Jim Ford and Phil Kenworthy from the Digital Pound Foundation have posted on LinkedIn an interesting article challenging central banks to think differently about CBDCs. It suggests that differentiating ‘retail’ and ‘wholesale’ CBDCs is silo thinking conditioned by the limitations of the past.
The standard infrastructure consists of a real time gross settlement (RTGS) system to clear and settle high value payments settled on a real time accumulated basis. They operate on a payment-by-payment basis by wholesale markets. For retail markets there will be an automated clearing house (ACH) for low value mass payment type transactions. The final settlement is arranged using the RTGS system based on a deferred net settlement (DNS) basis.
Over time a range of alternative infrastructures have been created in addition to the ACH. In Europe, for example, there are TARGET 2, TIPS, EBA (Euro 1, Step1/2 and RT1). The UK has CHAPS, FPS, BACS, Cheque Clearing and LINK. All this does not split neatly into wholesale and retail systems.
For example, in the UK CHAPS is used primarily for wholesale clearing, but retail transactions such as house purchase payments are also made using CHAPS. Corporate payments go across the FPS system. However, FPS has a £250,000 payment limit, and therefore any transactions above that limit would need to use CHAPS.
Given this, is a single ‘system’ covering clearing and settlement using one CBDC, rather than wholesale and retail CBDCs, the way ahead? Given payment providers are likely to have to link into non-CBDC payment systems, there is a benefit in keeping things as simple as possible.
The paper gives examples of data enrichment and efficiency benefits, improved liquidity saving mechanisms and easier interoperability. Perhaps the work being done today on cross-border wholesale payments will point towards how to achieve an integrated approach.
Invest HongKong (InvestHK), working with Finnovasia, has created The Global Fast Track, which aims to connect global fintech companies with Asian corporate, investor and service champions to explore business partnerships and investments.
InvestHK and the Hong Kong Monetary Authority (HKMA) have added a CBDC track to it so that local and global firms can partner with the central bank to boost the growth and adoption of fintech in Asia and beyond.
The CBDC track invites banks, fintechs and tech firms to submit solutions in eight areas, including retail CBDC (rCBDC) adoption, wholesale CBDC (wCBDC) adoption, programmable money, interoperability, privacy, cybersecurity, foreign exchange and liquidity management, and offline payments.
Selected applicants will then pitch their ideas to win a Best Use Case, Best Technology and Best Ecosystem award. Qualified candidates may get the chance to work with HKMA on research projects and pilots that foster the growth of the CBDC ecosystem.
Two new capabilities have been added to the e-CNY. First, It can now be used to scan and pay on public transport. Although still a pilot, in Guanzhou on ten city bus routes people can pay using their e-CNY wallet by scanning a QR code. On the subway in Ningbo 125 stations now accept e-CNY. Eight other cities are already allowing this.
Second, digital yuan wallets now have the capability to transfer funds from accounts to the wallets automatically based on a trigger level. This is now being trialled in 23 cities and regions in China. Nearly 20% of consumers have downloaded the digital yuan app in the six months after it was launched in January.
This is part of a programme of extending the usefulness of the e-CNY. In August Guangzhou allowed employees to pay their housing fund contributions using
e-CNY. The government has partnered with the food-delivery giant Meituan and the e-commerce platform JD.com to create e-CNY air-drops that can be spent at listed venues.
Working paper 2713 from the ECB suggests policy interest in retail CBDCs has been driven by the decline in cash use and the rapid increase in digital payment types and use, challenging the status quo.
This paper reviews academic work on the development of digital money and the economic motives justifying introducing a retail CBDC. The risk that BigTech companies could use their network power to dominate payment markets, and the access to payment data they would gain, is an important motivation for a CBDC.
The implications of a CBDC for monetary policy and financial stability and for privacy are reviewed. When issuing a CBDC, central banks will need to bear in mind the size and structure of their balance sheets, as well as those of commercial banks given the risks of disintermediation.
While this is a risk, it could also incentivise banks to offer more attractive deposits, giving rise to a potentially non‐linear relationship between CBDC remuneration and bank stability.
The authors argue that market forces are unlikely to safeguard privacy sufficiently.
The paper also contains a discussion of key policy issues and challenges such as regulation and incentives for the adoption of a CBDC.
The Digital Dollar Project (DDP) – a partnership between Accenture and the Digital Dollar Foundation – was created to encourage research and public discussion on the potential advantages and challenges of a US CBDC – or a ‘digital dollar’.
It aims to provide the federal government, policymakers, and private sector organizations with a stronger, clearer picture of what implementing a CBDC in the US would look like, and to answering important questions of what a roll-out might entail across retail, wholesale, and international use cases. In that context it has just announced the launch of its Technical Sandbox Programme.
The Sandbox will be collaborative, allowing DDP participants and financial service providers a neutral environment for the evaluation of technological, business, and policy approaches to CBDCs.
The programme will consist of two phases: an education phase and a pilot phase.
The education phase will develop a business and functional understanding of the technology and evaluate the differences in possible design choices.
The pilot phase will identify and test specific CBDC use-case hypotheses, with the aim of gathering data on business- level impacts.
