CBDC Round-Up

Drive to CBDCs Maintaining Momentum

The Bank for International Settlements (BIS) has surveyed 86 central banks and found over half are conducting concrete experiments or piloting CBDCs. 93% are doing some kind of CBDC work, three percentage points more than last year. At the same time, the number saying they are unlikely to issue a CBDC in the near future has increased driven by the crypto market crash.

Perhaps counter intuitively, work on retail CBDCs is more advanced than on wholesale CBDCs. 15 retail and nine wholesale CBDCs are expected to be issued by 2030. Central banks see potential value in having both a retail CBDC and a fast payment system. Emerging Market Economies are pursuing CBDCs to get more people into the banking system.

The BIS has also issued a paper exploring the motivations for issuing a CBDC around the world. Different motivations drive different policy approaches and technical designs. This paper includes a comprehensive database of these based on central bank speeches and technical reports.

Countries that have large informal economies tend to be more advanced in their work on retail CBDCs, although the majority of projects are in economies that are already digitised.

The most common approach is for the CBDC to be a direct claim on the central bank in the same way that cash is, but with the private sector that handling customer-facing activities. The paper concludes with an in-depth description of three very different CBDC approaches – those in China, Sweden and Canada.

Clarity Needed on the Purpose of a Digital Pound

The Bank of England has suggested that the limit on digital pound holdings might be much higher than the European Central Bank’s €3,000, a sum of between £10,000 and £20,000 per individual has been suggested as an appropriate balance between managing risks and supporting wide usability of the digital pound. UK Finance, which represents 300 banks and fintechs, is concerned it could result in a run on bank deposits and is suggesting £5,000 to avoid panic and deposit flight.

UK Finance has also said that the Bank of England has to lay out clearly what objectives and needs the digital pound is expected to meet and why it is best suited to meet those needs.

IMF to Create Global CBDC Platform

The International Monetary Fund’s (IMF) Managing Director, Kristalina Georgieva, speaking at a central bank conference in Morocco, has said that it is working on a CBDC platform to allow transactions between countries.

A common regulatory framework is required for global interoperability. A CBDC that is only designed for domestic use will not fulfil its potential. The average cost of money transfers is 6.3% amounting to $44 billion each year.

Georgieva pointed to some of the challenges of cryptocurrencies and the need to avoid the problems that they have, including the fact that they need to be backed by assets if they are to avoid being purely speculative investments.

MAS Serious About Digital Currency Adding Value

The Monetary Authority of Singapore (MAS), working with the IMF, the Bank of Italy, Bank of Korea, financial institutions and FinTech firms, has issued a white paper proposing a common protocol for CBDCs. In fact, it goes further than that, including digital currencies, stablecoins and tokenised bank deposits on a distributed ledger.

The technical specifications proposed would allow users to use their preferred wallet provider irrespective of the form of money or the underling ledger technology. It also addresses business and operating models for programmable transactions. This work builds on MAS’s Project Orchid.

Financial institutions and FinTech firms will now trial the proposed approach. The functions and capabilities being tested should improve the customer experience and reduce payment friction for merchants. The aim is for digital money to become a key part of the future financial and payment landscape because it adds value.

Swiss Banks Position Themselves for a Future Digital Ecosystem

The Swiss Bankers Association is getting ahead of the game by enabling a digital Swiss franc, based on tokenised deposits, to work well. The aim is to allow Swiss banks to work with deposit tokens and this requires a robust legal and economic framework which is compliant with regulations. Based on this the solution will need technical viability, scalability, functionality, and alignment with the objectives of enhancing efficiency and resilience.

11 Swiss banks, the regulatory authorities, industry stakeholders and technology experts are co-operating. The project is not working in isolation but is linked to other initiatives in Switzerland.

Sand Dollar Wallet Upgrade Underway

In an attempt to boost use of the Sand Dollar, the Central Bank of the Bahamas is working to create a smoother interface and better user experience for its mobile wallet. This should be ready for September.

Enhancements include:

• Self-onboarding

• Secure wallet recovery

• An optional memo field, which allows additional transaction details to aid reconciliation

• A list of frequent contacts with whom wallet holders regularly transact

• The ability to top-up wallets from commercial bank accounts via online banking domestic transfers.

India Links UPI to its CBDC Pilot

India is running pilot programmes for retail and wholesale transactions using CBDCs. By the end of June, the retail CBDC pilot had one million users and 262,000 merchants. The Reserve Bank of India (RBI) has been actively encouraging banks and fintech firms to be involved and to increase transactions.

As part of this programme, the RBI is working to ensure a CBDC in India will work with its Unified Payments Interface (UPI). The aim is for customers to be able to use the UPI QR code to transact with a CBDC. It will be possible for merchants without a CBDC account to make transactions, with the payment being directed to their UPI account.

The aim is for this to be ready by the end of July 2023. 13 banks have adopted the interoperability programme and the goal is for 20-25 banks to use it.

At the moment banks process 5,000-10,000 transactions per day using CBDCs. The goal is for this to reach one million by the end of 2023. 300 million transactions currently take place using UPI each day.

One motivation for this work is to reduce transaction costs, particularly for cross-border payments where the cost can exceed 6%.