It is becoming increasingly difficult to keep up with all of the announcements from a raft of central banks and think tanks but here are some that caught my attention:
The minutes of the first meeting of the Bank of England’s CBDC Academic Forum were released. Key areas of discussion included:
whether financial inclusion should be a primary policy driver for CBDC
how behavioural factors may affect adoption of any future digital pound
how different forms of technology such as distributed ledger technology or digital identities may change the role of banking and finance
that there was little widespread public understanding of the different forms of money, and that the current payments landscape was both complex and in parts largely invisible to end users
The minutes of the February meeting of the Bank of England’s CBDC Technology Forum were released. Key areas of discussion included:
Exploring three models of interaction between PIPs with the following models of interaction covered:
Model one was a centralised model in which PIPs could interact with each other through the core digital pound system operated by the Bank of England (the Bank).
Model two was a centralised model where PIPs could interact with each other through a third-party operator. This third-party operator could also facilitate PIPs’ interactions with the core systems operated by the Bank.
Model three was a decentralised model in which PIPs could interact with each other directly.
Exploring core ledger technologies for the digital pound to help identify options for core ledger technology and how those options would meet the requirements related to transaction speed, privacy and uptime set out in the Bank’s Technology Working Paper. They considered both centralised and decentralised governance as well as distributed architectures.
The Bank for International Settlements issued the results of its 2023 survey on central bank digital. Key findings included:
94% of surveyed central banks are exploring a central bank digital currency (CBDC). During 2023, there was a sharp uptick in experiments and pilots with wholesale CBDCs – mainly in advanced economies (AEs), but various emerging market and developing economies (EMDE) also stepped up their wholesale CBDC work. Overall, the likelihood that central banks will issue a wholesale CBDC within the next six years now exceeds the likelihood that they will issue a retail CBDC. Central banks further enhanced their engagement with stakeholders to inform CBDC design. Many CBDC features are still undecided. Yet, interoperability and programmability are often considered for wholesale CBDCs. For retail CBDCs, more than half of central banks are considering holding limits, interoperability, offline options and zero remuneration. Differences exist between AEs and EMDEs, for example with respect to the potential use of a distributed ledger and transaction limits.
On crypto, the survey indicates that, to date, stablecoins are rarely used for payments outside the crypto ecosystem. Moreover, about two out of three responding jurisdictions have or are working on a framework to regulate stablecoins and other cryptoassets. At the end of May 2024, the total market capitalisation of cryptoassets amounted to $2.7 trillion. Stablecoins constituted a relatively small proportion (6%) of this market, with a market capitalisation of $161 billion.
Over the course of 2023, various banks and other traditional payment service providers started to use stablecoins for their activities or to issue stablecoins to their customers. For example, in April 2023, Société Générale launched the euro-denominated stablecoin EUR CoinVertible to their clients for the settlement of on-chain securities. In August 2023, PayPal launched a USD-based stablecoin (PYUSD) with Paxos. In addition, in September 2023, Visa announced it was expanding its stablecoin settlement capabilities with USD Coin (USDC) issued by Circle to merchant acquirers. These show that stablecoins are no longer the sole domain of cryptoasset providers and may boost the uptake of stablecoins for payments outside the crypto ecosystem. If not properly designed and regulated, the large-scale use of stablecoins for payments could have serious implications for the safety and efficiency of payment ecosystems.
Project mBridge continues its development and has reached the minimum viable product (MVP) stage, while broadening its international reach. The project aims to explore a multi-central bank digital currency (CBDC) platform shared among participating central banks and commercial banks, built on distributed ledger technology (DLT) to enable instant cross-border payments and settlement.
Project mBridge is the result of extensive collaboration starting in 2021 between the BIS Innovation Hub, the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People's Bank of China and the Hong Kong Monetary Authority. The Saudi Central Bank is joining mBridge as a full participant.
The project aims to tackle some of the key inefficiencies in cross-border payments, including high costs, low speed and operational complexities. Multi-CBDC arrangements that connect different jurisdictions in a single common technical infrastructure offer significant potential to improve the current system and allow cross-border payments to be immediate, cheap and universally accessible with final settlement.
The Swiss National Bank, The Bank for International Settlements’ Innovation Hub (BISIH) Swiss Centre, and SIX Digital Exchange published the Helvetia report, a two proofs-of-concepts experiment using “near-live” systems to settle digital assets on a distributed ledger with central bank money.
The initiative demonstrated the feasibility and legal robustness of issuing a wholesale CBDC onto a distributed digital asset platform and linking the digital asset platform to the existing wholesale payment system. The collaboration sets the stage for further joint experimentation and policy work to assess the impact of digital innovation on the future of the financial system.
Helvetia III piloted tokenised central bank money for wholesale use, often referred to as wholesale CBDC. Participating banks used Swiss franc wholesale CBDC to settle transactions with tokenised bonds on SIX Digital Exchange (SDX) - a regulated trading and settlement platform for tokenised assets. Since the start of the pilot, four tokenised bond issuances and one secondary market transaction have been successfully settled in wholesale CBDC.
Economically and legally, the wholesale CBDC used in Helvetia III is equivalent to sight deposits on the SNB balance sheet. Access to wholesale CBDC is restricted to banks and financial institutions which participate in the Swiss real-time gross settlement system. Legally, wholesale CBDC is an alternative representation of sight deposits at the SNB. A key difference to sight deposits is that the pilot makes tokenised central bank money available on the same third-party platform where the tokenised assets are held. This eliminates barriers in today’s siloed financial market infrastructures where financial assets and central bank money are usually held on separate systems that are linked in order to synchronise payments and asset transfers. With wholesale CBDC as piloted in Helvetia III, assets and central bank money are instead closely integrated. This reduces the need for synchronisation and reconciliation and facilitates programmability.
Resources, Reports and Announcements
Take up of the retail CBDC in the Bahamas is less than 0.41% of currency in circulation.
