than traditional banking services, making them available among populations with poor access to smartphones or the internet remains a challenge.

Generally speaking, achieving inclusive access requires addressing technological barriers, ensuring reliable network connectivity, and providing user-friendly interfaces.

What Are Some of the Most Prominent CBDC Adoption Cases Nowadays?

Currently, many jurisdictions are considering implementing centralized digital currencies, yet there are three countries that have been making the biggest headlines in this endeavor, namely:


The Fundamental Forces Driving & Slowing Down CBDC Adoption

China’s CBDC, the E-CNY, has gained significant traction, with over 261 million users and a transaction volume exceeding $15 billion. The deployment of E-CNY initially targeted key cities such as Shanghai and Beijing, gradually expanding to 23 cities where it is now accepted as an official payment method.

As of now, seven commercial banks and two online banks have integrated the E-CNY pilot. Besides, super-apps like Alichat and WeChat have integrated E-CNY into their wallets. To further encourage adoption, the Chinese government offers users incentives like vouchers, cashback rewards, and subsidized interest rates.


The Fundamental Forces Driving & Slowing Down CBDC Adoption

Nigeria has achieved impressive results with its CBDC project, with over 800,000 people using an e-Naira wallet.

However, e-Naira is still facing adoption challenges due to low levels of trust in the government and a lack of confidence in the system. Limited communication about the e-Naira project has also contributed to disinterest among some parts of the population and many merchants.

As a result, transaction volumes remain low. To increase adoption, the Nigerian government has considered reducing service charges for businesses and minted over 10 billion e-Nairas. This decision has led to a 63% increase in transaction value yet resulted in controversy and a crisis.

Despite the varying success, the government remains committed to promoting e-Naira’s adoption and addressing the key concerns related to it.

The Bahamas

The Fundamental Forces Driving & Slowing Down CBDC Adoption

The Central Bank of Bahamas launched its CBDC, the Sand Dollar, in October 2020, but its adoption rates have been lower than expected.

While end-user adoption is significant, with 50% of active workers owning a CBDC wallet, merchant acceptance is limited, with only 1,500 merchants accepting the currency, accounting for 7% of all businesses.

To address this issue, the government plans to prioritize merchant training and awareness in 2023 and has hired Sand Dollar ambassadors to promote the CBDC’s usage and raise awareness of its benefits.

Final Thoughts: What Can Be Learnt from CBDC Pioneers?

The Fundamental Forces Driving & Slowing Down CBDC Adoption

Now that you know about the potential benefits and challenges associated with the CBDC initiative and have an idea about some of its use cases, you have probably realized why the notion of adopting centralized digital currencies is as complex as it is promising.

Based on the experiences of some CBDC pioneers, it is safe to say that for this endeavor to gain ubiquitous adoption, governments need to take care of multiple elements, such as:

  • A secure technological infrastructure
  • Synchronized stakeholder collaboration
  • Public education and communication
  • Regulatory framework
  • Pilot programs and testing

These factors, combined with incremental implementation, international collaboration, and a user-centric approach, are guaranteed to help tackle the existing CBDC issues, effectively incentivize potential users, and ensure the solutions’ scalability in the future.

With that said, it is crucial to keep in mind that the most effective strategy will ultimately depend on the unique peculiarities and constraints of each specific environment.

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