Round-Up of CBDC News

As a reminder, CBDC announcements were made in May relating to Brazil, Georgia, Japan, Kazakhstan, Norway, Pakistan and Russia and in June to Indonesia, Korea, Mauritius, South Africa and Thailand.

This month Hungary has issued a study as a first step in researching CBDCs, the State Bank of Vietnam (SBV) has been asked by the Prime Minister to study and carry out a pilot implementation for cryptocurrency based on blockchain technology, and a law has been passed in Ukraine putting a a future Ukrainian CBDC on the same level as other payment instruments, paving the way for the adoption of a CBDC if the country decides to do so.

Bank of Jamaica CBDC Trial Starts in August

The Governor of the Bank of Jamaica has announced the start of a pilot project in August to test the technical dimensions of a CBDC system.

The project will be run with a sandbox, with the aim of extending it between September and December to include commercial banks, authorised service providers for payments and deposit-taking-institutions.

Eventually the CBDC will be released through either the Real Time Gross Settlement systems or financial markets.

Global CBDC Challenge from MAS

The Monetary Authority of Singapore (MAS) has launched a ‘Global CBDC Challenge’ which looks to resolve some of the challenges of a retail CBDC. Innovators are asked to address 12 problem statements around the CBDC instrument itself, CBDC distribution and CBDC infrastructure. The statements cover areas such as privacy, anonymity and facilitating interoperability without common standards being in place.

The goal is efficient payment services and improving financial inclusion whilst delivering monetary stability. The challenge is supported by the IMF, World Bank, Asian Development Bank, United Nations Capital Development fund, UN High Commission for Refugees, UN Development Programme, and the Organisation for Economic Cooperation and Development. Tech firms including Amazon Web Services, Mastercard, Partier, R3, and the Mojaloop Foundation are also endorsing the initiative.

There will be three winners. The closing deadline was 23 July 2021.

Russia to Pilot a Digital Ruble from January 2021

The Central Bank of Russia (CBR) will finish its digital ruble prototype in December and start testing it in January 2022. The testing will be carried out with 12 banks with the aim of publishing a roadmap for a possible future implementation at the end of the testing.

The first deputy governor described the project as aiming ‘to create new payment infrastructure to improve the availability of payments and transfers and to reduce their cost for households and businesses.’ 

Alexey Zabotkin, Deputy Governor, spoke about the CBR’s CBDC plans as part of a panel at the Cyber Polygon 2021 event. He said the CBR is looking at a two-tier digital ruble where it maintains a centralised ledger on its own platform but ‘last mile access will remain in the hands of the commercial banks, plus, possibly other authorised and properly supervised payment service providers.’

He described ‘the possibility of setting conditions on permitted terms of use of a given unit of currency,’ and gave the example of parents giving digital currency to their children with certain restrictions, such as blocking them from buying junk food.

Zabotkin said that the digital ruble would be a choice, and that people could still use cash if they wanted to.

Need for a US CBDC Questioned

Randal Quarles, Vice Chair for Supervision at the US Federal Reserve, has set three objections to a US CBDC.

‘First, the US dollar payment system is very good, and it is getting better,’ he said. ‘Second, the potential benefits of a Federal Reserve CBDC are unclear. Third, developing a CBDC could, I believe, pose considerable risks.’

The Federal Reserve is well underway with its programme to introduce a faster payment programme.

Quarles also addressed some of the reasons often given for introducing a CBDC. He is unconvinced that a foreign CBDC would usurp the position of the dollar in the global economy and he argued that, rather than introduce a CBDC to increase financial inclusion, a better route would be taking steps to make cheap, basic commercial bank accounts more available to people for whom the current cost is burdensome. He thought stablecoins have the potential to create innovation and that CBDCs were likely to be a target for cyber crime as they sought new routes into the payment system.

He suggested that introducing a CBDC created some fundamental risks, saying an ‘arrangement where the Federal Reserve replaces commercial banks as the dominant provider of money to the general public could constrict the availability of credit, fundamentally alter the economy, and expose the public to a host of unanticipated, and undesirable, consequences’.

The evaluation of whether to introduce a future US CBDC required all of these concerns and thoughts to be addressed. Quarles ended up commenting on the costs and difficulty of managing a CBDC and the risk that a CBDC could politicise the Federal Reserve.

Bankers Offer ECB CBDC Guidance

The German Banking Industry Committee (GBIC) represents five national banking associations. It has issued a policy paper on the design of a ‘digital euro’ ahead of the launch of any European Central Bank (ECB) CBDC project.

The committee wants any future CBDC to be as easy for consumers to use as cash is, capable of automated machine-to-machine payments, which is important for businesses, and to operate within the European financial system. The GBIC wants credit institutions to continue to be responsible for issuing money.

With those goals in mind, the GBIC wants credit institutions to issue CBDC wallets so that digital euros can be used as cash is today, offline and anonymously. It would like to see a wholesale CBDC for use in capital markets and for interbank settlements because this would allow the ECB to digitise central bank accounts more than they are today. The GBIC believes this would benefit consumers, businesses and the banking sector.

The paper goes further than retail and wholesale CBDCs; it also wants tokenised commercial bank money which will complement these CBDCs. It believes that tokenisation would allow the credit institutions to exploit opportunities created by ‘Industry 4.0’ and the Internet of Things based on the efficiencies possible with ‘smart’ contracts. The paper calls for the ECB to define a framework that allows banks and industry to exploit these new opportunities.

CBDC Sceptic

The American Institute for Economic Research recently has published an article questioning the need for a digital dollar – ‘To CBDC or Not to CBDC’. It listed 11 reasons often given for issuing a CBDC and asked whether amendments to what exists wouldn’t be a better option.

For example, what does a CBDC do that a deposit guarantee scheme doesn’t? The US is updating its payment system to make it real time. When done, won’t that do what a CBDC does? If the unbanked won’t use banks today, why will they use a CBDC?

When it comes to programmable money, why not just modify existing infrastructure, such as Fedwire, to include Application Programming Interfaces?

If privacy is an issue, then central banks and governments could regulate to achieve this. It suggests short term cards, ‘burner cards’, are an example of the private sector innovating to deliver privacy.

Some of the article’s logic is more convincing than others, but it is an interesting reality check on the head long rush to CBDCs.