CBDC — easy as 1,2,3?
19 April 2023
How different regions are looking to create a working environment for central bank digital currencies. Brian Bollen reports
Image: sulit_photos/stock.adobe.com
“Who put the ‘i’ in ‘bitcon’?” What might have once been treated as a reasonably funny remark at a meeting of hard-line economic purists rather lost its heft as the so-called digital currency soared in value and, consequently, interest.
Eurex became the first exchange in Europe to offer bitcoin index futures on 17 April, representing some kind of progress towards normality and official acceptability for cryptocurrency.
This could be construed as a slap in the face for sceptics, and raises the question of whether we are seeing the debate move away from the philosophy of cryptocurrencies and digital currencies and towards everyday associated practicalities.
“The idea of a central bank digital currency (CBDC) stems from the ongoing digitisation of the economy and efforts to improve the efficiency of payment systems and access to banking services,” affirms Swen Werner, head of digital custody at State Street.
Gaining momentum
David Durouchoux, deputy CEO of Société Générale – FORGE and Laurent Marochini, head of innovation at Société Générale Securities Services (SGSS), outline two different types of CBDCs: retail (CBDCr) and wholesale (CBDCw).
Marochini indicates: “CBDCr is a direct claim on central banks, meaning no credit risk for CBDCr holders. This can lead to the depletion of commercial banks’ balance sheets and reduction of their liquidity.”
He adds:“Wholesale CBDC is meant to provide settlement for capital market operations between banks as ‘the fuel’ of the markets, with no major balance sheet impact for banks.
Durouchoux outlines: “The focus was initially on CBDCr, because of the rise of cryptocurrencies. Now the focus is on CBDCw, because many banks have been entering into a real-world project of tokenising assets and such an instrument is needed to extract the maximum value from on-chain capital markets operations.”
SWIFT hosted a timely event dedicated to the subject of CBDCs and global interoperability on 12 April, attracting registrations from far and wide. During discussions, Alexandra Thomé, digital euro expert at Deutsche Bundesbank, touched upon the central banks’ wish for smooth payments, financial stability and atomic settlement.
“We’re not monsters,” she reassured, an affirmation given in the aftermath of recent events in the US and Swiss banking industries. “We like to see innovation, but the risk is moving too quickly,” she clarified.
Much of the conversation centred upon the SWIFT CBDC interoperability solution sandbox project, announced in early March. In that announcement, SWIFT said: “Central and commercial banks see ‘clear potential and value’ in SWIFT’s pioneering CBDC interoperability solution, following successful testing in a sandbox environment.”
SWIFT says that CBDCs are “clearly gaining momentum.” SWIFT cites figures from the Atlantic Council, which indicate that more than 110 countries are currently exploring a CBDC. It also referred to a recent survey by the Official Monetary and Financial Institutions Forum Digital Monetary Institute, which found that almost a quarter of countries are expected to launch one within the next one or two years.
Enabling interoperability
SWIFT cites figures from the Atlantic Council, which indicate that more than 110 countries are currently exploring a CBDC. As central banks around the world continue to explore their potential use cases in their local markets, it is clear that emphasis must be placed on ensuring that the evolving global payments landscape can continue to seamlessly interoperate. Enabling this alongside emerging innovations is a key focus and a key challenge for the financial industry as digital currencies develop.
However, most central banks are focusing primarily on domestic usage, which could lead to a fragmented landscape consisting of ‘digital islands’ if left unaddressed. “The national context differs according to local considerations and so does the actual solution that is being contemplated,” affirms State Street’s Werner.
Interoperability must be embedded from the start, and not added as an afterthought, it would seem. According to analysis by BanklessTimes, the total value of transactions carried out with CBDCs is expected to reach over US$200 billion by 2030. This marks a staggering increase of more than 260,000 per cent from 2023, where the market is currently valued at $100 million.
“The growth of CBDCs is a direct response to changing consumer preferences and increasing demand for digital payments,” says BanklessTimes CEO Jonathan Merry. “As more people across the world become comfortable using digital payment systems, CBDCs are likely to become more popular. We anticipate that their use will snowball over the coming years, driven by factors such as improved efficiency and cost savings.”
On 7 February, the Bank of England issued a consultation paper setting out its assessment for a retail CBDC – a so-called ‘digital pound’. The underlying preparatory work was overseen by the joint Bank-HM Treasury CBDC Taskforce, established in April 2021.
The official announcement communicates the sentiment that, at this stage, the Bank of England agrees that the digital pound will be needed in the future. The digital pound would be a new form of sterling, similar to a digital banknote, issued by the Bank of England. If introduced, it would exist alongside, and be easily exchangeable with, cash and bank deposits.
