In October 2020, the Central Bank of the Bahamas became the first country in the world to launch a digital currency (CBDC), the sand dollar, which can be used throughout the country via an app. The move by the Bahamas is part of a broad trend among the world's central banks, which are exploring the issuance of digital currencies.

Among the large countries, the most advanced in the development of a CBDC is China, a country that has been working on the digital yuan since at least 2014. It has already implemented an electronic payment system for digital currencies that has been tested in several provinces during 2020. In October last year it also dictated the legal framework for its operation, giving the digital yuan the same status as the physical yuan. 

What is a CBDC? It is a digital form of central bank money that is different from balances in traditional reserve or settlement accounts. It is a digital payment instrument, denominated in the national unit of account, which is a direct responsibility of the central bank.

Lhe race for digital currencies is strongly driven by the emergence of disruptive technologies in the financial sector, and especially by the rise of cryptocurrencies, such as bitcoin, which have accelerated the need for central banks to analyze the future of financial systems and the risks and opportunities of their rapid digitization.

The issuance of CBDCs has several purposes, such as facilitating financial inclusion and reducing the use of cash. It would also help reduce informality and tax evasion, in addition to facilitating crisis management and the application of unconventional monetary policies, such as those being implemented to combat the economic effects of the pandemic. But, above all, it will make it possible to maintain the relevance of central banks and monetary policy in the face of advances in the digitalization of the financial system. Among the risks that CBDCs seek to avoid is that the payments infrastructure becomes concentrated in private companies, opening the door to market abuses, or, in the extreme case, that rival payment methods emerge that make central banks irrelevant.

All indications are that the People's Bank of China will be the first of the major central banks to put its CBDC into circulation, although no date has yet been announced. The launch of the digital yuan would facilitate plans to internationalize the Chinese currency as a means of payment, allow the Chinese government to have greater control over payment flows in the country -and over the identity of the people behind those payments-, and secure a place at the global table where international standards will be discussed and rules will be established to manage the risks of CBDCs.

The People's Bank of China took an important step in that direction last February when it created a joint venture with SWIFT, the global cross-border payments and information system, a move that many analysts see as a new step on the road to globalization of the digital yuan.