The advent of Bitcoin, the blockchain and digital currencies has indelibly changed the world’s view on money and digital payments. While fiat currencies have been the modus operandi for the past fifty years, since US President Richard Nixon decoupled the US dollar from gold in 1971 (known as the Nixon shock), the world could possibly see a change as the 2020’s decade concludes. 

From electronic banking and online stock trading platforms in the early 2000s, to digital currencies in the early 2010s, and lately, to the rise of digital insurance and digital securities, the fintech space has witnessed vast evolution. Covid-19 played a critical role in the wide-spread adoption of digital payments and digital financial transactions. Today, the world has its eyes set on digital currencies and their implied impact should institutions globally begin adopting and using them.

Digital currencies enable people to store and transfer digital assets with minimal risk, minimal third party involvement, and little to no incurred fees. They also completely remove the need for cash; a historic change and transformation. Implementing a digital currency would enable households and businesses to store and transfer value though an electronic form of money which would be regulated and monitored by a nation’s or region’s central bank. 

Adjusting to a digitized form of money will require great foresight, especially when cogitating on the macroeconomic implications for smaller countries with weaker economies. Taking concerns and benefits into consideration, various countries and their central banks worldwide have been experimenting with, or have already begun laying the groundwork for central bank digital currencies (CBDC). 

For Cyprus and other member states of the EU, it is important to keep an eye on the various trials and experimentations, as well Europe’s digital Euro project timeline which aims to conclude by September 2023.

Given the rise in prominence of digital assets, as well as the decreased usage of cold, hard cash, central banks have grown keen on the idea of implementing their own digital currencies. 

The Atlantic Council, an organization providing a key forum observing and studying economic and political shifts around the world, shares a map indicating countries that are involved in the CBDC space and documents their progress. Most interestingly, it finds that eleven countries have at least launched a pilot of their CBDC. China’s pilot has garnered immense traction, as it reaches 260 million people and is being tested in various cases including public commute and ecommerce.

China’s CBDC began pilots in 2020, referred to as the e-yuan, digital renminbi, or digital RMB. Digital renminbi, issued by the People’s Bank of China (PBOC), is stated to be “faster, cheaper, and theoretically more secure” than cash. Domestic adoption was made clear, as it was reported that an estimated $315,761 worth of digital renminbi was spent every day during the Beijing Winter Olympics in 2022. China’s CBDC shows promise in its wide local adoption and its ability to provide financial accessibility.

Another CBDC on the world’s radar is Nigeria’s eNaira, released in 2022. It was developed on the Hyperledger Fabric blockchain, an open-source project commenced by the Linux foundation. The eNaira CBDC is entirely regulated by the Central Bank of Nigeria on a private network, whereby people connect to it through wallet apps. However, Nigerians have been reluctant to use it, as it further centralizes government power. 

Running eNaira through the blockchain only helps the government monitor people’s financial activities, as the government monitors and approves the blocks formulating the blockchain.  It also enables the Nigerian government to rank individuals on tiers, where they can limit and restrict balance and transactions made available to people.

These drawbacks have raised cautionary flags for countries developing and implementing CBDCs. The Eastern Caribbean has also faced backlash considering their CBDC, DCash, was offline due to unforeseen technological challenges.

Despite such drawbacks, McKinsey has realized the most notable strengths of a CBDC. Among them are reduced costs incurred by further digital transformation of finance from tangible assets. Another strength is that a CBDC can offer greater access to those who do not own a bank account. In Cyprus, for example, 5 percent of the population aged 15 and above do not have access to a bank account. Improved security of online payments is an additional strength, where regulated use of cryptography allows users to verify transactions.

There still remains a long road to global adoption of CBDCs, if that reality will come to fruition. While the benefits are great, the drawbacks are alarming. Enabling governments to exercise more controlled power over people, especially in economically weak countries, could be more detrimental than helpful. Regardless, it is critical for countries and governments to gain a grasp on the technology and skills behind establishing a CBDC to be prepared for the future of fintech and finance as a whole.

Cyprus has experienced a relatively steep decrease of cash payments made in 2020 and 2021, compared to previous years. The pandemic in 2020 undoubtedly played a major role in that movement, however, payments made in cash in 2018 were estimated to be at 70 percent, declined to 64 percent in 2019, and proceeded to experience a sharp drop to 56 percent in 2020, and to 52 percent in 2021. However, Cyprus, unlike its fellow European member states such as Italy, France, Spain, and more, has not started researching or developing a CBDC.

However, a Cyprus-based fintech company has recently sparked international interest. Armenotech is a fintech company that has vast experience and insights in developing solutions on the blockchain, namely on Stellar. They specialize in payment processing, blockchain integration, tokenization, and other fintech areas of expertise. What caused global interest, however, is their involvement in developing an ecosystem along with Canadian Advanced Payment Solutions (APS), and French fintech company Tempo France.

According to Armenotech’s CBO, Daniel Gazaryan, “we are looking at actively participating in three Central Bank Digital Currency (CBDC) projects, two of which are in Europe. It is a very promising digital assets market and we have already taken the first steps along this trajectory.” In this context, Armenotech could help keep Cyprus, the Central Bank of Cyprus, and other key stakeholders in the loop regarding CBDCs.

CBDCs represent a promising step towards the future of finance, capturing the interest of governments and state institutions worldwide. However, their development is a journey that demands collaboration and expertise from both the private and public sectors.

The future of CBDCs lies in a joint effort, where innovators and experts from diverse backgrounds unite in a shared vision. The private sector brings unparalleled innovation and agility, while the public sector offers essential regulatory oversight and stability. By harmoniously combining these forces, we can navigate the challenges ahead and create a secure and seamless CBDC system.

The journey towards fully functional CBDCs is a marathon, not a sprint. Governments and policymakers must navigate complex challenges, including technological infrastructures, security concerns, and striking the right balance between innovation and regulation. While the allure of digital currencies is undeniable, we must proceed with prudence and foresight.