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The rise of central bank digital currencies (CBDC) has left commercial and public sector banking officials dwelling on what the best move forward is and potential risks. Meanwhile, China continues to emerge as the most likely first mover.
CBDC emergence has spurred global momentum among central banks. A recent survey by the Bank of International Settlements found that 60 percent were now actively engaged in experimentation or proof of concept, while 14 percent had moved this on to pilot stage.
But the excitement surrounding the new form of money has been met with an equal amount of concern as regulators and commercial players tread carefully, as was evident at the Sibos 2021 session, "CBDCs Through The Bankers’ Lens - Challenge Or Opportunity?".
There is a geographical angle to the creation of a CBDC, noted Florence Lubineau-Henric, central bank chief at BNP Paribas.
"In Europe, money creation and money distribution is driven largely by commercial banks," she said. "Here, banks are systemic to the economy and therefore are highly regulated, so opening access to central bank money for non-banks drives concerns in terms of asymmetry of treatment between payment service providers and banks."
Banks are much more regulated, she said, adding that these concerns are driven by a need for fair competition. "We must have equivalent supervision and rules for all actors as well as for licensing, authorisation, and registration procedures."
Although nobody expects the CBDC to be a one size fits all issue, it needs to be issued in a way that does not allow it to create more problems than it solves, she said.
One of the concerns for people in the commercial banking space has been the potential for disintermediation from the private sector.
Sweden’s Riksbank, for example, has confirmed that it is considering offering interest on e-krona deposits — a possibility that some fear might shake the current banking system by driving masses away from retail banking.
Citibank's managing director, Tony Mclaughlin, struck a more positive tone, comparing the potential issuance of CBDCs to that of instant payments.
"In the past five or so years, we've connected into 20 instant payment schemes. Maybe in the next five years, we'll be connecting into 20 CBDCs,” he said. "Our view is that when you add a new lane to a highway, you don't necessarily get less traffic, you get more traffic. That's been our experience with instant payment schemes and I think will be the experience if CBDCs are launched.
"However, what regulators and SWIFT must do is consider, at a macro-level, is how to respond to the challenge of unregulated or quasi-regulated forms of money, such as cryptocurrencies.
“My question is whether narrow CBDC proposals are the best way for the regulated sector to respond?” he stated.
Retail V Wholesale
There are two different types of CBDC being considered by central banks.
Retail CBDCs, for low-value payments, “could be thought of as a form of the digital banknote, an item provided by the central bank to provide the basic payment needs of households and businesses,” said Tom Mutton, CBDC director at the Bank of England.
This form is being explored with great interest in the UK with pace and purpose, he continued, cautioning that no decision has been taken yet.
“This would be really quite a significant innovation in money and something which we will have to thoroughly explore before deciding whether or not we should do it,” he said.
However, realising the benefits of a retail CBDC will require private sector support, he continued. Private sector actors have begun to flourish in the CBDC space. For example, companies including G+D, Bitt, and Ripple have all entered into partnerships with central banks to help them create a CBDC proof of concept.
“Certainly, in the UK, as the Bank of England, we are supportive of safe and responsible private innovation,” Mutton said.
Meanwhile, there are also wholesale CBDCs, used mostly for clearing, settlement and wholesale payments.
“My perspective is that while a wholesale CBDC is very exciting, and is important, it has actually been around for a long time,” Mutton argued. “We have digital central bank money available to wholesale participants in the form of central bank reserves,” he said.
Much of the debate around wholesale CBDCs is as much about innovation in technology as it is innovation in money, Mutton said. “If there are new ways to interface with reserves, to think about how to use them, and how best to interact with them via new technology platforms then I think that is a very positive development,” he suggested.
Although merchants, consumers and businesses have benefited from payments innovations, that does not mean we should stay where we are today, urged Mutton, stating that a CBDC could be part of further innovation — as long as it adds sufficient value.
“We have to be really conscious of the fact that people’s payments needs might evolve really quickly and possibly in ways that we cannot fully anticipate,” he warned, pointing to the fact that people thought they did not need smartphones. “Now, we can’t live without them.”
Regulators need to be open minded on innovation, he said. “The really crucial question is one of the value of having central bank money and the security and safety that it offers, and whether that is important for people to have in digital form.”
China’s progress
The CBDC debate is moving fast in Asia, noted Soon Chong Lim, group head of transaction services at DBS Bank in Singapore.
For example, Singapore’s Monetary Authority (MAS) has taken interest in retail and wholesale CBDCs as well as project Dunbar, which involves MAS, and the central banks of Australia, Malaysia and South Africa investigating CBDC interoperability and the technology infrastructure.
One of the potential first movers, in Asia and beyond, is China. “The PBOC have already articulated how the distribution of a CBDC will work,” noted Chong Lim.
“We await with baited breath whether the PBOC [People's Bank of China] will be taking its CBDC toward cross-border use cases,” he said, listing options such as retail outbound travel, ecommerce, or even wholesale use cases.
“If they decide to do that, there will be significant developments in Asia about the rearrangements of the currency that we use for cross-border trade and investments,” he suggested.
So much of the cross-border trade and investments that happen in Asia use the US dollar, he said. “If central banks get their act together, or PBOC resolves to have the CBDC used for cross-border purposes, that could be a significant development in terms of monetary arrangements and use of settlement mechanisms.”
China was one of the first countries to begin in earnest to explore the possibilities of issuing a digital yuan, starting in 2014 under the governorship of Zhou Xiaochuan, who was succeeded upon retirement by Yi Gang in 2018. The digital currency work began as a way of improving operating costs and efficiency, and since, companies such as Ant Group and UnionPay have become involved in the project, as well as the country's financial institutions.
Testing began in 2020 in provincial cities such as Shenzhen and Suzhou, before expanding testing to the country’s largest and most populous cities, including Shanghai. There are even suggestions that the CBDC could be tested during Beijing's hosting of the 2022 Winter Olympics.
Regional interest in the project is clear, with crypto experts having told VIXIO this year that there is more interest in what China may do as opposed to the work of big tech companies like Facebook issuing stablecoins, which has prompted anxiety among Western politicians and regulators in the US and EU.
That is not to say, however, that interest in the PBOC's work is exclusive to neighbouring jurisdictions. There have been speculations globally that a digital yuan could have geopolitical implications, creating the possibility of a new reserve currency.
The potential for soft power that comes with first mover advantage, as well as the need to tackle the growth of stablecoins, are seen to be among the key drivers of PBOC’s motivations.
