The development of CBDCs across the globe continues with:
- Mexico delaying the launch of its CBDC until 2024
- Turkey conducting the first tests of its digital lira which would be integrated with digital identity and FAST - a payment system operated by the Turkish central bank
- India preparing to conduct the retail pilot of the “digital rupee”, having tested the wholesale version.
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:
- HM Treasury/Bank of England (BoE) consultation paper on the case for a retail CBDC or 'digital pound'. The digital pound would be a new form of sterling, similar to a digital banknote, issued by the BoE. At this stage, the Government and BoE judge it likely that the digital pound will be needed in the future. Although they believe it is too early to decide whether to introduce the digital pound, they have decided that preparatory work is justified and are seeking views on the proposed model of the digital pound set out in the consultation paper.
- The Deputy Governor of the Bank of England gave a talk in which he discussed why it was likely that a retail, general-purpose digital pound would be needed by the end of this decade, what the model could look like and how the digital pound could sit within the digital payments landscape.
- The Bank for International Settlements (BIS) and the central banks of Israel, Norway and Sweden concluded Project Icebreaker, which studied the potential benefits and challenges of using retail central bank digital currencies (CBDC) in international payments.
The project demonstrated that the hub-and-spoke model could reduce settlement and counterparty risk by using coordinated payments in central bank money; and complete cross-border transactions within seconds. For countries considering the development of a domestic CBDC, the project provided a model for extending them and innovative services into cross-border transactions.
For central banks contemplating the implementation of retail CBDCs, the outcome of Project Icebreaker provides a deeper understanding of the technologies that can be used and the technical and policy choices available. The project presupposes very minimum technical requirements so as to be able to integrate domestic systems running on different technologies (as was the case with the proofs-of-concept used by the three central banks), thus promoting scalability, interoperability and simplicity.
- The Digital Dollar Project (DDP) has issued an updated version of its white paper 'Exploring a US CBDC', offering a global perspective on developments in CBDCs. The white paper discusses ongoing CBDC projects in 114 countries, including DDP-initiated pilots and research, and revisits the concepts first proposed in the DDP's May 2020 inaugural white paper.
- The Eurogroup issued a statement on the digital euro project which emphasised that the introduction of a digital euro, as well as its main features and design choices, require political decisions that should be discussed and taken at the political level. Amongst other things, the statement also called for the environmental implications of the digital euro design to be considered and stressed that a digital euro should complement and not replace cash, and ensure a high level of privacy.
- The ECB published the second progress report on the investigation phase of a digital euro outlining the developments made since the first progress report was published in September 2022. The report details a second set of design and distribution options and describes the roles of the Eurosystem and supervised intermediaries in the digital euro ecosystem, i.e.:
- the role of intermediaries, responsible for the onboarding of end-users, anti-money laundering checks, and consumer-facing services, such as payment initiation solutions;
- the settlement model, which defines who will settle online or offline transactions;
- the way in which funding and defunding will take place to allow users to convert cash and money from a bank account into digital euro;
- the distribution model. A digital euro scheme is envisaged since it is best suited to guaranteeing that all euro area citizens can pay and be paid in digital euro.
- In the 2023 work plan of the Bank for International Settlements, CBDCs and improvements in payments systems continue to be a key area of exploration, accounting for 15 of the 26 projects that were active in the last couple of years.
Building on the knowledge gained from wholesale CBDC projects (eg Helvetia), the Hub is now experimenting more with retail CBDCs, for example, on the technology architecture of a two-tiered distribution model (Aurum); on the distribution of retail CBDC through an open API ecosystem (Rosalind); and examining cyber security (Polaris, Sela), resilience (Polaris) and scalability and privacy (Tourbillon).
Ongoing experiments are also showing how wholesale and retail CBDCs (Icebreaker), as well as the interconnection of domestic payments systems (Nexus) can deliver faster, cheaper, and more transparent cross-border payments. Three multi-CBDC experiments (Jura, Dunbar, mBridge) have demonstrated that common platforms with various digital currencies are technically feasible and offer benefits such as lower cost, faster settlement, and operational transparency. Automated market-makers for foreign exchange using CBDCs are also being explored (Mariana).
Other improvements in payments are being explored with a focus on payment synchronisation (Meridian), on a data-driven approach to combatting money laundering across firms and across borders (Aurora), and novel liquidity saving mechanisms (Titus).
Naresh Aggarwal
8 March 2023
