Updates on ECB retail and wholesale CBDC workstreams
The European Central Bank (ECB) published a slew of PowerPoint presentations from its two parallel central bank digital currency (CBDC) workstreams (wholesale and retail).
Bank of Israel considering remunerated CBDC
Andrew Abir, Deputy Governor of the Bank of Israel (BOI), floated the idea of a remunerated digital shekel, as a way to push banks to up their games. "We could consider that the digital shekel, which will be built to be able to pay interest directly on the public's holdings, would actually do that. Of course, we will need to think about this carefully – for example, by setting it at a lower level than the Bank of Israel policy interest rate, and/or by limiting the types of users who will be eligible for it and the maximum amount on which interest would be paid."
Modernizing Financial Markets with Wholesale CBDC
The World Economic Forum (WEF) published a report that explores the potential of wholesale central bank digital currency (CBDC) to unlock new economic models and integration points. Four areas of differentiated value are highlighted. First, they can realize a global settlement window by harmonizing foreign exchange (FX) and securities markets settlement times to overcome operational hour disparities among key trading corridors. Second, they can expand payment-versus-payment arrangements through cost-effective solutions that can support a diversity of currencies to enhance currency liquidity. Third, they can mutualize data across parties by securely transmitting settlement data across parties and jurisdictions to support automation, reduce settlement risk, and enhance trade and post-trade activities. Lastly, they tokenize credit risk-free settlement media for settling tokenized securities and supporting emerging tokenized payment instruments. https://www.ledgerinsights.com/wef-accenture-release-report-on-wholesale-cbdc/
New Zealand launches CBDC consultation
The Reserve Bank of New Zealand (RBNZ) launched its second retail central bank digital currency (CBDC) consultation (the first one was in 2021). Based on feedback and preparation of a business case, a decision will be made on whether to proceed to a "preparation" phase. The consultation document advocates for "digital cash" accessible to everyone, including those that don't have a bank account, and should be usable when the power is out or the internet is down, and work via physical cards, and on devices like phones and or watches. https://consultations.rbnz.govt.nz/money-and-cash/digital-cash-in-new-zealand/
Financial Stability Implications of CBDC
The U.S. Federal Reserve published a paper that examines the financial stability risks in times of stress associated with central bank digital currency (CBDC) under different design options. The analysis is based on lessons derived from historical case studies of bank runs as well as on an analytical framework that allows for the characterization of the mechanisms through which a CBDC can affect financial stability. It then discusses an extensive array of policy tools that can be employed to mitigate these risks.
Bundesbank and MIT Media Lab to conduct joint CBDC research
The Deutsche Bundesbank will work with the Massachusetts Institute of Technology's Digital Currency Initiative (MIT DCI) to investigate pivotal CBDC design questions, such as the implementation of data protection and privacy. Deutsche Bundesbank President Dr. Joachim Nagel said that the Eurosystem would not have access to digital euro users' personal information, and that consumers should have more control over their personal data. https://www.bundesbank.de/en/press/speeches/digital-euro-vision-advances-and-challenges-929800
Bank of Thailand retail CBDC proof of concept update (English version)
The Bank of Thailand (BOT) published an English version of its update on its retail central bank digital currency (CBDC) technical testing. The original version was published in late March 2024 in Thai and, because Google Translate was returning gibberish, I wasn’t able to ascertain whether the latest work was a pilot or proof of concept (POC). However, according to the new document, it is clearly a proof of concept because the 4,000 individual users that participated were employees of the BOT and the three intermediaries that took part. In any case, the POC successfully demonstrated the potential of the technology behind the retail CBDC system, but the BOT said it has no plans to launch one and will use the technology design to further develop a more efficient payment system.
The South African Reserve Bank to continue CBDC exploration
The South African Reserve Bank (SARB) published its Digital Payments Roadmap, aimed at realizing the overarching goals and strategies of the National Payment System Framework and Strategy: Vision 2025, including the promotion of competition and innovation, cost-effectiveness, interoperability and financial inclusion. In the Roadmap, the SARB commits to further exploring the issuance of retail and wholesale central bank digital currency (CBDC) over a two-year timeline. The work will follow up on the work that started in May 2021 to investigate the feasibility, desirability and appropriateness of issuing retail CBDC, and on the SARB's wholesale CBDC proof of concept work that goes back to Project Khokha 1, completed in 2018. The SARB is embarking on Project Khokha 2x, which will focus on wholesale CBDCs that could be used for settlements and collateral.
