CBDC Round-Up

BIS Project Addresses Trade-Offs for Resiliency, Scalability and Privacy

The Swiss Innovation Hub of the Bank for International Settlements (BIS) has started project Tourbillon, which will explore how to improve cyber resiliency, scalability and privacy. A prototype should be finished by mid-2023 and the solution will be useful for both wholesale and retail CBDCs.

The project is following approaches suggested by David Chaum and Thomas Moser put forward in their eCash 2.0 study ‘Inalienably Private and Quantum- Resistant to Counterfeiting.’ The work will look at quantum-resistant cryptography, an underlying architecture that works with distributed ledger technology while not being based on it, by separating transactions so that the systems resources can scale linearly and by providing privacy for the payment sender rather than the recipient.

The challenge is to achieve system, ledger and transaction security, scalability and privacy in equal measure.

India Kicks-Off Retail CBDC Pilot

The Reserve Bank of India has started its first pilot programme for a retail CBDC, the e-rupee. It began its wholesale CBDC pilot on 1 November, working with nine banks.

The retail pilot is based on a closed user group of customers, merchants and locations working through four commercial banks in four locations. The pilot uses a digital wallet stored on mobile devices, and transactions with merchants and other people will be via QR codes. While payments are possible, the e-rupee being used cannot be converted to other forms of money such as bank deposits.

The second phase will see a further four banks included and nine new cities. This initial pilot is to test the robustness of the entire process of digital rupee creation, distribution and retail usage in real time.

CBDC Macroeconomic Literature Review for Central Bankers and Senior Managers

The Federal Reserve has published a literature review of the macroeconomic implications of a CBDC ¹. The paper examines the risks of introducing a CBDC – disintermediation, adverse effects on financial stability and concerns about monetary policy implementation and the footprint of central banks in the financial system. It highlights the importance and impact of remuneration as an aspect of a CBDC’s design.

If a CBDC is not interest bearing, it is less attractive as a store of value and becomes more ‘cash like.’ Its usage would be determined by how much convenience it provides, relative to its money-like rivals. The convenience yield of CBDC, its nonpecuniary benefits which can differ with the application, is a recurrent theme in the literature.

BdE to Run Wholesale CBDC Pilot

The Bank of Spain (BdE) is looking to test wholesale CBDCs. BdE has said the work will simulate the movement of funds, experiment with the liquidation of financial assets and analyse the benefits and drawbacks of introducing a wholesale CBDC to what exists today. This work is separate from work being done looking at a digital euro.

BdE is looking for local partners to work on the project with applications closing at the end of January 2023.

Further Work on Wholesale CBDCs: New York Fed Reserve and MAS

The New York Federal Reserve and the Monetary Authority of Singapore (MAS) are working on Project Cedar Phase II x Ubin+. This is a wholesale CBDC (wCBDC) experiment looking at cross- border wholesale payments involving multiple currencies. The challenge is to establish connectivity across multiple heterogeneous simulated currency ledgers. If this can be done, then this should reduce settlement risk.

Phase I of the project found that using a wCBDC prototype to facilitate transactions supported by blockchain technology could improve the speed and safety of cross- border wholesale payments.

Further Work on Wholesale CBDCs: France and Luxembourg

The Banque de France (BdF) and Banque Centrale de Luxembourg (BCdL), working with the European Investment Bank (EIB) have conducted the ‘Venus Initiative.’ The project provided a safe settlement asset in the form of a token that represented euro central bank money.

The EIB issued a bond under Luxembourg law worth €100 million and used Goldman Sachs, Santander and Société Générale as banking syndication to issue and distribute the digital native bonds.

The bond was issued and registered on a permissioned DLT, and the subscriptions were cash settled using experimental CBDC tokens issued on a distinct permissioned DLT jointly operated by the central banks.

The partners also developed and deployed a trusted message exchange mechanism between DLTs, encompassing a Hashed Time lock Contract protocol, to allow for the simultaneous experimental CBDC tokens transfer and digital native bond delivery the same day of the issuance.

Nathalie Aufauvre, General Director, Financial Stability and Operations, Banque de France says the experiment ‘shows how digital assets can be issued, distributed and settled within the Eurozone, in a single day. The Venus Initiative confirms that a well-designed CBDC can play a critical role in the development of a safe tokenised financial asset space in Europe.’

Spanish Commercial Banks’ Working Group to Look at the Digital Euro

Up to 30 Spanish commercial banks have set up a working group to assess the impact on them if the European Central Bank (ECB) introduces a digital euro.

A proof of concept (POC) is planned to deliver an in-depth analysis of technical, operational and business implications of a digital euro and how it might work alongside what exists today. This will be complete by the end of 2023.

The POC will examine the different use cases proposed by the Eurosystem for the digital euro. The modelling assumes the banks will be the custodians of the digital currency accounts and will explore both e-commerce and physical commerce payments, and person-to- person remittances.

Bank of England to Develop a Sample Wallet

The Bank of England is offering a contract for a five-month project to develop a sample wallet for a CBDC. Worth £200,000, the wallet should include a signup process, a way to update details, and to display balances, transactions and notifications. Other specifications include the ability to request P2P payments through an account ID or QR code and the means for online business payments.

The project needs to develop a mobile wallet app, wallet, merchant website and back-end server that works with the mobile app and website, interacting with the core ledger API to store user data and transaction history.

1 - The Macroeconomic Implications of CBDC: A Review of the Literature.