The Riksbank has issued a public summary of its CBDC work. Part of this describes what will be tackled in 2023:
Investigating the effects of an e-krona on the Swedish economy.
Testing of the technical solution for the e-krona prior to the pilot focusing on offline payments and sustainability.
Investigating whether and how an e-krona affects the Riksbank’s current mandate and what legal amendments are needed for the Riksbank to issue an e-krona.
Having a dialogue with different authorities and the market, for example, via the external dialogue forum launched in 2022.
Performing user studies aimed at end-users and traders.
Preparing for a possible procurement of an issuable e-krona.
IMF working paper 2023/009 describes the findings of a structural, choice-theoretic model used to understand what happens if an optionally interest-bearing CBDC is introduced. The model estimates the total demand for a CBDC relative to all forms of money, the drop of deposit rate spreads to policy rates, the impact on reserve needs, the implied rotation of profits away from banks toward central banks, and the extent to which monetary policy pass-through may become stronger.
The paper found that the highest level of CBDC issue would be 25% in the US and 20% in the euro area, assuming the interest rate was set at the policy rate and that the public saw a CBDC as ‘deposit-like’. The actual take up is unlikely to be at that level.
In a recent speech to the European Union Committee on Economic and Monetary Affairs, Fabio Panetta, European Central Bank (ECB) board member, said the ECB is looking at a new digital euro app with a basic payment function and creating a standardised way of connecting end users to intermediaries. The basic functions mentioned were contactless payments, QR codes and an easy way to pay online.
The logic is that not all payment intermediaries will have the resources to set up their own payment interfaces and so such an app would allow them to continue to be active in payments. Some end users have also asked for an independent access channel.
Unexpectedly Panetta said the digital euro will never be programmable. This means, presumably, that supervised intermediaries will be left to develop conditional payments and other advanced services.
The Saudi Arabian Monetary Authority (SAMA) is at the research and experimentation phase of its wholesale CBDC programme. SAMA is exploring the economic impact, market readiness and possible applications of a CBDC payment system. Policy, legal and regulatory issues also need to be understood.
Local banks and fintechs, other market players and third party consulting and technology providers are involved in helping SAMA understand a CBDC’s functionality and to test design options.
SAMA worked with the Central Bank of the UAE in 2019 on a cross-border experiment to understand if distributed ledger technology could be used successfully for this.
The UK government is starting a four month consultation on the technical issues relating to a CBDC. The thinking is to have a CBDC in use by 2030. The Bank of England Governor, Andrew Bailey, said the case grows in line with the increasing digitisation around us. He sees it as a profound decision on the way money is used.
The Bank sees a limit on how many digital pounds can be held being between £10,000 and £20,000. The limit is needed to stop bank runs balancing risks and will support wide usability of the digital pound.
The technical paper dismisses blockchain as a viable technological option as it would present privacy, scalability and security challenges. The Bank prefers centrally governed, distributed database technologies that might achieve the ledger requirements without such limitations.
The Treasury is clear that a digital pound will not be anonymous, just as current digital payments and bank accounts are not, in order to prevent financial crime. Instead, strict standards for privacy and data protection will be used to develop consumer trust.
While the Bank of England is talking about a 2030 CBDC launch, the European Central Bank (ECB) appears to be moving faster with possible issuance of a digital euro in 2027. Mr Schaaf, adviser to the ECB, said that by Spring 2023 the ECB should have an overview of design choices and by the Autumn the Governing Council will decide whether to proceed to the realisation phase.
Three years, or more, of testing will then follow, and then a decision will be taken. These long lead times are needed because the main financing source for European banks is customer deposits, according to Mr Schaaf. If a digital euro is too attractive and consumers choose to move money from the balance sheet of commercial banks to the ECB, there could be problems. Thresholds on holdings or disincentivising remuneration for a CBDC can be used to keep the private sector attractive.
The Bank for International Settlements (BIS) has set up Innovation Hubs in Asia, Europe and North America. To date they have concluded five projects and are working on a further 21. The projects are looking at the opportunities of financial technology.
The 2023 agenda has been published and will focus on four areas:
Improving payments systems
Experimenting with CBDCs
Shaping the future of financial regulation and supervision
Greening and securing the financial sector.
Much reported in the press is a London hub project, Pyxtrial, which aims to solve the problem of monitoring stable coins to avoid asset-liability mismatches.
BIS is looking to integrate its global network with more cross-centre projects such as Mariana, which connects the Singapore, Swiss and upcoming Eurosystem centres, and others.
Anonymity is regarded as a key issue for CBDCs. The fear of direct state control, as opposed to commercial data exploitation, is a big issue for libertarians and others. This paper examines options for designing CBDCs for anonymity based on a stylised model from the perspective of the possible impact on commercial bank lending.
If banks have less information on the borrower, they are less likely to lend or they cannot price the loan accurately relative to the risk. The banks risk of lending to less useful projects is higher. The report sees a need for lenders to still have good information on the borrower.
