Comment: Momentum Towards Central Bank Digital Currencies

Staff Writer

 

According to Bank of International Settlements (BIS) published in January 2020, nearly 80% of the global central banks are currently exploring the issue of central bank digital currencies (CBDCs). It is not surprising why the central banks from the developed world are paying attention, with representatives from six global central banks slated to meet in Washington DC in April to discuss the topic, according to Nikkei. Central banks would rather use blockchain to their advantage than watch from the sidelines as Bitcoin and other cryptocurrencies eat their lunch. The urgency around the sovereign central bank digital currencies powered by blockchain is partly triggered by Facebook’s now-embattled cryptocurrency Libra and perhaps even more so by China’s decision to test its own digital currency (although with some sources such as Zhu Min, the former deputy governor of People’s Bank of China Zhu Min, now suggesting that Beijing should slow down the pace of its rollout.)

But there is no turning the clock back and the growing enthusiasm amongst the central banks in the developed world show the idea of CBDC is gaining momentum, particularly at the European Central Bank, which now has a new head in Christine Lagarde (formerly of IMF) who is known for her favorable stance on blockchain and digital currencies (see here).

Central banks from six countries include the U.K., Switzerland, Sweden, Canada and Japan as well as the ECB have already formed a working group with the BIS in January for research on CBDCs.  They will prepare their findings before the leaders meet on the sidelines of an international conference in Washington with the group slated to issue an interim report in June and a final report in the autumn.

Even more interesting is the clear shift in stance on CBDCs at the Fed. In a speech delivered by the governor of Fed Governor Lael Brainard on February 05, the US should remain vigilant of the rise of CBDCs around the world given the potential implications on the dollar’s role as a global currency. In the speech he noted that: “Like other central banks, we are conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC.” Brainard pointed out the need to explore the potential of CBDCs and also study what potential risks that such financial stability as well as their legal status. While this sounds like a typical central bank rhetoric, the fact that the Fed wants to get involved is a noteworthy development.

In the US, there are already activities in the private sector aimed at helping conceive the idea of a digital dollar. The former chairman of the Commodities Future Trading Commission (CFTC) Christopher Giancarlo has reportedly partnered with consultancy Accenture to create a non-profit Digital Dollar Foundation to explore a digital currency version of the US dollar (see here).  A big champion for a more progressive and liberal regulatory framework for FinTech and blockchain in the US during his tenure as the chairman of the CFTC (including the listing of the Bitcoin futures), he recently told The Wall Street Journal in an interview that the “US sent a man to the moon. We can send the dollar to Cyberspace.” Accenture is one of the consultants helping design CBDC for the Bank of Canada, the Monetary Authority of Singapore, the European Central Bank and Sweden’s Riksbank.

Global policymakers also heard the case for CBCDs at last month’s Davos World Economic Forum which issued a 28-page report, “The CBDC Policy-maker Toolkit” aimed at helping global lenders of last resorts design CBDCs on blockchain. Several initiatives are already underway in the emerging economies. The National Bank of Cambodia has already piloted a quasi-form of CBD for its national payment system while the Central Bank of Uruguay, the Central Bank of Bahrain and the Bank of Thailand are also applying the said toolkit – which is designed with the help of experts from over 40 institutions – to their respective CBDC evaluation processes, according to the report. During the Davos summit, one of the world’s leading blockchain firms ConsenSys has also released a white paper on how central banks can build CBDCs – both retail and wholesale – on Ethereum blockchain (with its’ founder Joseph Lubin pushing for the CBDCs amongst others in his address at the event.)

In addition to China and Singapore, there are already CBDCs being piloted and tested, such as The Bank of Thailand’s Project Ithanon and the Hong Kong Monetary Authority’s Project LionRock. Last month, the central banks of Hong Kong and Thailand published a report on their joint CBDC project, Ithanon-LionRock, aimed at facilitating seamless cross transfer of funds and foreign exchange transactions on a peer-to-peer basis using the respective CBDCs. The two parties said that they have successfully piloted the project with ten participating banks in Hong Kong and Thailand.

One of the main arguments for the deployment of wholesale and retail CBDCs is to address the problem of high cost of cross-border remittances and payments, which is precisely what cryptocurrencies claim to have found an answer for. The use of blockchain layer to run the CBDCs is said to significantly reduce the cost and the ease of remittances across borders, thereby making regulated, sovereign-backed payment infrastructures more competitive in the future. And a lot is at stake here, with the total global payment market currently estimated at US$817bn and expected to reach US$5.5 trillion by 2025. It is not surprising why central banks would be keen on jumping into the fray sooner than later. As we move into 2020, we will definitely see a lot of activities in this new arena.

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