CBDC News

Germany’s Community Banks Concerned About a Digital Euro

Germany’s community bank group has argued that Central Bank Digital Currencies (CBDCs) should only be brought into circulation by commercial banks who should be ‘appropriately compensated’ for it. It wants to see limits on the amount that may be stored by retail customers and an outright ban on businesses using it as a store of value to counter the risks of bank disintermediation. In contrast, the Association of German Banks is generally supportive of a CBDC.

The community banks say a Digital Euro will need to be a better form of cash if it is to succeed, available offline and ‘as close to anonymity as the law permits.’

The banks argue that they should not bear the costs of implementing a Digital Euro, rather they should be compensated for their contribution. The banks would like the European Central Bank (ECB) to fund the digital wallet solution currently being created by the European Payment Initiative.

In addition to being worried about disintermediation if customer deposits are changed into Digital Euros, they are also worried about the risk of falling revenues from the payments market, arguing that banks will have to come up with sustainable and innovative business models to survive.

Cross-Border CBDC Co-operation Between India and the UAE

The Reserve Bank of India and the Central Bank of the United Arab Emirates have signed a memorandum of understanding (MOU) to work together developing digital currencies. The MOU explores a number of areas of fintech, particularly a CBDC. They will conduct proof-of-concept and pilot projects of a bilateral CBDC bridge to enable cross-border CBDC transactions. Interoperability will be key in this work.

The UAE is implementing a wide-ranging financial infrastructure transformation programme, of which this is part. It wants to make the country a financial and digital payments hub. The first stage of the plan includes a domestic card scheme, an instant payments platform, a domestic CBDC and cross-border CBDC transactions. The second stage, set to be complete by 2026, includes work on financial cloud, e-KYC and Open Finance platforms in an effort to improve regulatory compliance, reduce the cost of operations and to strengthen security and operational resilience.

BOJ to Start a CBDC Pilot

The Bank of Japan (BOJ) will start a pilot CBDC programme in April. The BOJ has been researching CBDCs for two years including running proof-of-concept experiments exploring establishing a ledger, issuing tokens, making payments, optimising payments, controlling the value of CBDCs users could hold and economic design. It explored both account and token based CBDCs and is said to have had problems with the latter.

A CBDC Forum will be established with private companies to explore with the BOJ how the CBDC works on apps and devices. Private sector institutions have been exploring integrating a CBDC with existing payment cards.

Swift Acts to Stay Relevant

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides services related to the execution of financial transactions and payments between banks worldwide. Its principal function is to serve as the main messaging network through which international payments are initiated.

Swift has carried out a 12 week sandbox test of an experimental method for interlinking CBDCs with existing fiat infrastructures. Participants included the Banque de France, the Deutsche Bundesbank, the Monetary Authority of Singapore, BNP Paribas, HSBC, Intesa Sanpaolo, NatWest, Royal Bank of Canada, SMBC, Société Générale, Standard Chartered and UBS. Almost 5,000 transactions were simulated between two different blockchain networks and with existing fiat-based payment systems.

Swift will now go on to develop a beta version. Further testing will include securities settlement, trade finance, and conditional payments.

Swift is positioning itself as the natural market-neutral option to support digital asset developments. Interoperability between CBDCs avoids liquidity traps and allows network effects.

Real Digital Pilot Guidelines Agreed

The Banco Central do Brasil (BCB) will begin the development of a platform to test a pilot Real Digital (RD). It has issued new guidelines for the project. The testing will be in a simulated environment and will evaluate the benefits of the programmability offered by a multi-asset Distributed Ledger Technology (DLT) technology platform for operations with tokenized assets.

One of the guidelines of Real Digital is that tokenized assets will follow their respective regulatory regimes in order not to generate asymmetry between the forms of these current and tokenized assets. Another guideline is the emphasis on the design of a DLT that enables the registration of assets of various natures and the incorporation of technologies with smart contracts and programmable money. Finally, it is worth mentioning the search for full adherence to the norms related to secrecy, data protection and prevention of money laundering.

As part of the pilot, a forum will be used to exchange information and views on the development of the platform, the testing and whether expectations have been met. The BCB technical staff and representatives of entities in the programme will take part. Business and development strategies will be discussed so that the RD serves the needs of Brazilian society. The Brazilian Securities and Exchange Commission will be part of the forum in order to coordinate discussions on the tokenization of assets.

Law of Unintended Consequences

The IMF has published a paper that highlights that the introduction of CBDCs can have negative spill over effects on monetary policy. CBDCs can affect money velocity, bank deposit disintermediation, volatility of bank reserves, currency substitution, and capital flows. Countries most vulnerable are those with banking systems dominated by small retail deposits and demand deposits, low levels of digital payments and weak macro fundamentals.

Central banks will need to ensure that unintended macroeconomic risks are comprehensively identified and mitigated.

Freedom First: Against a Digital Dollar

The Cato Institute is a public policy research organisation – or think tank – that creates a presence for and promotes libertarian ideas in policy debates. Perhaps unsurprisingly it has come out strongly against CBDCs. Its main complaint is about the loss of privacy implied by a digital currency. But it goes on to highlight the risks of financial control, negative interest rates, programmable spending, the risk of data loss and cybercrime, and the destabilisation of the financial system.