The digital pound would maintain public access to retail central bank money and, as lifestyles and the economy become more digital, it would also promote innovation, choice and efficiency in domestic payments.
As State Street’s Werner indicates: “most CBDC projects are today focused on the retail sector, especially in the UK. Institutional payment arrangements, particularly for securities settlement, are thus not directly impacted.” Nevertheless, HM Treasury and the Bank of England have said they will engage extensively with stakeholders across the UK to seek views on the proposed model.
Alongside the consultation paper, the Bank of England published a technology working paper outlining opinion surrounding CBDC technology. The paper does not set out a final design for a CBDC, the Bank stresses, instead setting out one possible approach to CBDC architecture. The Bank says clarification will evolve as its work accelerates.
The paper, along with the digital pound consultation paper, are products of the research and exploration phase of CBDC development, and mark the start of the ‘design phase’. In the design phase, the Bank will conduct experimentation which will inform an evaluation of the technology feasibility of a CBDC, determining the optimal design and technology architecture.
Europe
The European Central Bank (ECB) says it is working with the national central banks of the eurozone to investigate whether to introduce a digital euro.
This would be a central bank digital currency — an electronic equivalent to cash, complementing banknotes and coins and giving people an additional choice about how to pay.
Having digital money issued by the central bank would provide an anchor of stability for the payment and monetary systems.
A digital euro would also strengthen the monetary sovereignty of the eurozone and foster competition and efficiency in the European payment sector.
“This investigation phase started in October 2021 and is expected to take around two years, concluding in October 2023,” states the ECB.
“We are looking at how a digital euro could be designed and distributed, as well as the impact it could have on the market. Then we will decide whether to start the process of actually developing it.”
The ECB reminds readers that a digital euro would be backed by a central bank, designed to meet the needs of citizens. It would be risk-free and respect privacy and data protection.
Central banks have a mandate to maintain the value of money, regardless of its physical or digital form.
SGSS’s Durouchoux says he expects to see a “fragmentation of the landscape” in the immediate future, “due to each central bank having its own view and risk management framework — some choosing public blockchains and others private ones.
“The logic would be to use existing blockchain protocols to benefit from the most compatible protocols, but that is not the path chosen by the banks.”
As a closing note, State Street’s Werner affirms: “Irrespective of the rationale for implementing a CBDC, there is a clear need for digital payment solutions that reflect the changing needs of the markets, and central banks can play an active role in this regard.”
Eurex became the first exchange in Europe to offer bitcoin index futures on 17 April, representing some kind of progress towards normality and official acceptability for cryptocurrency.
This could be construed as a slap in the face for sceptics, and raises the question of whether we are seeing the debate move away from the philosophy of cryptocurrencies and digital currencies and towards everyday associated practicalities.
“The idea of a central bank digital currency (CBDC) stems from the ongoing digitisation of the economy and efforts to improve the efficiency of payment systems and access to banking services,” affirms Swen Werner, head of digital custody at State Street.
Gaining momentum
David Durouchoux, deputy CEO of Société Générale – FORGE and Laurent Marochini, head of innovation at Société Générale Securities Services (SGSS), outline two different types of CBDCs: retail (CBDCr) and wholesale (CBDCw).
Marochini indicates: “CBDCr is a direct claim on central banks, meaning no credit risk for CBDCr holders. This can lead to the depletion of commercial banks’ balance sheets and reduction of their liquidity.”
He adds:“Wholesale CBDC is meant to provide settlement for capital market operations between banks as ‘the fuel’ of the markets, with no major balance sheet impact for banks.
Durouchoux outlines: “The focus was initially on CBDCr, because of the rise of cryptocurrencies. Now the focus is on CBDCw, because many banks have been entering into a real-world project of tokenising assets and such an instrument is needed to extract the maximum value from on-chain capital markets operations.”
SWIFT hosted a timely event dedicated to the subject of CBDCs and global interoperability on 12 April, attracting registrations from far and wide. During discussions, Alexandra Thomé, digital euro expert at Deutsche Bundesbank, touched upon the central banks’ wish for smooth payments, financial stability and atomic settlement.
“We’re not monsters,” she reassured, an affirmation given in the aftermath of recent events in the US and Swiss banking industries. “We like to see innovation, but the risk is moving too quickly,” she clarified.
Much of the conversation centred upon the SWIFT CBDC interoperability solution sandbox project, announced in early March. In that announcement, SWIFT said: “Central and commercial banks see ‘clear potential and value’ in SWIFT’s pioneering CBDC interoperability solution, following successful testing in a sandbox environment.”
