Latest / Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates / Why Central Banks Are Issuing Digital Currencies Now
Transcript
- Lucas: So back in 2020, the Bahamas launched something called the Sand Dollar. It's not a tourist souvenir — it's a fully issued central bank digital currency, what the industry calls a retail CBDC. And it was the first live one anywhere in the world. Luna: First to actually launch. But now we've got China's e cny, Sweden's e-krona pilot, the Eastern Caribbean central bank's DCash — even the Fed's been running Project Hamilton experiments at the Boston Fed since 2022. Lucas: Right. And if you strip away all the hype language — 'the future of money,' 'digital sovereignty' — what you're left with is a pretty practical question: why are central banks, these famously cautious institutions, suddenly pushing out digital versions of their currency? Because it's not obvious that citizens are demanding it. Luna: I mean, cash still works. Credit cards work. Venmo and Alipay work. So who's the customer here? Lucas: That's exactly the right question. And the answer depends on which central bank you're talking about. For the Bahamas, it was about financial inclusion — 20 percent of the population was unbanked, and the country is a chain of islands where physical cash distribution is genuinely hard. The Sand Dollar lives on a mobile wallet, no bank account required. It's a practical fix for a real infrastructure gap. Luna: So the Sand Dollar isn't about replacing cash, it's about reaching people cash can't reach efficiently. Lucas: Exactly. And that's one motivation. But then you look at China's e cny, also called the digital yuan. Their banking penetration is already high — Alipay and WeChat Pay are everywhere. So Beijing's motivation is different. It's about monetary sovereignty and surveillance. The government wants to see transaction flows, and it also wants a backup if private payment networks ever get disrupted or become too powerful politically. Luna: That's the part that makes people nervous. The idea that a CBDC could let the central bank see every coffee you buy. Lucas: And that's a real design choice. Not all CBDCs are created equal. The Bahamas' Sand Dollar is a 'token-based' system — it's more like digital cash, with some privacy, no interest, and you can hold limited amounts anonymously. China's e cny is account-based, linked to your national ID, with full transaction traceability. That's a spectrum. The European Central Bank has said its digital euro will have 'offline functionality' for small payments that preserves privacy — but they're still figuring out the details. Luna: And the Fed? What's the US actually doing? Lucas: The Fed is moving slowly, deliberately, and with a lot of public consultation. They've got Project Hamilton at the Boston Fed, which is technical — they built a theoretical engine that can handle 1.7 million transactions per second. That's a proof of concept, not a product. And they've been clear: they won't issue a digital dollar without explicit authorization from Congress. So there's no imminent launch. But they're preparing the infrastructure. Luna: One point seven million per second. That's Visa-level throughput. So they're building for scale. Lucas: They're building for worst-case scenarios. The quiet driver here — the one central banks don't say out loud — is competition from private digital money. If stablecoins like USDC or Tether grow large enough, or if a Big Tech company like Meta had launched Diem, they could effectively create a parallel payment system outside central bank control. A CBDC is a defensive move: make sure the official currency remains the anchor of the payment system. Luna: Defensive. That's a good way to frame it. So it's less about innovation and more about insurance. Lucas: Exactly. And that's why you see the European Central Bank moving ahead with the digital euro even though cash usage is still relatively high in the eurozone. They've said explicitly: if private digital currencies become dominant, we need the digital euro ready so people can still use public money. It's an option they want to have, not necessarily one they want to force. Luna: So it's like having a fire extinguisher. You hope you never need it, but you don't want to discover you don't have one when the fire starts. Lucas: Exactly. And now, the interesting tension: the more successful a CBDC is, the more it might destabilize the banking system. If people shift deposits from commercial banks into central bank digital wallets, banks lose a funding source. That's called 'disintermediation.' So central banks are designing caps — limits on how much digital currency an individual can hold. The ECB's digital euro proposal has a limit around 3,000 euros. The Bahamas has a 500-dollar cap on Sand Dollar accounts. You can hold more, but it flows into a linked bank account, so the bank doesn't lose the deposit. Luna: Which means the central bank is walking a tightrope: they want to offer a public alternative, but not so attractive that it breaks the