CBDC Round-Up

DeFi Technology Concepts Tested X-Border by the BIS

The Bank for International Settlements (BIS) has used decentralised finance (DeFi) technology concepts on a public blockchain to trade and settle hypothetical euro, Swiss franc and Singapore dollar wholesale CBDCs across borders between simulated financial institutions. An Automated Market Maker was used to trade and settle foreign exchange automatically.

Project Mariana was conducted by Banque de France, Swiss National Bank and the Monetary Authority of Singapore, along with the BIS hubs in Europe, Switzerland and Singapore.

Tokenisation and DeFi are very new and so the BIS was keen to explore their potential for possible future use.

The Contribution of CBDCs to Financial Inclusion

The IMF has issued a paper looking at how CBDCs can contribute to financial inclusion. 60% of Emerging Market Economies see financial inclusion as one of their top three reasons for introducing a CBDC.

The logic is that payments form the foundation of financial services, encompassing deposits, withdrawals, overdraft credit lines, and repayments, which are increasingly becoming digitalised. The ‘cash-digital divide’ drives a wedge between low-income households and the formal economy by making it costly for banks, insurance companies, and other institutions to transact with them. CBDC, once adopted by the financially excluded, can serve as an entry point to the broader formal financial system.

To do this, CBDCs need to be designed to address the barriers to financial inclusion. They will need to replicate some of the desirable properties of cash, as ‘digital cash’. For example, be useable without a bank account, for small transactions with no or low fees and with less stringent identification requirements for low-risk populations that have challenges obtaining formal identity documentation. CBDCs could even be designed to operate in offline environments.

As with many other digital products, once users are engaged with them, they would allow people to engage with other digital financial service providers and develop a credit history. Digital exclusion, in the form of poor infrastructure, digital literacy and digital identification, needs action.

The impact of CBDC for improving financial inclusion is currently speculative, but they can be considered as one component of a broader set of measures to improve financial inclusion.

Further evidence and experience are needed. The IMF paper includes a step-by-step framework to help assess CBDC’s value proposition for improving financial inclusion in a country.

Central Banks Urged to Move on CBDC Frameworks

The BIS has urged countries to modernise their legal frameworks ready for CBDCs. Key areas of focus are legitimacy, privacy, integrity and choice. A strongly worded statement by BIS General Manager Augustin Carstens said it was ‘simply unacceptable’ that unclear or outdated legal frameworks could hinder the deployment of CBDCs.

‘The work to address these issues needs to begin in earnest. And it needs to proceed at pace. The BIS wants to avoid ending up with fragmented system and legal framework that stops CBDCs from being interoperable’.

Changes to Make the e-CNY Useful for Visitors

China has made changes to allow overseas visitors to pay using the e-CNY. Visitors can now replenish their digital RMB wallet using online services of Visa and Mastercard. They can also go to bank service outlets to recharge the digital RMB wallet with cash. Previously visitors could not top up their e-CNY wallets in advance. They could only do so on the spot when making payments.

With the upgrade, visitors can use their e-CNY wallets both at shops and on online platforms such as ride-hailing app Didi, takeaway service provider Meituan, travel portal Ctrip and e-commerce platform JD.

The upgrade may also increase the presence of e-CNY in cross- border transactions.