Central bank digital currency and monetary policy implementation
The European Central Bank (ECB) published a paper that discusses the potential impact of retail CBDC introduction on monetary policy implementation if it leads to a decrease in commercial bank deposits. Should this happen, bank holdings of central bank reserve holdings might shrink. However, the paper argues that uncertainty as to the timing and extent of any conversions of deposits into CBDC might prompt banks to scale up their demand for central bank reserves in order to hold larger precautionary buffers. Consequently, central banks might need to adjust their reserve supply and other features of their monetary policy implementation. In any case, the paper suggests CBDC design features could mitigate the risk of negative consequences for monetary policy implementation.
Bank of Japan publishes CBDC proof of concept progress report
The Bank of Japan (BOJ) published a progress report on its central bank digital currency (CBDC) proof of concept (POC) work. It’s available only in Japanese, so I’m leaning on Norbert Gehrke’s excellent summary. The BOJ is building an account-type CBDC ledger that covers everything from user wallets/apps to the intermediary and central systems. In parallel, the BOJ has established a CBDC Forum with 64 private companies organized into five working group themes, with more planned. The BOJ aims to steadily advance CBDC discussions through POCs and the CBDC Forum, although no decision has been made yet on actual CBDC issuance. https://www.boj.or.jp/paym/digital/dig240422a.pdf English version: https://www.boj.or.jp/en/paym/digital/dig240531a.pdf
G+D Partners with Mauritania's Central Bank for CBDC Design
The Banque Centrale de Mauritanie is partnering with Giesecke+Devriant (G+D) to design and introduce a potential CBDC complementing the Ouguiya national currency. The aim of the joint project is to gain a clear understanding of how a digital Mauritanian Ouguiya could benefit society and the country's economy. G+D will support the central bank in defining the requirements for a national CBDC and deliver the technical solution for initial testing of defined uses cases.
Kyrgyz Bank advances its digital som project
The Kyrgyz Bank Interagency Working Group (IWG) on Regulatory Impact Analysis (RIA) wrapped up its work on the implementation of a potential digital som. Their comprehensive analysis delved into ten Kyrgyz Republic legislative acts related to the introduction of the central bank digital currency (CBDC), proposing crucial amendments in the process. During a meeting of the Steering Committee on Digital Som, the IWG demonstrated a demo version of the digital som on the (blockchain) platform of one of the CBDC platform providers of CBDC. Going forward, the project team will continue further work on research, analysis of proposals, as well as negotiations with CBDC platform. https://www.linkedin.com/posts/altynbek-kamchybek-uulu-0883b927a_digitalsom-regulatoryimpactanalysis-economicdevelopment-activity-7188456348999712768-PDZw/
ECB says iPhone is currently incompatible with digital euro
The European Central Bank (ECB) is opposed to Apple’s proposed changes to the iPhone’s near-field communication (NFC) at the core of Apple Pay. The ECB argues that by not providing third parties with full access to the secure element (SE) of its NFC technology, Apple Pay maintains an unfair advantage against third-party payment apps on iPhones. Because of these limitations, contactless payments made through third-party apps on iPhone would be less user-friendly and ultimately be slower than Apple’s offering. Also, iPhones would be incompatible with the digital euro, because the current enabling legislation requires the ability to do peer-to-peer (P2P) and offline payments, the latter which requires access to the SE.
CBDCs in the Middle East and Central Asia
The IMF published a paper on central bank digital currency (CBDC) developments in the Middle East and Central Asia (ME&CA) region. A survey of IMF country teams representing 31 ME&CA countries found that 19 are considering issuing or exploring CBDC, most of which are at the research stage, although a few are at the proof-of-concept (POC) stage (Bahrain, Georgia, Saudi Arabia, United Arab Emirates). Kazakhstan is most advanced in its CBDC journey, having initiated two digital tenge pilots. The region's fragile and conflict-affected states and low-income countries (LICs) have expressed limited interest. The paper also includes three country case studies (Jordan, Kazakhstan, and Libya).