SWIFT says that CBDCs are “clearly gaining momentum.” SWIFT cites figures from the Atlantic Council, which indicate that more than 110 countries are currently exploring a CBDC. It also referred to a recent survey by the Official Monetary and Financial Institutions Forum Digital Monetary Institute, which found that almost a quarter of countries are expected to launch one within the next one or two years.
Enabling interoperability
SWIFT cites figures from the Atlantic Council, which indicate that more than 110 countries are currently exploring a CBDC. As central banks around the world continue to explore their potential use cases in their local markets, it is clear that emphasis must be placed on ensuring that the evolving global payments landscape can continue to seamlessly interoperate. Enabling this alongside emerging innovations is a key focus and a key challenge for the financial industry as digital currencies develop.
However, most central banks are focusing primarily on domestic usage, which could lead to a fragmented landscape consisting of ‘digital islands’ if left unaddressed. “The national context differs according to local considerations and so does the actual solution that is being contemplated,” affirms State Street’s Werner.
Interoperability must be embedded from the start, and not added as an afterthought, it would seem. According to analysis by BanklessTimes, the total value of transactions carried out with CBDCs is expected to reach over US$200 billion by 2030. This marks a staggering increase of more than 260,000 per cent from 2023, where the market is currently valued at $100 million.
“The growth of CBDCs is a direct response to changing consumer preferences and increasing demand for digital payments,” says BanklessTimes CEO Jonathan Merry. “As more people across the world become comfortable using digital payment systems, CBDCs are likely to become more popular. We anticipate that their use will snowball over the coming years, driven by factors such as improved efficiency and cost savings.”
On 7 February, the Bank of England issued a consultation paper setting out its assessment for a retail CBDC – a so-called ‘digital pound’. The underlying preparatory work was overseen by the joint Bank-HM Treasury CBDC Taskforce, established in April 2021.
The official announcement communicates the sentiment that, at this stage, the Bank of England agrees that the digital pound will be needed in the future. The digital pound would be a new form of sterling, similar to a digital banknote, issued by the Bank of England. If introduced, it would exist alongside, and be easily exchangeable with, cash and bank deposits.
The digital pound would maintain public access to retail central bank money and, as lifestyles and the economy become more digital, it would also promote innovation, choice and efficiency in domestic payments.
As State Street’s Werner indicates: “most CBDC projects are today focused on the retail sector, especially in the UK. Institutional payment arrangements, particularly for securities settlement, are thus not directly impacted.” Nevertheless, HM Treasury and the Bank of England have said they will engage extensively with stakeholders across the UK to seek views on the proposed model.
Alongside the consultation paper, the Bank of England published a technology working paper outlining opinion surrounding CBDC technology. The paper does not set out a final design for a CBDC, the Bank stresses, instead setting out one possible approach to CBDC architecture. The Bank says clarification will evolve as its work accelerates.
The paper, along with the digital pound consultation paper, are products of the research and exploration phase of CBDC development, and mark the start of the ‘design phase’. In the design phase, the Bank will conduct experimentation which will inform an evaluation of the technology feasibility of a CBDC, determining the optimal design and technology architecture.
Europe
The European Central Bank (ECB) says it is working with the national central banks of the eurozone to investigate whether to introduce a digital euro.
This would be a central bank digital currency — an electronic equivalent to cash, complementing banknotes and coins and giving people an additional choice about how to pay.
Having digital money issued by the central bank would provide an anchor of stability for the payment and monetary systems.
A digital euro would also strengthen the monetary sovereignty of the eurozone and foster competition and efficiency in the European payment sector.
“This investigation phase started in October 2021 and is expected to take around two years, concluding in October 2023,” states the ECB.
“We are looking at how a digital euro could be designed and distributed, as well as the impact it could have on the market. Then we will decide whether to start the process of actually developing it.”
The ECB reminds readers that a digital euro would be backed by a central bank, designed to meet the needs of citizens. It would be risk-free and respect privacy and data protection.
Central banks have a mandate to maintain the value of money, regardless of its physical or digital form.
SGSS’s Durouchoux says he expects to see a “fragmentation of the landscape” in the immediate future, “due to each central bank having its own view and risk management framework — some choosing public blockchains and others private ones.
“The logic would be to use existing blockchain protocols to benefit from the most compatible protocols, but that is not the path chosen by the banks.”
As a closing note, State Street’s Werner affirms: “Irrespective of the rationale for implementing a CBDC, there is a clear need for digital payment solutions that reflect the changing needs of the markets, and central banks can play an active role in this regard.”
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