Category Archives: central bank digital currency

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CBDC Report Identifies Cross-Border Payment Practicalities

A joint research report conducted by three central banks has concluded that Central Bank Digital Currencies (CBDC) have the capacity to upgrade cross-border payments and settlements.

Hypothetical proposals

Titled Cross-Border Interbank Payments and Settlements: Emerging Opportunities for Digital transformation, the paper was collaboratively authored by the Bank of Canada (BOC), Bank of England (BoE) and the Monetary Authority of Singapore (MAS). With them, a number of experts from commercial banks “led by HSBC”.

Specifically, the research project the proposal for three possible models to address issues and achieve what it calls “future-state capabilities”; these are the desired outcomes which have been gathered from research into “challenges and root causes of issues associated with cross-border interbank payments and settlements”.

Appraising the limitations of technological innovations within this space, the report acknowledges present initiatives that are taking place that “go some way” to address obstacles. However, it describes these as “incremental changes” and in order for a long-term solution to be established, there “may need to be a more fundamental paradigm shift” which are “enabled by new technology platforms”.

A study from IBM and the Official Monetary and Financial Institutions Forum (OMFIF) recently revealed that central banks have been exploring and trialing CBDCs with “mixed results”.

W-CBDCs

There are two types of CBDCs; firstly the “retail CBDC” which is designed for public use, and secondly “wholesale CBDCs”, which are limited to financial institutions and markets.

The report offers two approaches based on legacy models with one referring to the collection of initiatives currently underway or in the making and a second which is based on the expansion of real-time gross settlement (RTGS) operators roles for cross-border settlements, eliminating intermediary banks.

Weighted approach

A third model comes with three nuanced variations and focuses on the utilization of wholesale central bank digital currencies (W-CBDCs) for this process.

The first of the W-CBDC models is one that can only be “transmitted and exchanged only within their home jurisdictions”. This would require commercial banks to open wallets across multiple central banks should they desire to hold a number of currencies. The second broadens the scope a little further by suggesting for a W-CBDC that can operate “beyond their home jurisdictions”. For commercial banks, this would entail adopting multiple wallets within their respective central banks, and would require “each central bank to support multiple CBDC tokens”.

Finally, the third variation is ideal yet ambitious, and suggests a universal W-CBDC, “backed by a basket of currencies and accepted by all participating jurisdictions”. Conclusively, the report found the first jurisdiction-specific model offered few benefits as they are simply tokenized versions of existing models.

The other models that do not limit the scale of the system are, however, solid options to reduce counterparty credit, settlement and payment risks; also broadening access to RTGS systems. That said, the report identifies all of the W-CBDCs models as having particular drawbacks including not performing to present standards and that they “degrade” existing governance frameworks.

In discussion

The concept of CBDC’s has been around for some time, however, now it appears as though there is significant potential on the horizon, as a few nations around the world such as Thailand begin to embark on the CBDC journey.

This is also not the first time that the BoE or BOC have spoken publicly about CBDCs. Furthermore, Managing Director of the International Monetary Fund (IMF) Christine Lagarde recently gave a speech in Singapore on the matter, highlighting the several positives that can be drawn from this new fintech frontier.

 

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IMF Urges Consideration of National Crypto: Harness Benefits, Manage Risks

Reaffirming an open stance to the versatile application of blockchain technologies and digital currencies, International Monetary Fund (IMF) Managing Director Christine Lagarde has furthered the discussion surrounding the prospect of central bank digital currencies (CBDCs). She said that they should be considered and urged further discussion about the potential roles of central banks.

Speaking at the Singapore Fintech Festival on  14 November 2018, Lagarde opened up to the audience about the disruptive nature of technological change and said: “The key to is to harness the benefits while managing the risks”.

Crypto-race

In her speech, she noted three areas for her address: the evolving nature of money and fintech development, central bank roles in the new financial landscape, especially regarding CBDC, and an examination of downsides and steps toward mitigation.

Noting the larger names in the space such as Bitcoin, Ethereum and Ripple, Lagarde believes that cryptocurrencies are seeking a firm position in the “cashless world” and are “constantly reinventing themselves” as they hope to seek more legitimate grounds through stable values, as well as cheaper and faster transaction settlements.

CBDCs

According to Lagarde, e-money providers consider themselves to be less risky than banks due to the fact that they do not lend money and that cryptocurrencies are seeking to “anchor trust in technology”. However, she remains skeptical and retains the belief that “proper regulations of these entities will remain a pillar of trust”.

Lagarde published an article earlier this month (November 2018) that established the case for regulations that don’t stifle innovations, offering a balanced argument for and against cryptocurrencies.

After revealing the latest IMF paper named Casting Light on Central Bank Digital Currencies, one that covers the pros and cons of the concept, Lagarde said, “We should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy.”