Successful execution of RBI’s programmable CBDC pilot
IndusInd Bank successfully implemented the Reserve Bank of India’s (RBI’s) programmable central bank digital currency (CBDC) pilot. It was executed as an alternate form of CBDC wherein the bank can program the end use of funds being disbursed to farmers in lieu of generation of carbon credits. IndusInd Bank initiated the programmable CBDC disbursement to 50 farmers in Ratnagiri district of Maharashtra, which will expand to 1000 farmers. Phase 2 of the project will focus on Safai Karmacharis, aiming to increase their income by leveraging revenues generated from the collection, recycling, and repurposing of plastic waste.
Rwanda central bank launches CBDC public consultation
The National Bank of Rwanda (NBR) launched a public consultation on the potential issuance of central bank digital currency (CBDC). A detailed feasibility study, launched in 2023, formed the basis of its approach, that identified four "sweet spots" for a Rwandan CBDC: (i) increase resilience against possible network outages, power failures and natural disasters, (ii) improve innovation and competition, (iii) contribute to achieving the cashless economy national initiative over time, and (iv)develop faster, cheaper, more transparent, and more inclusive crossborder remittances. The consultative paper recommends a cautious iterative approach with multiple proofs of concepts and pilots.
CBDC and the operational framework of monetary policy
The Bank of Spain published a paper that analyzes the impact of introducing a central bank-issued digital currency (CBDC) on the operational framework of monetary policy and the macroeconomy as a whole. It is based on a theoretical model that is calibrated to replicate the main monetary and financial aggregates in the euro area. It predicts that CBDC adoption implies a roughly equivalent reduction in banks' deposit funding, but this has a rather small effect on bank lending to the real economy. This result reflects the parallel impact of a CBDC on a central bank's operational framework. For relatively moderate CBDC adoption levels, the reduction in deposits is absorbed by an almost one-to-one fall in reserves at the central bank, implying a transition from a 'floor' system – with ample reserves – to a 'corridor' system. For larger CBDC adoption, the loss of bank deposits is compensated by increased recourse to central bank credit, as the corridor system gives way to a 'ceiling' system with scarce reserves.
Digital rupee to get boost from offline feature
Speaking at the Bank for International Settlements (BIS) Innovation Summit, Reserve Bank of India (RBI) Governor Shaktikanta Das said offline accessibility, which is in the works, will make the digital rupee an attractive choice for retail users. Governor Das said that the digital rupee should have the same benefits as cash - anonymity and finality of settlement. While there is currently a preference for the Universal Payments Interface (UPI) among retail users, Governor Das was hopeful that offline and programmable CBDC will change this going forward.
Few Chinese workers paid in digital yuan choose to use it
Some Chinese cities have begun to pay employees with eCNY but most convert to cash immediately. Ledger Insights points out that this may be because few retail outlets accept it because of the zero acceptance fees paid by merchants, versus the 0.6% paid on other retail digital payment instruments. Apparently, point-of-sale (POS) equipment manufacturers earn a cut of merchant fees, so zero eCNY fees disincentivize conversion of POS equipment.
Central banks of France and Tunisia conduct WCBDC experiment
[On July 8th 2021] Banque de France successfully carried out a wholesale central bank digital currency (CBDC) experiment in cooperation with Banque Centrale de Tunisie. A wire transfer took place between two individuals, in commercial bank money through transfer of wholesale CBDC between the two central banks.
Central Bank of Taiwan launches CBDC research project
[On June 18, 2020] the Central Bank of Taiwan announced a multi-phase approach to central bank digital currency (CBDC) research, starting with retail CBDC in the first half of 2020 and moving to distributed ledger technology (DLT) based wholesale CBDC in the third quarter of 2020.
The possible impact of the digital euro on Sweden
Sveriges Riksbank published a paper that assesses the impact of a European Commission legislative proposal to open up the possibility for non-euro countries to allow their citizens and businesses to access digital euro services. It concludes that the impact will be minimal, but a digital euro could increase the need for an e-krona to safeguard the role of the Swedish krona and may have positive effects on the work on an e-krona. By taking advantage of the technology and regulatory framework being developed for a digital euro, the costs and complexity of the work on an e-krona can be reduced. Together with an e-krona, a digital euro could also improve and simplify cross-border payments.
