CBDC Outlook 2024: Challenges and Predictions

A significant number of CBDC research projects will experience slowdowns or even come to a complete halt due to various challenges and uncertainties.

Currently, 44 countries are in the research stage, with nineteen in Africa and the rest in smaller developing economies across Central America, South America, and Asia. Except for New Zealand, these countries share common traits such as volatile currencies, unstable governments, and limited trust in government institutions. Additionally, they often lack the necessary digital financial and technical infrastructure.

Consider Madagascar, with a population of 28 million and an alarming 75% poverty rate, one of the world's highest. The country grapples with weak governance, insufficient human and physical capital development, and a slow pace of structural transformation. Despite the central bank's noble intentions, such as enhancing financial stability and inclusion, essential prerequisites for successful CBDC adoption are currently absent.

The driving forces behind CBDC research projects are often political and economic concerns, coupled with peer pressure from other countries. These initiatives are intricate, necessitating external advisory services and technology providers, substantial funding, and dedicated teams capable of working on projects for up to two years.

Unfortunately, most of these projects face challenges related to insufficient funding and the absence of dedicated teams to see them through to completion. Unless these projects receive full funding from organizations like the World Bank, the International Monetary Fund (IMF), or equivalent entities, the presence of volatile governments and economies will likely lead to delays or even the suspension of these projects.

India is poised to take the lead in the CBDC arena, displaying substantial progress and commitment to modernizing its monetary system through digital currency adoption.

In late 2022, India initiated a pilot project for its retail Central Bank Digital Currency (CBDC). Within the first six months of its launch, the project has garnered participation from more than one million users, two hundred thousand merchants, and ten banks. Remarkably, India boasts the largest market participation for CBDC outside of China. India's strategic plan includes the swift implementation of additional retail and wholesale use cases.

India's favorable conditions, including a stable government, effective governance, robust financial infrastructure, a trusted central bank, and strong public support, make it an ideal environment for CBDC adoption. As long as there are no significant changes in the central government following the next elections, India is poised for consistent progress as it aspires to become a regional power with reduced reliance on Western or Chinese influences.

In developed economies, the European Union is poised to lead in CBDC, while the United States lags behind, especially during an election year, affecting its CBDC progress.

Over the past few years, the European Central Bank (ECB) has laid the groundwork for Central Bank Digital Currency (CBDC) implementation. While progress has been made, the digital euro project has now entered the preparation phase, which is anticipated to span the next two years. In contrast, the Bank of England has made notable strides in its CBDC efforts, but challenges persist due to political resistance and insufficient public support, hindering rapid advancement.

In the United States, CBDC initiatives have faced opposition primarily from Republicans. The current U.S. administration attempted to catalyze CBDC efforts through presidential orders and partnerships with think tanks. Additionally, the Federal Reserve has launched enhancements to the existing FEDNOW payments infrastructure, aiming to facilitate faster and more cost-effective interbank payments, which further reduced the urgency for financial institutions. The banking sector has experienced financial turmoil recently, while many fintech companies continue to grapple with challenges. With financial sector challenges, the tech industry's struggles, and a lack of clear vision and commitment, the United States lags behind in the CBDC race. United States risks missing an opportunity to lead the way toward a digital currency that could further solidify the U.S. dollar's status as a global reserve currency.

Developed nations choose modular, proprietary CBDC solutions co-developed by existing market participants, utilizing commoditized and open-source solutions.

These developed nations, keen to modernize their monetary systems, approach it cautiously due to national security, privacy, technology, and interoperability concerns. They prefer a gradual, decade-long transition to CBDCs to mitigate risks.

They have thriving financial ecosystems comprising banks, payment service providers, card providers, and fintech companies. They favor a CBDC platform that involves collaborative ownership with ecosystem players and seamless integration with existing systems.

India and China serve as successful CBDC models for developed countries. Thus, countries like the United Kingdom, the European Union, and Japan are adopting open-source technologies to co-create complex CBDC systems in smaller chunks with existing ecosystem players, reducing reliance on one or two software platform providers.

The CBDC market will have fewer comprehensive solution providers.

Over the past five years, CBDC solution providers such as Bitt, R3, Ripple, and G+D, along with various regional and global service providers, including Accenture, have played a significant role in shaping the CBDC market. However, providers with experience across multiple CBDC projects have realized that the current business model is unsustainable, with most projects proving unprofitable.

CBDC projects involve intricate technology and change management initiatives. Central banks seek cost-effective solutions with minimal license and maintenance fees, modest professional services charges, and limited transaction fees. Surprisingly, many projects lack budgets or anticipate unpaid contributions from providers. Such practices challenge the viability of providers' businesses unless they have substantial financial resources.

Profitable opportunities in the CBDC market are limited, with 70% of projects in economically challenged regions unable to afford necessary technology and services. Advanced economies, accounting for 10%, often prioritize control and developing proprietary solutions. As a result, only a few CBDC projects offer potential profitability for solution providers.

In the short term, revenue growth opportunities for solution and service providers appear limited. However, those with deep financial resources and a long-term strategic outlook may consolidate the market, positioning themselves for future benefits when critical CBDC adoption milestones are achieved.

Countries that have already launched their CBDCs continue to grapple with the challenge of achieving critical mass adoption.

Critical CBDC adoption remains an elusive goal, with no country having fully accomplished it yet. Ongoing projects in China, India, Nigeria, and the Eastern Caribbean are works in progress. To achieve critical adoption, an economy must have a stable government, trustworthy institutions, compelling use cases, sufficient budget, technical capabilities, and a long-term commitment. However, countries that have launched CBDCs often fall short of meeting all these criteria, leading to various adoption challenges.

Swift resolution of these challenges is crucial, particularly within the first year of the CBDC launch, as they become increasingly difficult to overcome over time. In 2024, the spotlight will be on India as it paves the way for CBDC adoption, while other countries will face pressure to resolve their adoption challenges.

In summary, CBDCs are reshaping the global monetary landscape, but the transition is slower than expected. Only a few prosperous, smaller nations are succeeding, while most are grappling with challenges or seeking external factors to make progress.