P Xenos and M Bacina
IBM and OMFIF release research into Retail Central Bank Digital Currencies
Due to the prominent and increased interest across the globe with respect to Blockchain-based Central Bank Digital Currencies (CBDC), IBM Blockchain and OMFIF have released a report which provides an overview of the opportunities these currencies present, the development of its core technology, and use cases to-date.
The use of cryptocurrencies issued by central banks have begun to encroach into the foreground of the global FinTech space, and through examples such as the Tunisian government's recent announcement to launch the E-Dinar national currency using blockchain, significant strides being made in the Nordic and European region, and China's plans to introduce a CBDC in 2020, it is clear that central banks and regulators are beginning to realize that they need to be a part of the future of money.
The first OMFIF-IBM report on CBDCs was published in October 2018 and focused on wholesale applications, outlining how a permissioned blockchain-based token could offer distinct benefits to backend infrastructures which underpin current modern payment systems, this new report focuses on the prospect of a retail CBDC, which have been spurred on by the Libra Association's plans to issue a cryptocurrency.
The report refers to the particular design of a CBDC as a significant determinant of its effectiveness as a monetary policy instrument and any consequential financial stability implications. The Report states that (emphasis added):
Practically, the operation of a CBDC is likely to rely on some sort of public-private partnership. Central banks could outsource the distribution of the CBDC to private financial institutions, which could also be involved in the onboarding of users. Difficult questions of interoperability, regulatory demands and cross-border use must also be answered
The China case elucidates this, and has generated causes for celebration, concern and also fierce skepticism, with Kenneth Rogoff (Professor at Harvard University) warning that although regulators globally are incentivized to rein in cryptocurrencies by proscribing their use in banks and retail establishments but otherwise to keep them generally in the end users hands, "this was not the case for the Chinese-backed digital renminbi", as:
"...when China announces its new digital currency, it will almost surely be “permissioned”: a central clearing house will in principle allow the Chinese government to see anything and everything."
Central banks, particularly in the US are stringent in their view of cryptocurrencies as mere speculative assets, rather than actual money. However, the emergence and polarization of Facebook’s Libra project was heralded by the report as a challenge to this sentiment and also to the use of the US dollar as the traditional global reserve currency system.
Context and Landscape
Before outlining the significant potential for CBDCs to play a role in upgrading incumbent centralised payments and settlements systems, the report sets out three key developments that have "shaped the discourse on the nature of money and the role of private and private institutions in its creation".
The growth of consumer distrust of major financial institutions;
The decline of trust in central banks in developed economies; and
The decline in the use of cash precipitously in most advanced economies, and in some emerging markets.
The report outlines the following use cases identified by central banks, reflecting the fundamental distrust in traditional payment systems, and the tension between private and public development of digital currencies:
The decline of cash use in Sweden over the past decade leading to concerns regarding access to state-backed money and the safety and efficiency of the domestic payments system, resulted in Riksbank's (Swedish Bank) launch of its e-krona project in 2017.
This launch was intended to evaluate the possibility of granting public access to a digital equivalent of cash, and highlights the needs of developed market economies that are considering CBDCs.
In July 2019, the National Bank of Cambodia launched the Bakong system, a blockchain project with the objective of improving payments efficiency, promoting financial inclusion and creating interoperability across payments channels.
Being a peer-to-peer fund transfer service available to retail customers of participating banks, money transfers and payments globally will be facilitated, forging the foundation for real-time retail payments, allowing transfers in local currency and the dollar, and connecting financial intermediaries and payments providers. Four institutions are currently participating wihtin the system, such as; Acleda Bank, Foreign Trade Bank, Wing Specialised Bank, and Vattanac Bank.
In March 2019, the Central Bank of The Bahamas announced ‘Project Sand Dollar’, a pilot programme for a blockchain-based CBDC.
The purpose of this project was to modernize and streamline the country’s financial system, while also complementing existing banking services, and uncovering plans to allow for mobile wallet holders to invest in government securities.
In November 2017, the Banco Central del Uruguay launched the 'el peso', a digital currency pilot project which was available to the public for six months as a complement to cash. The digital currency was issued through the Global e-Note Manager platform, which also registered the ownership of a digital bank note.
Users were able to exchange real pesos for digital ones, and then transfer e-pesos to other users or use them as means of payment in registered stores and businesses. The pilot ended successfully in April 2018, leading the Uruguayan central bank to further consider how a CBDC could be implemented, taking into account interest requirements, and the impact it would have on monetary policy and the role of banks in the economy.
The report concludes that within the next five years, there will be an introduction of at least one central bank issued retail-focused digital currency, likely to come from a smaller nation rather than a member of the G20.
Although the development would most likely be nationally driven, the increasing co-operation and collaboration between monetary authorities are likely to become the norm, and represent exciting opportunities for decades to come.
Whether this new CBDC is in reality a centralised monitoring system or the alternative path to a peer-to-peer electronic cash (as Bitcoin tries to be) remains to be seen. One thing is for sure, the image of a central banker as a bit of a dull and reliable economist type is sure to be shaken up and replaced with technologists (hopefully in hoodies).