World Bank partners with SNB and SDX to issue digital bonds
The World Bank will issue the first CHF digital bond by an international issuer to settle in Swiss Franc wholesale central bank digital currency (CBDC) provided by the Swiss National Bank (SNB). The coupon and redemption payments on the seven-year CHF 200 million bond will be made using tokenized CHF on the SIX Digital Exchange (SDX). The SDX connects to conventional settlement systems such as Euroclear and Clearstream, via SIX SIS, allowing investors to hold the digital bond through their traditional custodians.
Banks in Kazakhstan roll out CBDC card services
Early adopters of Kazakhstan’s digital tenge central bank digital currency (CBDC) who are customers of Altyn Bank, Eurasian Bank and Halyk Bank can apply for virtual and plastic CBDC cards and use them for purchases across Mastercard and Visa global networks. Additionally, they can withdraw cash at ATMs, link their cards to Google Pay, Apple Pay and Samsung Pay, monitor their CBDC card balance and transaction history through mobile banking; and access other related services.
Cross-Border Payments with Retail CBDCs
The IMF published a paper that draws lessons from ongoing experimentation and research to identify design and policy considerations when developing retail CBDC systems so they may be compatible for cross-border payments. The paper provides an analytical framework through the lens of five interrelated elements: access, communication, currency conversion, compliance, and settlement. For each element, the paper identifies key CBDC design choices, many of which can be tackled in the initial preparation phases.
Expanding the cross-boundary e-CNY pilot in Hong Kong
The Hong Kong Monetary Authority (HKMA) and the People’s Bank of China (PBOC) are expanding the scope of the e-CNY pilot in Hong Kong to facilitate the set up and the use of e-CNY wallets by Hong Kong residents, as well as the top-up of e-CNY wallets through the Faster Payment System (FPS). This marks the world's first linkage of a faster payment system with a central bank digital currency (CBDC) system. Users can now set up e-CNY personal wallets in Hong Kong, which requires only their Hong Kong mobile phone numbers. The e-CNY wallets can then be used for cross-boundary payments to merchants, but not person-to-person (P2P) transfers.
Bank of Ghana completes first Project DESFT proof of concept
The Bank of Ghana (BOG) has completed the second phase of Project Digital Economy Semi-Fungible Token (DESFT), a joint project with the Monetary Authority of Singapore (MAS) and the United Nations Development Programme (UNDP). The first phase saw the development of the blockchain-based Universal Trusted Credentials (UTC) system that enables micro, small and medium enterprises (MSMEs) to efficiently verify authenticity of key information, such as basic credentials, licenses, certificates, and trade records across borders. In the second phase, a cross-border payment was made using UTCs, the eCedi CBDC and a Singapore dollar stablecoin, using the Purpose-Bound Money (PBM) protocol. https://www.bog.gov.gh/wp-content/uploads/2024/06/PRESS-RELEASE-BANK-OF-GHANA-ANNOUNCES-SUCCESSFUL-COMPLETION-OF-CROSS-BORDER-TRADE-USING-DIGITAL-CREDENTIALS-120624.pdf
Bank of England point-of-sale proof of concept
The Bank of England (BOE) has assessed the technical feasibility of using existing point-of-sale (POS) hardware, as currently used in the UK, to initiate digital pound payments. This involved a proof of concept (POC) that used EMV standards to send payment instructions from smart cards to POS devices, and then to an application programming interface (API). It demonstrated that, while existing POS terminals may not need to be modified to make online digital pound payments, they might need to be modified for offline payments.
Retail CBDC Impact on Digital Payments and Bank Deposits: Evidence from India
The NBER published an empirical analysis utilizing detailed transaction data from India's digital rupee pilot to explore the dynamics between central bank digital currency (CBDC) and existing digital payment methods, as well as the implications of increased CBDC usage on traditional bank deposits. It finds that policies that increase transaction costs for current digital payment methods catalyze a substitution effect, bolstering CBDC adoption. Furthermore, an uptick in CBDC usage is associated with a notable decline in bank, cash, and savings deposits, suggesting potential paths to bank disintermediation.
Towards a CBDC for the euro area
"The aim of this study is a systematic presentation and brief analysis of (the majority of) the provisions of the proposal for a Regulation of the European Parliament and of the Council “on the establishment of the digital euro”, which was submitted by the Commission on 28 June 2023 as part of its “Single Currency Package” (taking in particular into account its Explanatory Memorandum and most of its recitals). The key concerns raised and proposals for amendment made by the European Central Bank (ECB) in its related Opinion of 31 October 2023 are also discussed."