CBDCs gather momentum

This article is an extract from Sibos Issues 2020 Preview edition. The complete PDF will be available soon.

The development of central bank digital currencies is the next step forward in the digitisation of financial services.

The world of financial services has become increasingly digitised over recent decades, with e-commerce, digital services and mobile user experiences taking off. But money, in its cash and account-based forms, has failed to match this pace of change. Central banks around the world have slowly started to address this problem through the exploration of central bank digital currencies (CBDCs).

"It's time to take advantage of what technology can do to create a new form of money that's digitally native, that delivers all of the features that users want in a digital experience," says David Treat, a senior managing director at Accenture who leads its Blockchain and Multiparty Systems business. "While money transfers for end-users may seem instant today, the messaging and reconciliation that happens behind the scenes is a big opportunity to simplify financial infrastructure and create better products and services. With a CBDC we will be able to address challenges from easier on-ramps and financial inclusion, improved privacy combined with enhance financial crime risk management, to greater efficiency in capital markets clearing and cross-border payments."

It's time to take advantage of what technology can do"

David Treat, Accenture.

With such benefits available, the design of a country's CBDC is crucial for success.

"There's all kinds of potential reasons why a certain kind of issuance of CBDC could be desirable," says Sheila Warren, head of Blockchain and Distributed Ledger Technology at the World Economic Forum. "But if you implement the wrong design, you're not going to get those outcomes. A lot of the technical choice is going to be dependent upon what problem you are trying to solve."

2020: a defining year for CBDCs?

A recent paper from the Bank for International Settlements¹ describes some specific national approaches to CBDCs, including China's DC/EP (digital currency/electronic payment) project, which is believed to be one of the closest to a live launch. On 20 April 2020, a People's Bank of China (PBC) spokesperson confirmed that pilot testing was under way in several cities. Meanwhile, in Sweden, having noted that its national economy is seeing “the greatest and fastest decline in cash worldwide”, the Riksbank is developing a proof-of-concept for an e-krona. The infrastructure and technical implementation for this are based on DLT using R3’s Corda, to run with several notaries.

Every central bank should be contemplating a CBDC"

Sheila Warren, World Economic Forum.

The BIS paper charts 31 countries that are pursuing this topic, nine of which have reached the pilot stage. While the technology setup is important to get right, so is the policy, something which has seen traction this year. At Davos in January, the World Economic Forum landed its CBDC Policy-Maker Toolkit², which is designed to help central bankers assess whether or not a CBDC makes sense for their jurisdictions.

"Every central bank should be contemplating a CBDC," says Warren. "However, we do not think every central bank should issue one, and we certainly don't think everyone should issue one on a blockchain. Those are different considerations."

Reimagining processes and procedures for financial services in the digital world is another aspect for central banks to consider.

Central banks need to look at the wider payments systems infrastructure"

Harish Natarajan, World Bank.

"Central banks need to look at the wider payments systems infrastructure and also the associated aspects like cyber security, and supporting infrastructure such as identification and regulatory processes around how you simplify KYC procedures and customer due diligence," comments Harish Natarajan, lead, Payments and Market Infrastructures at the World Bank. "All of these are building blocks for a CBDC."

Cross-border potential

As well as developing their own CBDCs, some central banks are already seeking to explore the cross-border potential of digital currencies. Project Inthanon-LionRock is a joint initiative between the Bank of Thailand and the Hong Kong Monetary Authority to explore the application of DLT to increase efficiency in cross-border funds transfers. Meanwhile the Bank of Canada and the Monetary Authority of Singapore have successfully linked up their respective experimental domestic payment networks, Project Jasper and Project Ubin, which are built on two different DLT platforms.

The whole notion of a CBDC cross border payment in some respect mirrors today's world"

David Treat, Accenture.

The movement of CBDCs outside of their domestic borders requires a technical component in order to apply the necessary financial crime logic to support the regulatory and policy choices of that particular country. That node infrastructure through which the tokens flow has to be governed by that country's government infrastructure - the central bank, plus whoever they deem to be fit to run the node infrastructure and apply that business logic.

"The whole notion of a CBDC cross border payment in some respect mirrors today's world," says Treat. "What we're seeing is the in-country node architectures through which these tokens will flow and through which those policy and legislative measures will be controlled, give the ability to have a foreign entity hold a wallet in that infrastructure through which you can then exchange the tokens and clear the two currencies."

I am sceptical that we will suddenly see a new global infrastructure on which CBDC runs that supplants all existing payment rails"

Sheila Warren, World Economic Forum.

While bilateral pilot projects are showing promise, the implementation of a whole new global infrastructure for cross-border CBDC transactions would appear to be a little further down the road.

"I am sceptical that we will suddenly see a new global infrastructure on which CBDC runs that supplants all existing payment rails," comments Warren. "A number of different bodies that are running consortia-type projects in the space seemingly failed to recognise that it's not just the issuer, the minter burner, that matters, it's actually all the people using that as reserve. If you don't have them in your consortium, then you're missing the true scope of the issue. I don't think that you get there if you're suddenly forcing an infrastructure on countries that were not part of the build of it and are not going to be able to pivot to it easily."

¹ BIS Working Papers No 880, Rise of the central bank digital currencies: drivers, approaches and technologies by Raphael Auer, Giulio Cornelli and Jon Frost: https://www.bis.org/publ/work880.pdf

² WEF Central Bank Digital Currency Policy‐Maker Toolkit: http://www3.weforum.org/docs/WEF_CBDC_Policymaker_Toolkit.pdf