Key points

Firstly, she argued that CBDCs may offer “great promise” in the area of financial inclusion; at their core, cryptocurrencies are capable of reaching any corner of the globe with a computer and an internet connection, thus providing rural areas populated with individuals and businesses with a robust financial tool. Efforts to connect unbanked rural areas to the national financial network are already underway in the Philippines.

Secondly, she discusses digital currency in the context of security and consumer protections; suggesting that just as the introduction and subsequent dominance of cash (paper and coins) provided a low-cost and widely available solution, digital currencies can also do so.

She said: “Regulation may not be able to fully redress these downsides. A digital currency could offer advantages, as a backup means of payment. And it could boost competition by offering a low-cost and efficient alternative — as did its grandfather, the old reliable paper note.”

Lagarde sees digital currencies as having a third potential benefit which is privacy, though she also argues that banks would not be ready to offer a fully anonymous digital currency due to it creating a “bonanza for criminals”.

Lastly, she lists three downsides to CBDCs: Financial integrity risks, financial stability, and risks to innovation, areas that have also been questioned by other institutions around the world including the Bank of England.

Conclusively, Lagarde looks optimistically toward the future and “more fundamentally”, retaining an open mind to change. She said, “In the world of fintech, we need to harness change so it is fair, safe, efficient, and dynamic.”

 

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Marshall Islands President Survives No-Confidence Vote over National Crypto

The president of Pacific nation Marshall Islands has survived a no-confidence vote from the parliament in the wake of her intentions to launch a national cryptocurrency.

The move came after the President Hilda Heine suffered a backlash after promoting a central bank digital currency (CBDC) model cryptocurrency to replace the current fiat system. As part of its arrangement with the United States, Marshall Islands uses the US dollar and in return, USA provides security and other measures.

Heine was opposed to the US having this much monetary control and resorted to the idea of a nationalized cryptocurrency called the Sovereign (SOV) back in February that could be used alongside the USD.

However, after the IMF warned Marshall Islands over this move, lawmakers from the country’s legislature became apprehensive regarding the move and the move for a no-confidence vote was submitted. Critics, including former president Casten Nemra, believed the move would tarnish the reputation of the country in the international community.

Nemra also caused political rifts to deepen following a corruption scandal regarding a USD 1 billion compensation paid by the US for citizens affected by nuclear tests carried out near them. With this deep division of confidence on her leadership, Heine probably breathed a sigh of relief after the vote came 16-16 tied, falling just one short of the required number to force her resignation.

But on the downside, the digital currency SOV initiative doesn’t have a clear mandate now. Progress may continue but will likely be slower and will warrant further checks from the legislature and other stakeholders. The government is also looking to fulfill the requirements of IMF and the European Union regarding the new currency.

 

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CBDC Study: Mixed Sentiments but Positive Outlook from 21 Central Banks

Central bank digital currencies (CBDCs) are currently being trialed and researched by a number of major central banks around the world.

Statistical findings

Released on 25 October 2018, the collaborative study between IBM Blockchain World Wire and the Official Monetary and Financial Institutions Forum (OMFIF) has found that 38% of the 21 central banks studied and trialed CBDCs to “inform the next upgrades” of their real-time gross settlement (RTGS) systems.

The remaining 62% were not active in this field, though the study does reveal a growing sentiment toward distributed ledger technology (DLT) in fintech, as well as smart contracts.

According to the report, central bank experiments with CBDC DLT systems resulted in “mixed results”, which it boils down to the mixed objectives set out by researchers, seemingly these goals are outlined by “novel avenues” being explored as opposed to the creation of an entire RTGS system replacement.

A majority of the respondents (76%) were unsure as to whether or not DLT is the solution, questioning its ability to live up to the hype with regulation being a contentious area. That said, the report notes that the central banks themselves are not putting sufficient effort into to researching the regulation of DLT payments and how they would work.

Of all the legal frameworks available that wholesale CBDCs would have to abide by, the Principles for Financial Market Infrastructures (PFMIs) are most relevant, which are the international standards for “payment, clearing and settlement systems”, as defined by the Bank for International Settlements.

Expert views

Lael Brainard, Federal Reserve Board of Governors offers a quote to the report saying: “Digital tokens for wholesale payments and some aspects of distributed ledger technology – the key technologies underlying cryptocurrencies – may hold promise for strengthening traditional financial instruments and markets.”

The report concludes that cross-border collaboration is essential to overcoming the complexities that come with RTGS in domestic and cross-border payments.

Michelle Bullock, Assistant Governor (Financial System) of the Reserve Bank of Australia (RBA), writes that “cross-border payments are widely regarded as an area in which significant efficiency gains exist. Current processes are slow and costly, involving significant compliance burden and a number of different financial institutions in different jurisdictions.”

Offering somewhat of a solution, she adds, “New technologies and new business models could be used to address some of these frictions.”

Practicality

Aside the statistical results and opinions, the report also breaks down particular areas of the subject across five sections, also offering some suggestions for those seeking to create CBDCs and how to manage particular issues that may arise.

