The development of CBDCs across the globe continues with feedback on Nigeria’s recently launched e-Naira and more insights from central banks on the risks, opportunities and challenges.
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 minutes of the June meeting of the Bank of England’s CBDC Technology Forum were released. Key discussion areas included:
o Offline functionality with CBDC (The presentation briefly touched on the time required to develop and launch offline functionality and there were mixed opinions on whether offline capability should be regarded as a day one requirement for CBDC).
o Possible functionalities including payments in scope, interoperability considerations and innovation features such as different payments for a potential CBDC and the relative complexity to build each of those into the system, including Person-to-Person, Person-to-Business, and offline payments.
Key features of a CBDC infrastructure include:
• The minutes of the July meeting of the Bank of England’s CBDC Engagement Forum were released. Key discussion areas included:
o The different business models (such as fee-based, data monetisation and cross-selling opportunities) for Payment Interface Providers (PIP)
o Whether end users should be charged or it would follow existing models where merchants would pay a fee to a PIP
o How private sector relevant experience would be useful for the Bank and HMT when designing a CBDC that incorporated some of the G7 Principles of (i) operational resilience and cyber security, (ii) competition, (iii) illicit finance and (iv) data privacy.
o That all layers of the CBDC system had to be assessed separately to understand what is most important to deliver when building it. This would mean laying out the fundamental elements of each layer (the core infrastructure layer, the PIP layer, and so on) and determining which elements belong in each layer (ledger provision, operational resilience, ID validation, etc.).
• In a joint report released by the BIS Committee on Payments and Market Infrastructures, The BIS Innovation Hub, the IMF and the World Bank, the key conclusion was that central banks must make critical choices on the access of non-residents and foreign financial institutions to CBDCs, as well as ensuring multinational interoperability, to fully harness the potential for CBDCs to enhance cross-border payments.
• A working paper issued by the ECB considered the optimal quantity of CBDC in a bank-based economy and concluded that:
o Empirical evidence suggests that adequately calibrating the amount of CBDC in circulation is important to mitigate the impact on the banking sector and the impact depends on banks’ reliance on deposit funding and the substitutability between
o CBDC and deposits.
o The issuance of CBDC exerts a fiscal expansion and a bank disintermediation effect through an expansion of the central bank balance sheet and profits. The sign and magnitude of the net impact on bank lending and real GDP depends on the relative size of these two effects.
o Welfare-maximizing CBDC rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. They induce a stabilisation effect which improves the liquidity services/ disintermediation trade-off faced by the economy under the introduction of a CBDC and permits to rank CBDC rules in terms of attainable welfare gains.
• In a recent presentation by Fabio Panetta (Member of the Executive Board of the ECB), at the Annual Congress of the European Economic Association, he noted:
o Digital public money is the monetary anchor in a digital world
o The importance of safeguarding monetary sovereignty
o The need to enhance competition and efficiency in payments
But also the importance that a CBDC was not too successful if it crowds out private sector activity.
• The Bank of Russia announced plans to connect all Russian banks to the digital ruble in 2024, as it fast-tracks plans to circumvent sanctions. Cross-border integration with the digital yuan and the CBDCs of other “friendly” countries” will remove the need for SWIFT, a central bank official said. As well as “gradually connecting all credit organisations”, the Bank of Russia will increase the number of “payment options and transactions using smart contracts.
• The Digital Dollar Project (DDP) announced the launch of its Technical Sandbox Program to jumpstart further exploration of technical implementations of a U.S. central bank digital currency (CBDC). The program is due to begin in early October with the inaugural cohort focused on cross-border payments. The program will serve as a collaborative space for the DDP participants and financial service providers, offering a neutral environment for the evaluation of technological, business, and policy approaches to CBDCs. Participants will examine real-world technology, explore potential implications to business strategies and operations, and experiment to uncover possible use-case specific solutions.
The aim of the DDP is to provide the federal government, policymakers, and private sector organisations with a stronger, clearer picture of what implementing a CBDC in the U.S. would look like, and to answer important questions of what a roll-out might entail across retail, wholesale, and international use cases.
• India continues its plans to launch a digital rupee by the end of the current financial year and recognises the impact it may have on its existing Unified Payments Interface (UPI).
• According to Cryptoslate, since its inception in October 2021, the digital currency eNaira in Nigeria has reportedly attracted 270,000 users and recorded transactions total N4 billion (about $10 million). The project’s acceptance rate has been gradual - within a month of launch, 400,000 wallets had registered but according to a report from July, the network only had 700,000 registered wallets, which prevented widespread adoption.
The failure of the nation’s commercial banks to support the project is considered one of the factors slowing down adoption. Users of the eNaira can conduct transactions without paying a fee, which has a negative effect on commercial banks whose income comes from fees.
According to the governor, “Since the launch of this great initiative, the e-Naira has reached 840,000 downloads, with about 270,000 active wallets comprising over 252,000 consumer wallets and 17,000 merchant wallets,” adding that 200,000 transactions totalling over N4 billion have been performed on the site. Out of the more than 200 million people living in the country, 8,000,000 active users are the aim of the project’s second phase.
