Launching Into the Future: A New Era for CBDCs Testing & Deployment

• Analysis of the Progress in Retail Central Bank Digital Currency (CBDC)
• Sovereign Official Digital Association (SODA)
• The Slow Evolution of 'Death Star' CBDC
• Cash-Like Privacy and Retail CBDCs
• Test and Deploy: An Alternate Approach for Smaller-Scale Retail CBDCs
• Examples of Test and Deploy Approach
• Challenges with the Test and Deploy Approach
• The Way Forward with Test and Deploy

Analysis of the Progress in Retail Central Bank Digital Currency (CBDC)

As per data from CBDCTracker.org, at least 100 central banks have initiated, trialed, or researched retail CBDCs. Out of these, 16 have either launched or piloted them, while 17 have done proof-of-concept trials. This count is based on credible public sources, such as the central banks themselves. Other central banks may have chosen to keep their CBDC plans confidential. The recent increase in the number of retail CBDC explorers is noteworthy.

Sovereign Official Digital Association (SODA)

Co-founder and CEO of the Sovereign Official Digital Association (SODA), Chris Ostrowski, and John Kiff, Research Director at SODA, have been leading the charge in this domain. Despite there being no new retail CBDC launches since early 2022, there is a notable rise in interest and rigorous analysis by central banks. The majority of G20 central banks are in the advanced stages of retail CBDC research.

The Slow Evolution of 'Death Star' CBDC

One reason for the slow progress of retail CBDC is the staged approach utilized by most central banks. The International Monetary Fund (IMF), for instance, recommends a 5P decision-making framework - preparation, proof of concept, prototype, pilot, and production - where users are not involved until the fourth phase. This strategy is suitable for death star retail CBDCs aimed to serve as all-round payment instruments for all residents, given the high stakes and risks involved.

Cash-Like Privacy and Retail CBDCs

However, these retail CBDCs often end up offering nothing new or appealing to end-users, while the potential appealing features like cash-like privacy are avoided to meet the Financial Action Task Force's anti-money laundering and countering the financing of terrorism requirements.

Test and Deploy: An Alternate Approach for Smaller-Scale Retail CBDCs

An alternative approach, known as test and deploy, that focuses on narrow use cases has been gaining popularity. This mechanism allows for rapid iterations from the stages of proof-of-concept to pilot and enables retail CBDC to be issued to real end users in a safe and controlled way, providing insight into user demand and experience. The risks associated with a death star retail CBDC are absent, making this approach more agile.

Examples of Test and Deploy Approach

The central banks of Hungary, Australia, Kazakhstan, and Hong Kong are piloting CBDCs using the test and deploy methodology. For instance, the National Bank of Kazakhstan is launching digital tenge pilots to test various use cases such as the automated distribution of social support payments using smart contracts.

Challenges with the Test and Deploy Approach

Central banks often find it challenging to test a use case when piloting a retail CBDC without seeming to favor a particular technology. They are also cautious about committing to a technology even at the test and deploy stage.

The Way Forward with Test and Deploy

The test and deploy framework provides a route for central banks to live test a CBDC without making early technology choices. The most suitable test and deploy use cases will differ from country to country. Aniko Szombati, the director of Hungary's MNB, states that the test and deploy approach has been beneficial as they can innovate safely in a live environment.

Edited by Jonathan Stoker