Central Bank Digital Currency
Innovation and Tech Zoom In: Central Bank Digital Currency
In this article, we will attempt to unpack some of the interesting information shared by the hosts (Ajit Tripathi & Brett King) and guests (Makoto Takemiya from Soramitsu, Aleksi Grym from Bank of Finland, Todd McDonald from R3, and Lynn McConnell from Binance) such as ‘What is CBDC?’, ‘Different types of CBDC’, ‘CBDC Projects moving ahead’ and ‘What is implementable in the current environment?’. For more input on the conversation, please take a listen to Breaking Banks Europe, Episode 20, in your favourite podcast streaming service.
Contrary to popular belief, Central Bank Digital Currency (CBDC) are not cryptocurrencies. CBDC represents the digital form of a fiat currency of a particular nation (or region) and is issued and regulated by the competent monetary authority of said nation (or region). Basically, ‘CBDC will act as a digital representation of a nation’s fiat currency and will be backed by a suitable amount of monetary reserves, such as forex or gold’. Another important differentiating factor from cryptocurrencies is that CBDCs are centralized. Which, as Brett King mentions in this episode, “for a lot of crypto purists, that’s kind of the issue of fiat currencies.”
So, what does this mean? Ajit sets the question in a way most of us living in economies with wide adoption of digital payments can relate to. “What is CBDC? I mean, money is already digital, I can make payments with Venmo, Revolut, you name it. So how is a CBDC different from what we do today in terms of electronic payments?” From an end-user perspective is really not very different. The key difference is that if you use Venmo or Revolut or any of these electronic money type of solutions, as a customer of that service provider you have a claim on that company (i.e. You have put money on that service or account and then you can use that to make payments so in the end, it’s that service provider who owes you the money or it owes you the services that it’s promising to provide). In the case of CBDC, the service is very similar, the difference is that the claim is on the central bank (i.e. the Central Bank takes your money and promises to keep it safe and provide those payments services). As of now, Central Banks don’t do that, they have left it to the private sector.
Now that we have gotten the premise of what CBDC is and what would actually change if implemented, let’s touch open the different types of CBDC. There’s a lot of talk about ‘Wholesale CBDC’ and ‘Retail CBDC’, but what does that mean? In very simple terms, a retail CBDC is one that will be issued for the general public and a wholesale CBDC is for financial institutions that hold reserve deposits with a central bank. A retail CBDC based on DLT has the features of anonymity, traceability, availability 24 hours a day and 365 days a year. This proposal is relatively popular among Central Banks in emerging economies, mainly because of the motivation to take the lead in the rapidly emerging fintech industry, to promote financial inclusion by accelerating the shift to a cashless society, and to reduce costs of cash printing and handling. A wholesale CBDC could be used to improve payments and securities settlement efficiency, as well as to reduce counterparty credit and liquidity risks. The wholesale CBDC is seen as the most popular proposal among Central Banks because of the potential to make existing wholesale financial systems faster, inexpensive and safer. ‘The Bank of International Settlements also shares the view that wholesale CBDC could potentially benefit the payments and settlements systems.’ Decisions on whether to implement retail, wholesale or hybrid CBDC, depends on each specific Central Bank and what is trying to achieve. If you are interested to learn more please visit the WEFs’ ‘CBDC Policy-Maker Toolkit.’
What are some CBDC projects moving ahead? One of the projects touched upon with most detail was ‘Bakong’, a collaboration project between Makoto’s Soramitsu and the Bank of Cambodia. “Bakong is a next-generation Real-Time Gross Payments system already in production, that promotes financial inclusion through a friendly yet powerful app.” If you want to learn more about Bakong, please visit their case study. Other projects mentioned in the podcast where: Bank of England, People’s Bank of China and Riksbank. Others such as Canada, Uruguay, Thailand, Venezuela and Singapore, are looking into the possibility and validity of introducing a Central Bank issued digital currency.
The podcast ended with the guests sharing what they believe to be “implementable in the current environment.” but it would not be right of me to take away the joy of listening to these stellar analysts closing statements.