CBDC Round-Up

Wholesale Digital Euro the Priority

Bruegel, a Brussels based European think tank, has published a paper considering the value added by CBDC in the context of the euro area ¹.

For Europe, financial inclusion is perhaps less important than responding to the increase in the digitalisation of finance. Equally, cryptocurrencies and stablecoins are only infrequently used for transactions, meaning that cash and the current commercial money systems have not been undermined. The need for a retail CBDC does not appear to have a strong case.

Wholesale CBDCs do offer the chance to revolutionise cross-border, cross-currency payments. Today these are slow, inefficient and expensive. If two central banks had operational CBDCs, they could settle transactions between themselves rather than the current cumbersome infrastructure and use of correspondent banks.

Particularly for the US dollar and the euro area, this would have geopolitical implications. Engagement in developing a wholesale CBDC would allow the European Union to help develop a global standard.

BCB’s CBDC Pilot Goes Live

Banco Central do Brasil (BCB) is allowing 14 entities to join its digital real platform and starting its pilot phase. Some of these are joint groupings, for example Microsoft, Banco Inter and 7COMm are one grouping. As well as international banks such as Santander and the payment service providers Mastercard and Visa, several Brazilian banks are involved.

The pilot will assess the CBDC platforms, privacy and programmability capabilities. The platform uses blockchain and distributed ledger technology to process tokenised assets. It will be tested using specific user cases, testing delivery against payment protocols for federal public securities. All this will happen in a ‘simulated environment’ rather than real-world.

Brazil already has a lively cryptocurrency market and the country’s instant payment platform, Pix, has been hugely successful.

BCB is looking to launch a Digital Real perhaps as early as the second half of 2024, assuming this testing phase goes well. The goal is to boost the provision of retail financial services, and make easier transactions settled using tokenised deposits within Brazil’s financial and payment systems. No doubt Pix will play a role.

Hong Kong Focuses on e-HK Potential Uses

The Hong Kong Monetary Authority (HKMA) has chosen 16 companies to take part in its e-HK pilot programme. HKMA ran technical and policy scoping work in the run up to the pilot.

The project choices give an indication of the user cases being explored:

• Full-fledged payments

• Programmable payments

• Offline payments

• Tokenised deposits

• Settlement of Web3 transactions

• Settlement of tokenised assets.

The selected companies will work with HKMA to examine these user cases and their implementation and design. In addition to a number of banks, Ant Group’s Alipay, Ripple Labs, Visa and Mastercard will also be involved. A CBDC Expert Group of university academics will advise on issues relating to privacy protection, cybersecurity and interoperability.

Summary of Major Economy Latest CBDC Policy Perspectives

Seven central banks ² and the Bank for International Settlements (BIS) ³ have issued a report on how their thinking on CBDC policy perspectives have developed since 2021. Since 2020/2021, considerable work has gone into CBDCs, and they are approaching a point where decisions to engage even more deeply may be taken.

Key findings are:

1. Development of CBDC work requires careful consideration and engagement with a wide range of stakeholders, including the private sector and legislators

2. To successfully meet its public policy objectives, a CBDC ecosystem should allow a wide range of private and public stakeholders to participate and, in doing so, deliver services which benefit end users.

One point made here is that central banks may need to consider the optimum level of adoption needed to meet their public policy objectives.

Interestingly it notes that the management of banknotes already gives central banks expertise in creating and managing a sophisticated value chain for a mass market retail product. This may be useful even if CBDCs have a different value chain.

• The complex design questions and the potential risks arising from the implementation of any CBDC require careful consideration.

In designing and implementing any measures, central banks would need to be mindful of central bank balance sheets, interaction with bank regulation and how CBDC compares with other forms of money.

CBDCs, if issued, must be interoperable with other forms of money and existing payment systems. CBDC s would need to connect with instant payment infrastructure, and CBDC transactions may need to be processed at point of sale (PoS) terminals.

• The evolving payments landscape requires central banks to give some consideration to how CBDCs may be used for wholesale and cross-border use cases.

Compared with today’s central bank reserves, wholesale CBDC might enable programmability, composability and tokenisation within the future financial system.

In the Annex the paper discusses different options for industry and public engagement, key legal issues, what tools will be needed to manage stressed conditions and the implications of using blockchain technology and associated concepts in CBDC.

Thailand’s Retail CBDC ‘Pilot to Learn’

The Bank of Thailand (BOT) is better known for its work on wholesale CBDCs, but it has now started a retail CBDC pilot with three payment service providers operating in a regulatory sandbox – Bank of Ayudhya (Krungsri), Siam Commercial Bank and 2C2P, a Singaporean based payment service provider. The project is said to be running with 10,000 users. The BOT is referring to this as a ‘pilot to learn’ rather than as a pilot.

The challenge is to differentiate the CBDC from the PromptPay service. The participants are providing an app, including a wallet and a QR code scanner, and recruiting merchants and users.