Development of central bank digital currencies (CBDCs) globally continues to power ahead and, while much of the effort to date in this space has been on developing proofs of concept, it is likely that over the next six months central banks will begin implementing these ideas into real world trials, according to Richard Brown, chief technology officer at US-based enterprise blockchain technology developer R3.
The scale of the global effort in developing CBDCs is undeniable, with the Bank of International Settlements (BIS) estimating that 80% of the world’s central banks are engaging in research, experimentation, or development of CBDCs. As of January 2022, 68 central banks (38% of the global total) have “communicated publicly” about their CBDC projects, with 28 of their projects at pilot stage, according to the BIS. However, several retail CBDCs are now live in the Bahamas, the Eastern Caribbean, Nigeria, and Jamaica.
According to Brown, a particularly interesting, relatively recent innovation being explored in the CBDC space is “programmable” tokens that can be implemented by different government initiatives. Food stamps where recipients are given coupons that can be spent only on food is one potential application of programmable money with constraints.
Wholesale vs retail
Teunis Brosens, head economist for digital finance and regulation at ING, says most of the central bank effort around the world with CBDCs so far has focused on developing retail CBDCs that can be issued to the general public, rather than wholesale CBDCs which would serve corporate and financial institutions.
According to the BIS, 43 central bank CBDC projects are focused only retail application, compared with just two central banks where the emphasis is solely on wholesale solutions. 23 banks are investigating the potential of both retail and wholesale.
As it stands, China is well ahead of the rest of the world’s banks with development and roll out of its CBDC, the digital yuan (eCNY), with there being geostrategic considerations for governments and their central banks to bear in mind.
“While China’s eCNY also has a retail focus, there is some concern across Europe and US that it might be used in the context of its Belt and Road initiative, that it might be used to further China’s geopolitical ambitions,” says Brosens.
Another driver for central banks interest in developing CBDCs, according to Brosens, is the principle that people should, even in a digital world, have access to public money.
“We have fiat bank notes and coins but in the digital world, as it stands today, we only have liabilities issued by private institutions,” he says. “That is not something that most governments, central banks, and regulators want to see as the end game here.”
While there is some overlap between banks interest in retail CBDCs and corporate interest in wholesale CBDCs in that both can help promote frictionless cross-border and cross-currency transactions, the advantages for the private sector in this respect are potentially much greater with dedicated wholesale CBDCs that enable large, instant, and virtually risk-free transactions on a 24/7/365 basis.
Not all treasurers will be keen on the “instant part”, says Brosens, with many preferring settlement take place more often intraday as it helps them to better manage their cache from a balance sheet perspective.
“But then that would not be taking full advantage of the wholesale infrastructure that has been built,” he says. “There are other advantages of wholesale, such as removing the need for correspondent banks, but if you are not going to exploit the instant 24/7 advantage then it might beg the question of why we have this innovation.”
Stablecoins in the wholesale frame
With wholesale CBDCs set to remain a side show for central banks compared to retail CBDCs for the foreseeable, Brosens anticipates the private sector will ramp up its own wholesale efforts by focusing on fiat-backed stablecoins.
Stablecoins are a type of cryptocurrency which are tied to a currency such as the US dollar to stabilise the price. Like CBDCs, they can be monitored and controlled to the extent desired by individual countries.
Interest in stablecoins from banks and financial market infrastructure providers is rising, according to Brosens, as they can co-exist alongside CBDCs, while offering many of the same benefits. In fact, data by CoinGecko shows that the value of all stablecoins now stands at around $155bn compared to the total crypto market cap of $946bn.
With the momentum building behind CBDCs and outlook for stablecoins looking promising Brosens is understanding of treasurers who might feel they need to prepare now for their application in their operations. However, he strongly advises they hang fire.
“I would say do not panic. Do not take any rushed decision. That is not necessary because CBDC development, at least in Europe, the US, and many parts of the world, will take many years. The ECB for instance is not planning to issue the digital euro until 2026 at the earliest and the US is still in the exploratory phase.”
Stablecoins are available to corporates in the meantime, of course, but there is currently no real pressure for firms currently to engage with them, says Brosens.
“There is no requirement to join with a stablecoin right now. If you get on board one it would really be more for reputational reasons, to perhaps show how digitally savvy you are,” he says. “For now, both with CBDCs and stablecoins, I would say just wait and see what happens.”
It is “very important” for treasurers to ask themselves what problem they intend to solve by joining a CBDC or a stablecoin platform, says Brosens.
“Do they want to facilitate retail clients’ payments? Do they indeed want to improve cross border cache management? Do they want to be ready for issuing bond tokenized bonds? Or do they just want to avoid missing the boat on a possibly important new development? First ask that question, why do I want to be in this space? And depending on the answer to that question, conduct further research with that in mind. Don’t spend any money and resources because it’s just early days at the moment.”
Death of cash?
Looking ahead over the next five to 10 years, Brosens envisions multiple digital currency platforms will be available and operated by both the private sector and central banks.
“We may see some domestic retail focused, others cross border cross currency focused. I do expect we will have retail CBDC infrastructure live in that time frame. In China, it is already live in a way, soft launched if you like. In Europe and the US, we will see retail CBDCs with retail facing corporations especially active on these platforms. “
For R3’s Brown the next few years will be about more detailed research into the usability of various CBDC approaches, with ideas rapidly filtered down to designs which consumers can understand, and merchants can integrate with existing systems.
However, he believes some fundamental architectural questions around what real-world purpose a CBDC might serve will also need to be addressed.
“If physical cash declines to irrelevance, does this mean our historic right to make payments that are not observable or censorable by the state would die on the same day?
“Ever since humans have traded with each other, it has been possible to engage in direct commerce, without needing permission from a third party,” Brown says. “If cash is to fade away, something needs to take its place, but no existing regulations permit true digital equivalents of cash, even in limited and supervised form.”
If there is an obligation to replicate the unique properties of cash in the digital realm it will require close partnership between public and private sector at all levels, according to Brown.
“Luckily, these relationships are strong and active, but it is crucial for policymakers as well as regulators to engage in the detail before their hands are forced or the opportunity these new technologies present are squandered.”
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