CBDC Round Up

Project Aurum Delivers Wholesale Retail CBDC Advance

The Hong Kong Monetary Authority (HKMA) and Bank for International Settlements (BIS) Innovation Hub have been working on Project Aurum.

The project explored whether a wholesale CBDC would work with private stablecoins. A technical solution was created in which a wholesale CBDC was issued to banks for distribution to retail users. Retail users had an e-wallet which held an intermediated CBDC, a CBDC token, and a CBDC- backed stablecoin. Tokens could be traced back to the backing asset using a UTXO (Unspent Transaction Output) so that users were protected should the commercial bank be bankrupt.

The two-tier system provided additional privacy since the interbank system recorded no personal data and cyber resilience was increased because the wholesale and e-wallet systems were decoupled based on the principle of privilege separation and network segmentation.

Asia Pacific Region Working Steadily on CBDCs

The IMF has issued a paper about a recent survey of Asian and Pacific central bank work on CBDCs 1. 34 countries took part. One finding was that the emergence of private crypto assets has acted as a spur to work on CBDCs. Despite that, there are few immediate plans to issue a CBDC in the near or even the medium term. The survey found a significant level of heterogeneity in terms of the stage of development in the responses.

The view of OMFIF is that the major economies, China and India apart, are in no rush to issue a retail CBDC. A number of smaller economies have introduced or are piloting CBDCs but their impact is likely to be within their own borders at this stage. China’s CBDC appears to be motivated by the wish to ensure non-bank currencies do not have a leading role and that fiat currency predominates. In due course it will be used with China’s major trading partners. India’s motivation appears to be to reach its significant un- and under- banked communities.

It is likely that central banks currently have rather more urgent priorities and that this is contributing to slower progress. Improving existing domestic payment infrastructure is more attractive in such a situation.

In addition, the problem being ‘solved’ by a CBDC does not appear to resonate with users where well-established effective payment systems are in place. So for now, steady progress is all that is required.

Laying Out CBDC Challenge for Commercial Banks

While arguments have been put forward that less risk might encourage people to keep higher levels of deposits in their accounts, these have received little attention.

A McKinsey paper explains the drivers behind central bank interest in CBDCs and outlines the risks to commercial banks of a successful CBDC (disintermediation and lower payment fees) 2. In fact, the paper does not go on to describe an active role but asks questions that need addressing by central and commercial banks.

Accenture has also written about the relationship of CBDCs and commercial banks 3.

It draws the conclusion that the positive opportunities of new capabilities and more diversification in payments will provide a net benefit. The paper argues that disintermediation is unlikely to happen in practice. It suggests that the growth in the ratio of bank deposits to money market funds over the last 20 years demonstrates this point.

The article goes on to address privacy, financial inclusion, the expansion of central bank balance sheets and the ability of banks to make loans if deposits shrink.

Promoting Inclusion by Design

The World Economic Forum (WEF) has issued a paper giving four design criteria CBDCs must have if they are to promote financial inclusion 4.

1. Financial and digital literacy programmes. 

People tend to trust governments more than crypto, but privacy and security are concerns for people. WEF suggests lending, liquidity and debt need to be understood for digital money to work well for them.

2. Build financial identity. 

A financial identity is needed to be able to build credit, establish a lending track record and access more traditional financial instruments.

3. Transform payment ecosystems.

WEF says for businesses a CBDC offers a way to represent physical assets digitally so that they can be used as collateral for loans to build their businesses. Its vision is that by ‘by reducing parcel sizes and removing entry barriers, reducing transaction costs or enabling new market operators to be established with less regulatory friction.’ 

4. Value interoperability and inclusion.

WEF wants to open markets and to do this, currencies must not sit in silos. Interoperability will be key.

ECB Update on its Digital Euro Work Issued

The ECB has issued an update on its Digital Euro work and Fabio Panetta has updated EU lawmakers.

The Governing Council will decide in autumn 2023 whether to start a ‘realisation phase’ but the public won’t see a Digital Euro before 2026 at the earliest. The ECB sees this development and testing phase lasting at least three years.

Eswatini Moves to Next CBDC Assessment Phase

The Central Bank of Eswatini, formerly known as Swaziland, has completed the first stage of a CBDC Diagnostic Study begun in 2020. It will now move on to an advanced research phase of the practicalities of implementing a CBDC including looking at governance, accessibility, interoperability, security and programmability.

Giesecke+Devrient has been selected as the Bank’s technology partner. At the end of this phase, the bank wants to understand whether, and how, a CBDC could provide additional benefits and ensure continued access to central bank money, and how it would contribute to a diverse and resilient payment system.

Retail CBDCs to be Tested Across Borders

The new Nordic hub of the Bank for International Settlements (BIS) has started a project involving the central banks of Norway, Sweden and Israel to look at whether a CBDC can be used for international retail payments and for remittances.

Each country will connect their domestic proof-of-concept CBDC systems with the hub to test specific functions and the technical challenges of interlinking the domestic CBDC systems. This is a test of retail, rather than wholesale, CBDCs across borders.

1 - Towards Central Bank Digital Currencies in Asia and the Pacific: Results of a Regional Survey (imf.org)

2 - Central bank digital currencies: An active role for commercial banks | McKinsey

3 - Why CBDC stands to benefit banks | Accenture

4 - How Central Bank Digital Currencies can promote inclusion | World Economic Forum (weforum.org)