A Busy Month for CBDCs

ECB: PUBLIC CONSULTATION

On 12th October the European Central Bank (ECB) opened a public consultation on the creation of a Digital Euro, a Central Bank Digital Currencies (CBDCs). The logic is that the increased usage of digital payments may mean that a Digital Euro is needed to safeguard citizens. A decline in cash usage or the launch of a private sector digital currency, such as the Libra, may also require a Digital Euro that addresses regulatory concerns and maintains financial stability.

At the same time the European Union has launched a public consultation for a Retail Payment Strategy and during a webinar about it, a Digital Euro was also discussed. The European Commission’s head of retail financial services and payment unit, Eric Ducoulombier, said, ‘A digital euro solution should not crowd out solutions that come from the private sector. In the ECB report, it is highlighted that such a solution would be complementary to private sector opportunities. There should not be rivalry or competition.’ At a virtual IMF event the ECB president Christine Lagarde said “A digital euro will never be a substitute for cash. It is a very good supplement and a very good partial substitute for what was being done physically.” 

AUSTRALIA: NOT CONVINCED ABOUT RETAIL CBDCs

The head of payments policy at the Reserve Bank of Australia (RBA), Tony Richards, spoke recently about CBDCs giving a different perspective. His view is that Australian businesses and consumers are already served by an efficient, resilient and data rich payments system, including the recently ‘New Payments Platform’, which is a real-time, 24/7 electronic payments system. The RBA is though researching the technological and policy implications of a potential wholesale CBDC. The RBA has gone as far as developing a limited proof-of-concept of a DLT-based interbank payment system using a tokenised form of CBDC backed by ESA balances.

Tony Richards said, ‘Currently, the Bank is collaborating with a number of external parties on a project to extend this proof-of-concept to incorporate tokenised financial assets to explore the implications of delivery-versus-payment settlement on a distributed-ledger platform as well as other programmability features of tokenised CBDC and financial assets. This is interesting research and we will be providing further information on it in due course.’ 

THE BAHAMAS: PHASE II

The Central Bank of The Bahamas will gradually release a digital version of the Bahamian dollar nationally, outside of the pilot regions of Exuma and Abaco, through authorised financial institutions (AFIs), beginning on 20th October, 2020. This initiative has acquired the name Project Sand Dollar, with the sand dollar also being the name assigned to the CBDC.

The first phase of the national rollout, focused on the immediate readiness within the private sector, covering all three tiers of authorised accounts. These account tiers are each subject to risk-based customer due diligence or “KYC” requirements. These are low-value personal wallets with the least demanding account opening requirements but with more restricted transaction limits; regular personal accounts in line with the established, flexible customer due diligence for existing banking and financial services; and business or enterprise accounts, subject to further KYC rigour and with higher limits for transactions and holdings of the digital currency.

The second phase of national engagement will target Government services and public utilities, becoming more intensive over the course of the first and second quarters of 2021.

The intended outcome of Project Sand Dollar is that all residents in The Bahamas would have use of a central bank digital currency, on a modernized technology platform, with an experience and convenience—legally and otherwise—that resembles cash. It is expected that this will allow for reduced service delivery costs, increased transactional efficiency, and an improved overall level of financial inclusion.

CBDC: Foundation Principles and Core Features

The Bank for International Settlements has issued a first report of the work of seven central banks ¹ to collaborate on the feasibility of creating a publicly available CBDC to deliver central bank policy objectives. Although the group expressed no opinion about whether they would issue a future CBDC and made no commitment to issue one, this work summarized a broad range of areas where there is agreement. This is particularly important to allow shared policy and technology learning and since in the future broad interoperability across borders may be wanted.

They have defined a CBDC as being, ‘a digital payment instrument denominated in the national unit of account, that is a direct liability on a central bank.’ ² The paper describes three types of money, two of which are central bank money and one of which is supported by central banks: cash, used by the public; electronic central bank deposit money, used by banks and financial organisations as reserves and for settlement; private money, electronic commercial bank deposits. ³

The work has established three key principles:

1. Co-existence with cash and other types of money in a flexible and innovative payment system;

2. It should support wider policy objectives and do no harm to monetary and financial stability;

3. Features of the CBDC should promote efficiency and innovation.

The core features identified are:

• Resilient and secure to maintain operational integrity;

• Convenient and available at very low cost or not cost to end users;

• Underpinned by appropriate standards and a clear legal framework;

• Have an appropriate role for the private sector, as well as promoting competition and innovation

The group see a CBDC as working alongside physical cash and lays out why a general purpose CBDC might be useful as well as the risk, particularly financial stability risks, involved. The paper is clear that any decision to launch a CBDC would depend on an informed judgement that the risks can be managed.

It looks at the instrument, system and institutional features needed and how these flow through to the design and technology. Future reports will deal with these in more detail.

1 - Bank of Canada, European Central Bank, Bank of Japan, Sveriges Bank, Swiss National Bank, Bank of England and the Federal Reserve Bank.

2 - The paper discusses synthetic CBDCs but discounts them since they are ‘narrow’ money, meaning they are required to be backed, which limits their liquidity in the case of an emergency. In addition, the profit motive of the providers means they will not be open and inclusive in a way a central bank issued CBDC can be.

3 - Central banks support private money by allowing commercial banks to settle interbank payments using central bank money, enabling convertibility between commercial bank and central bank money through the provision of banknotes and offering contingent liability through acting as a Lender of Last Resort.