CBDC Round-Up

Digital Euro Thinking Evolves

The European Central Bank (ECB) has issued a progress report on the digital euro. The ECB’s thinking is in development, with a final decision to be made at a future date. A notable element in the report is the work on how the digital euro may be made available and harmonised with existing payment systems. Banks may have to provide mandatory core services to end-users but will then be allowed to offer additional functionalities such as conditional payments or bill splitting.

The ECB has run focus groups around Europe and a common requirement identified is a basic function is person- to-person (P2P) payments. Offline payments are seen as useful, as are budget management tools and conditional payments, for example payment on delivery and pay-per-use.

Distribution of a digital euro should be via apps and digital and physical cards. At the point of sale (POS) it will need to work with QR codes and Near Field Communication technology for contactless payments.

Originally the thinking was that only euro area residents, merchants and governments would have access to a digital euro. Non-resident euro area citizens would need to have an account with a euro area-based payment service provider. The latest thinking suggests consumers from selected third countries could also have access. The ECB is anticipating cross- currency functionalities with other CBDCs.

Separately, Fabio Panetta, Executive Board member at the ECB, has said that merchants should have to accept a future digital euro as legal tender and that people and businesses should be able to access it at their banks.

Panetta was speaking to the European Parliament’s committee on economic and monetary affairs.

Meanwhile, the Economic Governance and EMU Scrutiny Unit has issued a report on the digital euro at the request of the European Parliament’s Committee on Economic and Monetary Affairs.

The report finds that at the present time, the risks and imponderables of this enterprise are stronger than the arguments in favour of it. Unless new elements emerge, the ECB should not issue a digital euro.

One issue is that a digital euro would compete directly with banks and other payment service providers. The report’s issue seems to be the chance of success rather than competition itself – ‘it is not clear that there is a market niche for a potential digital euro (PDE), nor that a PDE would have a good chance of establishing itself in today’s highly diversified, competitive, innovative, and fast moving retail payment industry.’ The risk of a digital euro accelerating a bank run during a crisis was highlighted.

Finally, the report was sceptical that a digital euro would increase financial inclusion in the eurozone, although it may help reduce the high costs and delays of cross-border workers’ remittances.

IMF to Issue a CBDC Handbook

With nearly 90% of central banks doing some work on a CBDC, it is perhaps little surprise that the International Monetary Fund (IMF) is to publish a CBDC handbook. The IMF is already working with 30 central banks on CBDCs.

The IMF’s priority is to ensure CBDCs foster domestic and international economic and financial stability. Its handbook will act as a reference document summarising CBDC knowledge and experience.

The IMF issued a policy paper on 11 April outlining its approach to CBDC capacity development, outlining a multi-year strategy to help member countries meet challenges regarding digital currencies.

Snapshot of e-CNY Progress

Changsha, located in Hunan Province in central China, joined China’s digital yuan (e-CNY) pilot project in April 2021. With a population of 10 million people, two years later over 420,000 merchants accept the e-CNY. These are physical businesses, not online vendors. 800,000 ‘public’ wallets have been opened by firms and government organisations. 62 million transactions have taken place with a total value of over $1.4 billion.

Similarly named Changshu City, which is in East China’s Jiangsu province, has announced it will pay the salaries of civil servants and state-owned unit using e-CNY. Changshu has a population of 1.5 million.

The People’s Bank of China (PBoC) has been working hard to make the e-CNY more useful for the public. It has been embedded into WeChat, which has more than a billion active monthly users, so that the express payments function of the e-CNY wallet can be used. Users can pay for orders on WeChat’s mini-programs and platforms such as food delivery sites and at grocery stores. The e-CNY is also enabled on Alipay.

The e-CNY is being tested in 23 cities and regions in 15 provinces and provincial level cities with the aim of establishing its reliability and ease of use. 5.6 million commercial outlets accept the e-CNY and transactions with a value of over 100 billion yuan, $14 billion, have been made.

Although this is impressive, the growth rate is relatively small. In 2021 87.6 billion yuan was transacted.

Visa Programmable CBDC Prototype Helps Brazilian Farmers

The Banco Central do Brasil has asked business to identify user cases for a CBDC, its ‘Lift Challenge Real Digital’. Visa was one of nine companies selected, having submitted a proposal for a programmable finance platform for farmers using a CBDC. Visa worked with Microsoft, Agrotoken and Sinqia.

The programmable finance platform is designed to provide local farmers with more timely and greater access to a global pool of investors for financing, allowing them to get the best price discovery for their goods.

It should be possible, for example, for a soybean farmer to create and globally auction a tokenised contract on a permissioned version of the Ethereum blockchain, while utilising different forms of money and interoperating between themselves and the buyer.

Public Consultation on a Canadian CBDC

The Bank of Canada (BOC) has launched its first public consultation on a possible CBDC. It is asking the public how they might use a CBDC and what security and privacy features it should have. Ultimately the decision to launch a possible CBDC lies with the federal government, but the BOC is doing the research to inform that decision. There is no current plan to issue a Canadian CBDC.

In its press release, the BOC refers both to a future decline in the use of cash for day-to-day transactions and the possibility that private cryptocurrencies or CBDCs issued by other countries could become widely used in the future. The BOC sees such a development as compromising the role of a an official, centrally issued currency and pose a risk to the stability of the financial system.

The consultation closes on 19 June and the BOC will publish a report on its consultations later this year.