Central Bank Digital Currencies (CBDCs) and other digital currencies – January 2023

Central Bank Digital Currencies (CBDCs) and other digital currencies

The development of CBDCs across the globe continues with:

  • Mexico delaying the launch of its CBDC until 2024

  • Turkey conducting the first tests of its digital lira which would be integrated with digital identity and FAST - a payment system operated by the Turkish central bank

  • India preparing to conduct the retail pilot of the “digital rupee”, having tested the wholesale version

It is becoming increasingly difficult to keep up with all of the announcements from a raft of central banks and think tanks but here are some that caught my attention:

  • The Bank of England launched a CBDC Sample Wallet Proof of Concept and Research project which resulted in 20 applications. The project aims to:

    • Explore the end-to-end user journey as a way to sharpen functional requirements for both the Bank and private sector. Whilst the Bank will not develop a user wallet itself, it may develop payment scheme rules and user experience guidelines, etc. for the private-sector wallet providers, in addition to supporting core CBDC functionality via its ledger and API

    • Make the CBDC product more tangible for internal and external stakeholders, e.g. as a prototype for future user testing.

    • Support the Bank’s work towards the BIS Innovation Hub’s ‘Project Rosalind’, by testing integration of a front-end with the Rosalind API. Details of Project Rosalind will be shared with the successful bidder.

    • Support future exploration of further functionality which is out of scope here, e.g. offline payments or KYC processes for new users.

    • Produce the following deliverables:

      • Wallet Mobile app (built on both android as well as iOS);

      • Wallet Website;

      • an example Merchant website; and

      • Back-end server to serve mobile app and website, call the core ledger API and store user data and transaction history

  • The ECB published the second progress report on the investigation phase of a digital euro outlining the developments made since the first progress report published in September 2022. The report details a second set of design and distribution options and describes the roles of the Eurosystem and supervised intermediaries in the digital euro ecosystem, i.e.:

    • the role of intermediaries, responsible for the onboarding of end-users, anti-money laundering checks and consumer-facing services, such as payment initiation solutions;

    • the settlement model, which defines who will settle online or offline transactions;

    • the way in which funding and defunding will take place to allow users to convert cash and money from a bank account into digital euro;

    • the distribution model. A digital euro scheme is envisaged since it is best suited to guaranteeing that all euro area citizens can pay and be paid in digital euro.

  • The BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority and the Bank of Israel are joining forces in Project Sela to explore the cyber security and technical feasibility of a two-tier retail CBDC architecture that allows intermediaries, such as commercial banks, payment service providers and financial technology firms, to provide CBDC services without any related financial exposure – meaning that the CBDC never resides on the intermediary's balance sheet.

Project Sela will explore technological solutions towards a two-tier retail CBDC model (where the claims are direct central bank liabilities while real-time payments are handled by intermediaries) in which intermediaries provide wider access to the CBDC system but are not financially exposed, meaning that at no point in the process does the CBDC reside on their balance sheets. Similar to using cash, this allows users to benefit from the safety and liquidity of central bank money without being exposed to financial counterparty risk. Furthermore, the exposure-less nature of intermediaries could spare them from the capital and liquidity requirements imposed on intermediaries whose balance sheets are "exposed". This could enable wider participation and competition in the payments market by expanding eligibility of intermediaries to those beyond financial institutions, which in turn could reduce the overall costs and widen access for the end user in a CBDC system.

  • Australia’s Digital Financial Cooperative Research Centre issued a short report commenting on the state-of-play regarding the possible issuance of CBDCs, focusing on higher-income economies with good electronic payments systems. It noted that:

    • Many reports have shown that CBDC issuance is considered significantly more likely in emerging economies than in higher-income economies

    • There is no evidence that advanced economies are considering introducing retail CBDCs as a precursor to the removal of cash

    • There is not much evidence that central banks are considering CBDCs based on a range of rationales that might be described as ‘improving the implementation of monetary policy’

    • Additional data from CBDC transactions would not represent a sufficient additional improvement to justify the significant cost of implementing a CBDC

    • There is no evidence that central banks in advanced economy jurisdictions have any desire to introduce CBDCs to somehow enable visibility or control over the spending of citizens

The report has also noted that:

    • Jurisdictions might decide to issue more than one form of CBDC (i.e., retail as well a wholesale)

    • Central banks in higher-income economies are expecting that any retail CBDCs would use two-tier (or intermediated or platform) models whereby the central bank would “mint” the CBDC and the private sector would handle all customer facing activity

    • The case to introduce CBDCs will potentially depend on them being able to at least match existing payment methods in many ways (ease of use, speed, finality of transactions, etc.) but also to improve on them in some significant ways (such as programmable/conditional payments)

    • Central banks will be mindful that the introduction of CBDCs should not bring about major unintended changes to the structure of the financial system

    • Privacy issues will be a focus for policy makers as the technology already exists to incorporate different levels of privacy into payments

    • Experimentation with wholesale CBDCs is more advanced than thinking about access issues and possible business rules

    • There have recently been a significant number of experiments with wholesale CBDCs that could be promising for improving cross-border payments

  • The Monetary Authority of Singapore (MAS) launched Ubin+, an expanded collaboration with international partners on cross-border foreign exchange (FX) settlement using wholesale central bank digital currency (CBDC). Ubin+ will focus on the following:

    • Study business models and governance structures for cross-border foreign exchange (FX) settlement, where atomic settlement, based on digital currencies, can improve efficiencies and reduce settlement risks compared to existing payment and settlement rails.

    • Develop technical standards and infrastructure to support cross-border connectivity, interoperability and atomic settlement of currency transactions across platforms using distributed ledger technology (DLT), and non-DLT based financial market infrastructures.

    • Establish policy guidelines for the connectivity of digital currency infrastructure across borders, for better access and participation. This includes policy relating to governance, access and compliance issues for such linkages.

As part of Ubin+, the following projects will be undertaken with international partners:

    • Foreign Exchange and Liquidity Management: Project Mariana is a collaborative initiative that explores the exchange and settlement of Swiss franc, Euro and Singapore dollar wholesale CBDCs with an automated market maker arrangement. The project is a partnership involving MAS, Banque de France, Swiss National Bank, and the Bank for International Settlements Innovation Hub’s Eurosystem, Switzerland and Singapore Centres.

    • Interoperability between DLT and non-DLT payment systems: MAS is participating in SWIFT’s CBDC Sandbox, together with more than 17 central banks and global commercial banks, to explore cross-border interoperability across digital currencies based on DLT and non-DLT payment systems.

    • Connectivity across heterogenous digital currency networks: As wholesale digital currencies could potentially gain traction as a cross-border medium of exchange, MAS is studying possible mechanisms to maintain connectivity across CBDC and other heterogenous digital currency networks. MAS will also study the use of smart contracts to optimise efficiency and reduce counterparty risks in the settlement of cross-border transactions.

Naresh Aggarwal

Associate Director, Policy & Technical


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