Digital Currency News

Central Bank Digital Currencies (CBDCs) are moving to centre stage as increasing numbers of central banks study and work on them, even launch them. The term CBDC can mean different things to different people – wholesale, retail, general, synthetic etc. And how do they fit in with cash, faster payments, Real Time Gross Settlement, private money or crypto currencies? Part of the story is about policy, the ‘business case’, part legal and governance and part technical. With the rationale behind them unique to each country, the Bahamas has not launched its Sand Dollar for the same reason as China’s e-yuan project, and with developments moving so fast, this is not an easy area to understand or to keep up with.


This Week in DCN Weekly News

The Bank of Israel is looking at creating 'ordinary' digital shekels, the transfer of which is recorded in the ledger, and 'private' digital shekels. While spending ordinary shekels would be recorded on the ledger, spending private shekels would not be, providing the same privacy as using cash. An appropriate limit on using private digital shekels is one of the issues yet to be decided for this concept. The bank has also been exploring how to set quantitative restrictions on payment transactions and how to use 'smart contracts' for delivery versus payment transactions. The Bank of Israel does not see itself writing applications for specific payment transactions but neither does it see a free for all where anybody can write smart contracts on the blockchain, which is the underlying technology the bank has been using for these trials, since this brings the risks to the entire system. If payment service providers write smart contracts, then how will this be supervised?

 

The Bank for International Settlements (BIS) Hong Kong Innovation Hub will start Project Selah in the third quarter of 2022. The project sees the Hong Kong Monetary Authority and the Bank of Israel working together, with the BIS, to test a two-tier system in which the central banks will deal directly with consumers without the input of banks. This is an unusual approach. This approach means financial intermediaries such as banks would have no exposure from the public holding or transferring CBDCs. The cyber security risks would lie with the central bank. While it reduces risks to commercial banks, it increases the risk of disintermediation if consumers choose to save their money with the central bank. The ECB is looking at capping the issuance of digital euros to $1.56 trillion to limit this risk.

 

An OMFIF article neatly summarises why CBDCs are not a priority for central banks, particularly with inflation unleashed and raging around the world. It quotes recent Monetary Authority of Singapore and UK House of Lord committee comments about the lack of a user case for retail CBDCs, former BIS staff statements about cross border payment efficiencies being possible without CBDCs, new payment innovations such as PIX and regular examples of a lack of resilience in digital payment solutions. Perhaps the conclusion is not yet rather than never ever.

 

Despite the OMFIF article, the BIS has issued a paper reporting on the results of project Inthanon-LionRock2, Jura, Dunbar and mBridge, all experiments exploring the possibilities and boundaries of cross-border payments using CBDCs. While the first was a proof of concept and the others prototypes, they all demonstrated the potential for lower costs, faster settlements and increased operational transparency. They explored policy, legal, governance and systemic issues. Perhaps so far, so good. The report details how new and existing platforms will work together, how scalable solutions are and the resilience and security of the systems as areas needing work.

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