Central Bank Digital Currency Round-Up

BIS – Putting a Big Idea into Practice

Augustin Carstens, General Manager at the Bank for International Settlements (BIS), made a speech at the end of March considering progress with CBDCs. He explained how the simpler payment process with CBDCs reduced risks, costs and time while addressing the weaknesses of today’s payment system - high credit card and cross border payment fees, a lack of universal access to digital payment tools and weak governance frameworks on big tech and other providers’ use of transaction data.

Despite these strengths, he does not believe the CBDC share of payments would be very different from that of cash. Carstens argued that the existence of CBDCs should put pressure on other means of payment to perform better, even if their market size is small.

The speech considered cross border payments. CBDCs should be able to enhance cross border payment efficiency without creating a new global unit of account through the use of multi-CBDCs. Active projects are being worked on pursuing a number of approaches. The risk of currency substitution is small given most CBDCs are account based, and so opening accounts can be carefully regulated.

Finally, he suggested that this is not a race to create a new global reserve currency. Firstly, CBDCs are proving to be highly collaborative and the G20 coordinates cross border payments. Secondly, the choice of a reserve currency depends on a wide range of factors, from the rule of law to the openness of financial markets in a currency.

Roll Out of the Sand Dollar Goes On

At the BIS Innovation summit, the Governor of the Central Bank of the Bahamas spoke about the Sand dollar, the Bahamas’ CBDC. He positioned it as a tool to encourage and increase financial inclusion, to modernise the payment system and to allow private wallet systems to be interoperable. To date, nine institutions have integrated their mobile wallet applications – four money payment firms, three payment providers, a bank and a credit union.

The Sand dollar is not anonymous and the usual KYC regulations apply. For people who don’t have photo ID, and therefore don’t have a bank account, there is a lower access level that only needs either an email address or a phone number. For these accounts, balances of up to $500 and transactions up to $1,500 are allowed.

If the full KYC process has been followed, people can hold up to $8,000. If people don’t have a smartphone, a smart card is available. Part of the thinking behind this is that the elderly and children will find this useful.

Interoperability remains a work in progress. Today there is interoperability between mobile payment apps. The plan is to allow balances to be transferred between mobile wallets and to allow wallet portability. That will allow a user to take their ID and account number and to move it to another wallet. The Bahamas Automated Clearing House is being integrated to allow two-way transfers between bank accounts and wallets and this should go live soon.

CBDC Announcements

The Bank of Japan has started work on a CBDC feasibility study, starting with the technical feasibility of the core functions and features needed for a digital currency. This is an exploration of a possible retail CBDC to be used for payments. The work will involve Japan’s banking, payment service and fintech associations, as well as the Finance Ministry and the Financial Services Agency.

Bank Negara Malaysia does not have immediate plans to issue an CBDC according to its 2020 annual report. Malaysia’s existing payment infrastructure is working well allowing real time digital payments.

The report notes the rise in privately issued digital assets such as Bitcoin, but comments that these do not have the ‘universal characteristics of money’ and they are neither a good store of value nor medium of exchange. In March 2020, for example, the value of Bitcoin fell 39% on one day. This is the same point made by the Governor of the Bank of England to the World Economic Forum at the end of January 2021.

The existence of assets linked or backed with assets such as a currency, for example a stablecoin, demonstrates that the situation is changing. As a result, Bank Negara is actively assessing the potential value of CBDCs.

The Bank of Jamaica will work with eCurrency Mint on its CBDC project. eCurrency Mint specialises in cryptography for CBDC issuance. The pilot stage will run from May until December 2021 as part of the Bank’s Fintech Regulatory Sandbox, with the aim to go live early in 2022.

DLT Use in Europe

On consecutive days at the end of March Finextra reported stories about a CBDC in Europe.

The first report was that the Bundesbank, working with the German Finance Agency, had successfully used Distributed Ledger Technology (DLT) to settle electronic securities. This demonstrated it is possible to link DLT and conventional payment systems to settle securities in central bank money.

It suggested that this approach could be implemented in a ‘relatively short space of time – at least in far less time than it would take to issue central bank digital currency, for instance’, according to Brukhard Balz, member of the Bundesbank executive board. The trial involved six large European commercial banks and institutions.

The next day Fabio Panetta, an ECB board member, posted a blog aimed at a number of ‘misconceptions’ about the digital euro, starting with a strong denial that there are any plans to abolish cash in order to introduce even lower negative interest rates as part of its monetary policy plans. He also took time to address talk about the risks of banking disintermediation and the business model for a digital euro.

Panetta stated that a digital euro is about offering ‘bank money as a convenient way of paying digitally.’ He went on to say, ‘we believe in the strong merits of allocating credit through private channels - banks and capital markets,’ so we have no intention of redesigning the European financial system. Customer deposits and the role of banks as lenders go hand in hand, and a digital euro would not challenge this.’

It appears that the motivation of the ECB is to avoid the dominance of the payment market by a small number of non-European suppliers.