It also makes note of several countries that are actively exploring DLT solutions and engaging with the potential issuance of a national CBDC, such as the Bank of Thailand who is developing a wholesale CBDC and has successfully tested its key payment capabilities, and the Bank of Canada who have tested DLT in payment systems to mixed results.

Furthermore, the need for a cooperative international regulation effort is considered as “critical” by the study, writing that PFMIs offer a “solid foundation”, but are limited as a long-term solution due to the potential of “regulatory arbitrage in different jurisdictions”.

 

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Bank of Canada Reinvigorates Case for Central Bank Digital Currencies

A paper released by the Bank of Canada has brought forth a positive argument for the implementation of central bank digital currencies (CBDCs).

Published on 26 July 2018, the paper written by the bank’s Senior Economist in the Funds Management and Banking Department, Mohammad R Davoodalhosseini, goes into great detail to emphasize the potential economic welfare gains that a CBDC could have for Canada and the United States.

Welfare benefits

Summarily, the economic researcher estimates that gains from the introduction of a CBDC “can lead to an increase of up to 0.64% in consumption for Canada and up to 1.6 per cent for the US, compared with their respective economies if only cash is used”.

Davoodalhosseini writes that many central banks are currently contemplating the concept; whilst they provide benefits including holding interest, CBDCs also beg the question as to how fiat cash and digital currencies can co-exist.

Through complex modelling, a quantitative approach and maths, the researcher makes compelling arguments for the use of a CBDC in the instance of welfare.

Should implementing digital currency prove to be cost effective he writes, “Having both cash and CBDC available to agents (consumers) sometimes results in lower welfare than in cases where only cash or only CBDC is available. This fact suggests that removing cash from circulation may be a welfare-enhancing policy if the motivation to introduce CBDC is to improve monetary policy effectiveness.”

European findings

The European Parliament Committee on Economic and Monetary Affairs (ECON) released a study that suggested banks to consider establishing “permissioned cryptocurrency systems” to “complement or substitute” their respective fiat currencies.

The study writes, “The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors.”

In the UK, a 2014 quarterly bulletin from the Bank of England concluded that digital currencies pose “no material risk” with regards to monetary or financial stability in the UK due to the small size of such operations at present. However, the paper describes the underlying technology of blockchain as beneficial in many regards, which is evident given its recent positive completion of a distributed ledger technology project.

CBDC use-cases

Countries around the world have been adopting national digital currencies in the most recent of years. Senegal in West Africa was one of the first to roll-out a digital currency. Announced in 2016, the blockchain based eCFA currency, which is dependent on the central banking system, is circulated alongside paper money and is helping unbanked Africans in the emerging market connect to financial services.

This year, Venezuela has utilized cryptocurrencies to extraordinary effect in the face of world-leading levels of hyperinflation and poverty. Through this success, the Venezuelan government announced a move to an oil-backed national cryptocurrency called Petro, which is presently being utilized to fund a huge housing project.

Though in a bizarre turn of events, the Venezuelan government announced recently that it would be getting rid of its fiat currency the Bolivar Fuerte and replacing it with a fiat currency that is tied to the Petro, the new fiat is to be named the Sovereign Bolivar.

The “economic reconversion” is to start on 20 August 2018, says Venezuelan President Nicolas Maduro.

 

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Bank of England Governor Openly Considers a Central Bank Digital Currency (CBDC)

Mark Carney, Governor of the Bank of England, spoke at the Riksbank Anniversary conference on Friday, putting forward an open-minded stance about the possibility of a central bank digital currency (CBDC).

Potential CBD for England

As reported by Bloomberg, while Carney appeared open to the idea, he also pointed to several issues that prevented him from offering his full support for a CBDC. Specifically, Carney stressed his view that cryptocurrencies are not a true equivalent of money, and that should a CBDC be adopted, it will not be capable of happening successfully in the near future.

During his speech, Carney went on to explain that the Bank of England is looking to boost diversity within the institution by engaging with people who not only come from a mainstream economic background. “The future of central banking may involve fewer central bankers, ” he said, indicating perhaps a future direction more compatible with the cryptocurrency field.

Sweden’s central bank Riksbank hosted the conference. Risbank is currently researching the practicality of implementing an e-krona, a CBDC for Sweden, with results from the inquiry scheduled to be published in 2019.

Carney and Crypto

The Bank of England issued a working paper earlier this month, detailing results of an extended inquiry into the possible financial risks and stability issues associated with CBDC. The report indicated that there was no probable cause to assume adopting a CBDC would create issues surrounding private credit, or total liquidity provision to the economy.

Carney has not held back on his personal, skeptical view of cryptocurrencies in the past. In February this year, he stated ”[cryptocurrency] has pretty much failed thus far on… the traditional aspects of money. It is not a store of value because it is all over the map. Nobody uses it as a medium of exchange.”

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