CBDC Round-Up

ECB Tenders for Elements of its Digital Euro Pilot

The ECB is looking to sign five agreements worth about €1.1 billion for a four year pilot of a Digital Euro starting early 2025.

The framework agreements are for the alias lookup component; the fraud and risk management component; the app and SDK components; the offline services component; and the secure exchange of payment information component.

Offline CBDC Trial Begins

JCB, a payments network provider based in Japan, is piloting a person-to-person offline trial for CBDC payments made either card-to-card or via a mobile phone or phone-to-phone. The trial also involves Soft Space, a Malaysian fintech who provides the payment platform, and IDEMIA, the identity technology provider. Even without internet connectivity, fund availability will be immediately guaranteed.

This is the second phase of a project started in October 2022 that tested the use of existing contactless payment cards, point-of-sale hardware and softPOS payment acceptance technology for in- store CBDC payments.

CBDCs to Hit Critical Mass Within 5 Years

Proponents of CBDCs argue that a single global payments network would aid global integration by allowing value to be transferred seamlessly anywhere in the world. Given that every country has its own international payment and legal systems, this is not straightforward to achieve. Perhaps a first step is regional payment networks. OMFIF’s Future of payments 2023 paper considers the options.

OMFIF’s survey found that 40% of respondent central banks believe they will have a CBDC within five years. In 2022 35% of respondents did not expect to launch a digital currency. In 2023 this figure was 19%. As expected, Emerging Market Economies (EMEs) were interested in financial inclusion while Advanced Economies (AEs) were motivated by preserving monetary sovereignty.

Whether people would actually use a CBDC was the single biggest concern. In EMEs, 27% identified this as their biggest concern, but in AEs it was 67%.

The ability to use CBDCs offline was seen as the most challenging aspect of CBDC design.

Multi-currency CBDC projects on a limited, regional basis between countries with strong trading relationships were popular given that the challenge of building consensus on standards and the visibility of operational efficiency gains was better. 17% of respondents wanted to reduce their reliance on the US dollar. 66% of central banks were not convinced that stablecoins or cryptocurrencies were promising for improving cross-border payments.

Understanding the Impact of CBDC on Balance Sheets and Monetary Policy

The Federal Reserve has published a discussion paper about the impact of CBDCs on its balance sheet and its ability to implement monetary policy.

The paper starts with the observation that a CBDC is different from reserves, because reserves can be held only by banks in addition to a very narrow group of selected institutions, while CBDC is typically intended for a much broader set of counterparties, including possibly individual consumers.

The wide range of possible outcomes depend on the extent to which CBDC is substituted for cash and bank deposits, how banks are affected by the introduction of CBDC and respond to its introduction, and how the Fed chooses to manage the supply of reserves and its balance sheet. The model suggests that the impact of a CBDC on the size and composition of the Fed’s balance sheet can differ significantly depending on these factors.

The Feds analysis highlights that the potential effects on the financial sector depend critically on how the Fed manages its balance sheet. In particular, CBDC could in principle put substantial upward pressure on the spread of the federal funds rate and other wholesale funding rates over the interest rate on reserves unless the Fed expanded its balance sheet to accommodate CBDC issuance.

Conditions Justifying a Retail CBDC Clarified by Norges Bank

Norges Bank has concluded its fourth phase of CBDC experiments, deciding that a retail CBDC would only make sense of certain conditions are met. It has though, decided to explore a wholesale CBDC for interbank settlement of tokenised deposits since such deposits could provide an alternative to a retail CBDC. This fifth phase will last through until the end of 2025.

Norges Bank might issue a retail CBDC if there is a risk of currency substitution and reduced national control over payment systems. Scenarios which might cause this range from the widespread adoption of cryptocurrencies, BigTech payments or a digital euro. Even so, if the private sector has provided an alternative payment means capable of programmability, such as a tokenised deposit, a retail CBDC won’t be needed.

One option could be to use the digital euro infrastructure for a Norwegian CBDC, given that developing its own would be a very significant task. Current off-the-shelf CBDC solutions are not considered sufficiently capable currently.

Norges Bank has also published a paper exploring the liquidity impact of a CBDC on banks and monetary policy.

ECB CBDC Decision Reflects World View

Euronews has suggested a divergence between the thinking about a CBDC for the European Central Bank (ECB) compared with the Bank of England (BOE) or Swiss National Bank (SNB). It suggests that the choice between a retail and wholesale CBDC suggests differing world views on societal governance and value systems.

The BOE and SNB appear to prefer a synthetic model which blends innovation with traditional financial stability, while the ECB seems to be embracing a retail CBDC designed in similar ways to China’s.

A synthetic CBDC grants licenced private e-money issuers access to central bank reserves which they then use to back safe- guarded effectively riskless public money. This approach outsources operation and management to private entities while offering the public indirect access to central bank money.

In contrast the ECB sees the digital euro as ‘an electronic means of payment available free of charge to everyone.’ What this means is that a central bank intends to enter the payment market with a ‘free’ solution.

Armed with a monopoly on money creation and extensive regulatory powers over its competitors, the ECB will enter the market providing a direct competitor to the private sector where it sets the rules, regulations, fines, licenses, and market access of its competition.

An interesting viewpoint!