At OMFIF’s European payments and digital assets conference CBDCs were on the agenda. Wholesale CBDCs are more familiar ground for central banks since they can be regarded as exploiting a technological opportunity rather than a major structural change.
Retail CBDCs are seen as needed in order to continue ‘to offer access to legal tender which goes along with the decline of cash’, according to Doris Dietze, head of digital finance at the German Federal Ministry of Finance, and Costanza Iacomini, head of fintech sector, Banca d’Italia.’ Payments have moved up the agenda as the political and strategic importance of payments has gone up agenda in Europe, primarily due to the awareness of the power of non-bank players in finance and big tech dominance in the Eurosystem.
Paul Tucker, a former Deputy Governor of the Bank of England, felt that the ECB is dragging its feet. Dietze commented that ‘central banks can’t act as quickly because we are talking about trust in public authorities. There is not much room for failure here.’
Wholesales CBDC discussions are more about the role of distributed ledger technology (DLT), the overhaul of cross-border payments infrastructure and the need to tackle the lack of interoperability between domestic payment structures.
There was discussion about whether central bankers just regard wholesale CBDCs as real-time gross settlement, and similar, systems based on DLT. Have they properly explored ideas for cross-border payments based on completely new systems, with or without DLT, to ease, underwrite or replace correspondent banking between currencies and jurisdictions?
The Banque de France has just issued its report on seven experiments it has conducted on wholesale CBDCs. Claudine Hurman, director of infrastructures, innovation and payments at Banque de France, acknowledged the efficiency of blockchain but said, ‘further work has to be done to stress scalability and security.’ The Monetary Authority of Singapore, Banque de France, JPMorgan and others have carried out work which has demonstrated that wholesale CBDC and corridor networks between multiple central banks mean you can transact on central bank money rather than commercial bank money, the benefit being shortened transaction chains and reduced settlement risk.
Dirk Schrade, deputy head of the payments and settlement system, Deutsche Bundesbank challenged the need for a wholesale CBDC to deliver these benefits. He referred to ‘digitalised corresponding banking,’ such as Partior, which could save 80% of the cost of cross-border payments. His concern was that turning to wholesale CBDCs could put sovereign currencies at risk.
Regulation will be needed for whatever new solutions are pursued. Creating an agreed framework with rules will be highly complex since many of the parts that will be necessary to get aligned, eg. communication protocols, standards, regulation and compliance etc., will apply far beyond just CBDCs. In a sense, the technical possibilities are the straightforward part.
