CBDC Round-Up

Laos Launches CBDC Trial

Laos has trialled a digital currency, the Digital Lao Kip, working with Soramitsu, a Japanese fintech company. Soramitsu worked with the National Bank of Cambodia’s Bakong digital currency in 2020. Bakong now has 8.5 million users who use a QR codes to make payments.

The motivation for Laos is financial inclusion. Some 70% of Laos’ seven million people don’t have a bank account, so cash remains the default payment tool. A further benefit could be a boost to trade and the payment of remittances if Laos can connect its digital currency with neighbouring countries.

Laos does face some challenges. Its digital infrastructure is poor so that only 43% of people have access to the internet. The regional average is 70%. In addition, the cost of the internet is expensive, $53 per month, meaning that many people can’t afford it.

Digital Real is a Platform for Financial Innovation

In March 2023 Brazil’s central bank chose the Digital Real platform to be used in transactions. Since then, it has enabled 16 consortia to develop financial tools and instruments that will be tested in the new system. The central bank has now started pilot tests to explore this CBDC technology and to develop potential use cases in the financial system with the aim of going live by the end of 2024.

This new platform will be called Drex, with each letter representing a feature of the currency. The ‘D’ represents the word digital, the ‘R’ represents the real (Brazil’s currency), the ‘E’ represents the word electronic and the ‘X’ conveys the idea of modernity and connection.

Drex is the underlying platform that enables end-users to access Digital Real via virtual wallets linked to a payment institution, such as banks and banking correspondents. Customers will deposit funds in these wallets and will then be able to make transactions with the digital version of the currency.

The concept is that while Pix will be used mostly for commercial transactions, Drex will be used to buy real estate, vehicles, and even government bonds.

In the past the IMF has praised Brazil’s instant payment system Pix, which it regards as having already achieved significant financial inclusion benefits in Brazil. It has now praised this Digital Real project, noting that Drex is introducing additional layers of innovation and describing it as a ‘smart platform seeks to harness the benefits of a public blockchain in a safe and reliable environment.’

It regards a Drex as providing a secure platform for the private sector to create innovative solutions using new technologies.

Colombia Contemplates CBDCs

Banco de la República, Colombia’s central bank, has issued a CBDC study – ‘Expected Macroeconomic Effects of Issuing a Retail CBDC’. It does not see a retail CBDC as a significant macroeconomic risk but does think that were it to issue one, it should have holding and spending limits.

The bank identifies three benefits:

Holding limits could reduce the incentive of cyber attacks targeting balances and transactions.
The regulator could allow people to hold different holding limits in line with different levels of transparency on how the money was used, a trade-off between privacy and transparency.
CBDC limits would reduce the demand for CBDC money as store of value, which would reduce commercial bank money holdings.

The central bank notes that a CBDC would need to offer sufficient benefits to generate a core group of users big enough to generate enough network externalities to make it viable.

The central bank does not have any plans to issue a CBDC at this time.

The Demand Side of Retail CBDCs

The CFA Institute surveyed its members about the implications of CBDCs for capital markets and investment practitioners. 5% of the CFAs 90,000 members responded, 4,157 people around the world. The survey explored the demand for CBDCs.

It found limited understanding of and support for CBDCs, 24% had no opinion about launching a CBDC and only 13% had a strong understanding of them.

42% of respondents believe that central banks should launch CBDCs, while 34% disagreed. Younger respondents, those in the Asia-Pacific region, including China and India, and those in developing economies were significantly more favourable to CBDCs.

Whether an advanced (AE) or emerging market economy (EME), accelerating payments and transfers was the top reason for supporting CBDCs. In EMEs, financial inclusion was important. Key concerns were cybersecurity and fraud, data privacy, and lack of use cases.

Other findings were that public acceptance is not assured. Public opinion remains an empty slate, presenting an opportunity for central banks to build public support for CBDCs.

A majority believes that CBDCs can coexist with private cryptocurrencies—but also that private money will always be inferior. That underlines concerns about disintermediation and financial instability.

The question of use cases is an existential concern. The paper cited these examples:

The House of Lords Economic Affairs Committee of the UK Parliament published a report titled ‘Central Bank Digital Currencies: A Solution in Search of a Problem?’
In the United States, a Federal Reserve governor, Christopher Waller, gave a speech in 2021 bearing the title ‘CBDC: A Solution in Search of a Problem?’
In Europe, a paper for the European Parliament Committee on Economic and Monetary Affairs appeared under the title ‘Digital Euro: When in Doubt, Abstain (but Be Prepared).’
In May 2023, the Financial Times published a Big Read article under the headline ‘The Digital Euro: A Solution Seeking a Problem?’

While the number of respondents was relatively small, and skewed to North America and AEs, this paper is an interesting summary of the challenges and opportunities facing CBDCs.

Mastercard Addresses CBDC Questions

Mastercard is looking to address how CBDCs could work with existing payment mechanisms. It is querying what problems a CBDC is solving and whether alternative solutions might not be a better answer. It has questions about the role of the private sector in CBDC issuance, security, privacy and interoperability.

To address these, it is launching a new partner programme with Ripple, Consensys, Fluency, Idemia, Consult Hyperion, G+D and Fireblocks already signed up.