New CBDC Project Announcements

The number of central banks announcing work on Central Bank Digital Currencies (CBDCs) continues to rise. This month there have been reports about CBDC activity by the central banks of the ECCB, Jamaica, Korea and Russia.

Bank of Thailand Proof-of-Concept Results

The Bank of Thailand (BoT) has reported on its proof-of-concept project with the Siam Cement Group (SCG) and Siam Commercial Bank subsidiary Digital Ventures to use its CBDC and distributed ledger technology (DLT) to pay B2B invoices. Working with ConsenSys, the CBDC integrated SCG with its suppliers to manage procurement, invoicing and payments.

Although the use of DLT enabled conditions to be set on the CBDC, which aided payment efficiency, the BoT also found that as configured for this project, the DLT ‘has some limitations, particularly in supporting large transaction volumes and preserving transaction privacy. Resolving these issues through technology development or system design will need to be explored further’. 

The BoT will now go on to investigate the development of a CBDC for use in the consumer retail sector.

Cross-Border Payment Project Expanded

The Hong Kong Monetary Authority (HKMA) and BoT are collaborating to study the use of CBDCs. Initially this was under the project name Ithanon-LinoRock, but is now called the m-CBDC Bridge project. The initiative is in partnership with the BIS Innovation Hub.

The proof-of-concept project has recently been expanded to include the People’s Bank of China’s Digital Currency Research Institute and the Central Bank of the United Arab Emirates (UAE).

HKMA and BoT are using DLT technology with a focus on making real-time cross-order payments efficient, particularly issues around fund transfers, international trade settlement and capital market transactions in their own jurisdictions. The goal is to address the existing inefficiencies, costs and regulatory complexities.

ECB Ponders CBDC Account Limits

The European Central Bank (ECB) is working on the key design issues of a possible CBDC, the policy, legal and technical questions.

One of those is whether to have a limit on how much money can be held in a central bank CBDC account in order to stop the public moving money out of their commercial bank deposit accounts.

ECB board member Fabio Panetta, in an interview with Der Spiegel, was clear that the ECB neither wants to compete with commercial banks or offer financial services. The ECB is considering a limit, for example €3,000, or charging interest on deposits held in a central bank account.

Riksbank CBDC Trial Extended

The Riksbank has extended its CBDC trial for a second year. The trial, conducted with Accenture, is testing a technical DLT-based platform that allows e-krona to be used for payments by cards, mobile phones and wearable devices.

Performance aspects such as scalability and off-line usage are being tested, along with now involving external participants.

Paper Review: Monetary Policy Pass-Through with CBDC

The Bank of Canada has published this staff working paper 2021-10 by Janet Jiang and Yu Zhu. This paper explores how the introduction of a CBDC can change the impact of interest rate policy.

Some economic theory. In traditional monetary policy, interest rates are used to manage the supply of money in the economy. Private banks create deposits in order to make loans. They hold reserves in proportion to those deposits to ‘back’ them. Households deposit money at the private banks and then draw on those deposits for online transactions and electronic payments.

The interest rates affect banks and households differently, reflecting how those funds are being used. The interest rate on reserves changes the cost to banks of creating deposits and, therefore, the cost of loans. The interest rate on deposits affects the interest earned on deposit accounts for household.

If a CBDC was a perfect substitute for bank deposits as an electronic means of payment, interest would be paid on the CBDC when in a deposit account. The impact of interest rate changes would be fully passed on to banks and households.

In reality, although CBDCs can be designed to be a perfect substitute for deposits as an electronic means of payment, deposit markets are not fully competitive and so an interest rate change would not be fully passed through to the household or loan rates. Households, of course, cannot hold reserves.

The research found that the impact on the deposit market would be more direct than on reserves. It can also have a stronger pass through to the loan market, but policy on the interest on reserves can dampen it. The conclusion was that central banks will need to coordinate their interest rates to achieve the desired monetary policy outcome.

To expand lending, for example, the central bank will need to increase the interest rate on deposits but lower the reserve rate. The positive effect on lending is maximised if the reserve rate is low. If the central bank wants to increase efficiency in electronic payments but does not want to expand banks’ balance sheets significantly, then it will need to increase both the CBDC deposit rate and the rate on reserves.

Paper Review: How to Issue a CBDC

The Swiss National Bank (SNB) has issued its Working Paper 3/2021, which was first issued in May 2020, written by David Chaum, Christian Grothoff and Thomas Moser. The paper differs from others in that it seeks to create a CBDC that replicates physical cash rather than bank deposits.

To that end, SNB lays out how a central bank can issue a token-based system, without using DLT but, instead, based on existing technology which can be improved to deliver the necessary transaction privacy, regulatory compliance and ‘quantum-resistant protection against systemic privacy risk’.

One of the objectives of the work is a system that does not affect materially monetary policy or financial stability. The paper does not address whether a central bank should issue a CBDC.