CBDC Round-Up

Much Work Required Before a CBDC Possible in Australia

The Reserve Bank of Australia (RBA) has been researching CBDCs. Its latest work found legal, regulatory, technical and operation issues that suggest an early launch of a CBDC is unlikely.

The RBA has been running 14 pilot projects with industry partners to understand the benefits of a possible CBDC. These included looking at what programmable payments, atomic settlement and offline payments could offer. One finding was the opportunity for a CBDC to enable the development of new forms of privately issued digital money, including tokenised bank deposits or CBDC-backed stablecoins.

What became clear was the importance and need for developing a legal and a regulatory framework suitable for the innovations a CBDC could enable. It also showed challenges in integrating a CBDC platform with industry use case applications.

CBDCs Risk Being Derailed by Campaigners

The Financial Times has written about how CBDCs are getting caught up in what it refers to as ‘culture wars’.

In the US, CBDCs are now on the political agenda with Florida’s Governor, Ron DeSantis, saying he will ban a digital dollar. Vivek Ramaswamy, a Republic presidential contender, has posted on X (formerly Twitter), positioning CBDCs as being part of the ‘Great Reset’, a belief that the World Economic Forum, private individuals and state actors are reshaping society on a global scale.

Democrats are also sceptical. Robert F Kennedy, who wants to be the Democrats’ Presidential candidate and has said that ‘CBDCs grease the slippery slope to financial slavery and political tyranny.’

Lord Holmes sits in the UK’s House of Lords and campaigns for greater access to payment methods. He made the comment that, ‘if people don’t feel confident engaging with a CBDC or any other digital form of money, you won’t have consent, and without consent, you haven’t even got off the starting block.’ 

The article councils caution. Rather than dismissing the words and posts on X, social media and the web as minority posturing, central banks need to work hard to get the facts out there, to be crystal clear about what is being suggested and why, and to make sure that CBDCs are not and cannot be positioned as being part of abolishing cash.

The Need for Buy-In for CBDCs

Sibos, a financial services event organised by SWIFT, held a session looking at CBDCs. Scott Hendry, from the Bank of Canada, suggested that just as we live today with multiple forms of payment, so will we as new forms of digital money emerge. We will need to think carefully about the risks and benefits of each of the new forms of money.

Jack Fletcher, from R3, suggested that one of the motivations for CBDCs was the decline of cash. ‘We need to consider what elements of cash need to be retained, for example being central bank money, the ability to use it without providing your ID and that buying is without friction’.

Matthias Schmudde, from the Bundesbank, made the point that people will need to want to use a CBDC if it is to be successful. Without adoption to a certain scale, it won’t achieve the critical mass to form the network necessary to support the system, justify the investment and be useful for people.

Unlike Fintech’s, central banks do not take a trial and error approach, and so it will take time to get the necessary buy-in and to find a solution that is beneficial for all stakeholders.

New Approach Piloted to rCBDCs

Project Sela is an exploration of a retail CBDC ecosystem involving Hong Kong and Israel. It built on the work of the Hong Kong Monetary Authority (HKMA) in its Project Aurum and its e-HKD work. The goal was to create a CBDC that retained the advantages of cash while being accessible, secure against cyber-attacks and encouraging payment competition.

Sela introduces a new concept, what it called an Access Enabler, which handles all customer facing CBDC services but without holding end-user CBDCs or holding funds on its own balance sheet. The benefit being the privacy of users is hidden with settlement taking place on the central bank’s balance sheet. This also delivers instant finality of the transaction.

Cost, complexity and risk are reduced since no funds need to be held to ensure liquidity and settlement risk is less.

Colombia Assesses CBDCs

The Central Bank of Colombia has issued a report considering the macro-economic effect of issuing a retail CBDC. Its conclusion is that, based on a number of specific assumptions about the design of the CBDC, the macro-economic consequences would be negligible.

75% of transactions are made using cash today in Colombia, so the demise of cash is not imminent. Colombia has a private sector faster payment system, but it is still not fully inter-operable, and it is focused on peer-to-peer payments. A state-owned system is planned for 2025.

The report concludes that a tiered architecture that has holding and spending limits and that is non-interest bearing would be needed to manage potential macro-economic effects. Irrespective of whether a CBDC is introduced, appropriate regulatory standards and framework to strengthen the resilience of the domestic financial system to the emergence and popularisation of backed crypto assets, like stablecoins, is needed.

INX and SICPA Team up for CBDC

INX – the US-regulated broker-dealer, ATS, and transfer agent – and security ink and traceability specialist SICPA have launched a new joint venture, Nabatech, to aid government and central bank construct sovereign digital asset ecosystems.

According to both companies, the Swiss-incorporated joint venture uniquely combines Decentralized Ledger Technology (DLT) infrastructure and digital identity technologies to fulfill critical CBDC requirements - from security and privacy to resilience and financial inclusion.

‘This initiative is set to propel the establishment and launch of a secure and scalable framework for central banks to execute digital strategies’, they said in a joint press release, adding that, with over 80% of the world’s central banks contemplating the introduction of CBDCs, the urgency to deliver a concrete strategy to tap into the immense potential of digital currencies is palpable.

INX’s specialised CBDC and blockchain technologists will join forces with SICPA’s digital team to create robust CBDC solutions, with both entities anticipating that they will set new industry benchmarks in catering to central bank mandates concerning privacy, oversight, scalability, inclusion, and programmability.