private banking system. Lucas: That's the core design challenge. And it's why we haven't seen a flood of retail CBDC launches. As of June 2026, only about eleven countries have actually launched one. The Bahamas, Nigeria, Jamaica, the Eastern Caribbean — mostly smaller economies. The big ones — China, Sweden, the eurozone, the US — are still in pilot or research phase. They're watching each other. Luna: And they're also watching what happens with crypto. Because if crypto markets collapse, the urgency might fade. But if they keep growing, the pressure to act increases. Lucas: Right. And something interesting: the SHIFT in tone from central bankers. A few years ago, they were skeptical of digital currencies. Now most central banks have a CBDC project. The Bank for International Settlements surveys show that by 2025, over 90 percent of central banks were at least researching CBDCs. That's not a fad — that's a structural shift. Luna: It's also a recognition that the world of payments is changing whether they like it or not. The question is whether they lead or follow. Lucas: And if they lead, they get to set the rules: privacy standards, interoperability, the role of commercial banks. If they follow, they risk being sidelined by private networks that don't answer to democratic accountability. That's the real choice. Luna: You know, talking about how central banks are thinking long-term about the payments system — it's a good moment to mention something that keeps this show ad-free and independent. We don't have a corporate sponsor, and we don't run ads. A small group of listeners chips in monthly through buy me a coffee dot com slash fexingo, and that's what makes it possible to cover topics like this without any outside pressure. Lucas: Yeah, and we're grateful for that. It means we can be as skeptical or as deep as the topic requires. So if you've been getting something out of these episodes, that's the only reason we're still here, week after week. Luna: Alright, back to the numbers. Lucas, you mentioned China's e cny is the biggest pilot by far — how much is actually in circulation? Lucas: As of early 2026, the People's Bank of China reported about 26 billion e cny in circulation, which is about 3.6 billion US dollars. That sounds like a lot, but it's a tiny fraction of China's M1 money supply — less than a tenth of a percent. So it's real, but it's not replacing the yuan anytime soon. The pilot covers over 260 million individual wallets and 7 million merchant wallets. So adoption is growing, but it's still experimental in scale. Luna: And the use cases are interesting — China used the e cny for stimulus payments during COVID, and they use it for cross-border trade settlements with some Belt and Road partners. That's the wholesale side. Lucas: Right, and that's a different category — wholesale CBDCs, which are for interbank settlements, not for consumers. Most central banks see more near-term benefit in wholesale CBDCs because they can make the financial system faster and cheaper. The Bank of England and the Bank of Japan have been working on Project Stella for years, testing how wholesale CBDCs could settle cross-border payments in seconds instead of days. Luna: So if the retail stuff is slow and careful, the wholesale stuff is moving faster. Because the risks are lower — it stays inside the banking system. Lucas: Exactly. And the benefits are clearer: lower settlement risk, reduced counterparty risk, cheaper cross-border payments. The Bank for International Settlements estimates that wholesale CBDCs could save the global economy tens of billions a year in transaction costs. That's a strong incentive. Luna: But then you get into the geopolitical dimension. If China's wholesale CBDC becomes the default for trade in Asia, and if the eurozone's digital euro becomes the standard for European payments, the US dollar's role as the dominant reserve currency could be challenged — not replaced, but chipped at. Lucas: That's the long game. And I think that's why the Fed is moving carefully but not slowly. They know that the dollar's status as the world's primary reserve currency gives the US significant advantages: lower borrowing costs, influence over global financial standards. A digital dollar, if designed right, could reinforce that position. But if designed badly — with poor privacy or excessive government control — it could push users toward alternatives. Luna: So the design choices aren't just technical. They're political and economic. Lucas: Absolutely. Every decision about how a CBDC works is a decision about power: who can see transactions, who can hold the currency, how much, under what rules. That's why the debate is so heated. It's not really about technology. It's about what kind of monetary system we want. Luna: And that's a debate that's only going to intensify as more pilots go live. Lucas: For sure. We're still in the early innings. But the direction is clear: central banks are preparing for a world where digital money is the norm. They just have to decide what that world looks like.