Round-Up of CBDC News

Countries Announcing Work on CBDCs

Central banks making statements about investigating or working on Central Bank Digital Currencies (CBDCs) this month include Bank Indonesia, the Bank of Korea (pilot June 2021-January 2022), Bank of Mauritius, the South Africa Reserve Bank (retail CBDC), and the Bank of Thailand.

The Central Bank of Brazil, who announced that a CBDC may be ready as early as next year, has now said that a CBDC may be two or three years away.

Sweden’s Riksbank has announced that it will work with Handelsbanken and TietoEvry, a software firm, to test the integration of payment flows between existing systems and the e-krona’s technical platform.

The Bank of Ghana has announced that it is at the implementation phase of an e-Cedi and is looking to move into the pilot stage for a feasibility study.

As a reminder, in May CBDC announcements were made relating to Brazil, Georgia, Japan, Kazakhstan, Norway, Pakistan and Russia.

Bitcoin Made Legal Tender in El Salvador

Just as El Salvador announces that bitcoin is legal tender, the Basel Committee for Banking Supervision has issued a consultative document proposing that banks will need to hold capital equal to the full amount of their crypto asset exposure. It has placed bitcoin in its highest risk category. In 2001 El Salvador decided to stop issuing its own banknotes and to use the US dollar instead. It sees bitcoin helping with cross border remittances back to El Salvador.

Speaking at the launch of the London Innovation Hub (see page 9), Benoît Coeuré of the Bank for International Settlements said: ‘we have been clear at the BIS that we don't see bitcoin as having passed the test of being a means of payments. Bitcoin is a speculative asset and should be regulated at such.’

There appear to be some challenges ahead in El Salvador about this decision. Remittances normally flow from developed countries to individuals who depend on remittances in emerging markets. These individuals usually operate in cash and unless the infrastructure is in place, and they know how to do this, converting bitcoin to cash may not be straight forward.

A further disincentive for payment companies to work in this space is the annual compliance costs involved relating to crypto assets. Western Union’s annual compliance costs are reported to have doubled from about $100 million to $200 million in the last decade.

Bank of Thailand to Work with G+D on Retail CBDC Project

The Bank of Thailand has been doing considerable work on CBDCs for some time. In 2019 it concluded its Project Inthanon, which was a wholesale CBDC based on R3’s Corda technology in conjunction with CtryptBLK. It is also working on using CBDCs for cross border transactions with the Hong Kong Monetary Authority and ConcenSys, and is part of a multi-CBDC project with the central banks of China and the UAE as part of the BIS Innovation Hub.

Last year the Bank announced that it was working on a retail CBDC using enterprise Ethereum technology in a project with ConsenSys and Digital Ventures, a subsidiary of Siam Cement.

The Bank has now announced it will create a prototype retail CBDC working with Giesecke+Devrient (G+D). G+D has also been working on CBDCs for some time and has only recently made this public, providing information on its Filia solution and joining organisations such as the Digital Monetary Institute. Filia offers the option of a centralised database approach or using distributed ledger technology. The value of this proof-of-concept prototype contract is $320,000.

China’s DCEP Trials Reach Beijing

The People’s Bank of China’s (PBOC) trial of its Digital Currency Electronic Payment (DCEP) system continues to move along, with mass testing starting in Beijing. PBOC will issue 200 yuan, about $31, to 200,000 people through a lottery in the form of its digital yuan.

The experiment is time limited, 11-20 June, involving 2,000 retail locations, presumably to encourage people to use the system.

Similar trials have also taken place in six other major cities.

French/Swiss Evaluation of Wholesale CBDC

Banque de France and the Swiss National Bank will work with the BIS Innovation Hub and a coalition of private sector partners to evaluate a wholesale CBDC. Accenture will lead a partnership of Credit Suisse, Natixis, R3, SIX Digital Exchange and UBS to work on the project.

Project Jura, as it is known, will work on cross-border settlements based on digital versions of the euro, the Swiss franc and a French digital financial instrument. It will test two settlement systems, ‘delivery versus payment’ and ‘payment versus payment’, and will be based on DLT.

Bank of England Consults on Digital Money

The Bank of England has issued a discussion paper to consider new forms of digital money, in particular stablecoins, which it defines as ‘digital tokens issued by the private sector which aim to maintain a stable value at all times, primarily in relation to existing national currencies’.

For stablecoins to work as payment option, the Bank expects them to maintain a stable value at all times, to be redeemable one-to-one with state money and to have a robust legal claim. To do that, a regulatory model will be needed that includes capital requirements, liquidity requirements and support from a central bank, and a backstop to compensate depositors in the event of failure.

The paper also reported on the feedback from its CBDC consultation. It said that while the Bank was seen as providing a minimum level of infrastructure commensurate with creating a reliable, resilient, fast and efficient system, the private sector should take a leading role in meeting the needs of end users.

There was a view from some respondents that perhaps the intended benefits of a CBDC could be achieved through other forms of payment innovation.

Other topics that came up frequently were privacy, financial inclusion and the competitive environment.