Ten things you should know about Central Bank Digital Currencies

Issue 47 | 10 September 2020

Welcome to issue 47 of Payments, Payments, Payments - in this weeks subscriber edition we cover ten things you should know about Central Bank Digital Currencies (CBDC).

Let’s start with the simplest description of a CBDC that I’ve seen:

A Central Bank Digital Currency (CBDC) would be an electronic form of central bank money that could be used by households and businesses to make payments.

Bank of England

Ten things you should know:

1: Why we are getting digital currencies now

It’s time for a two minute Daveflix clip about why we are getting digital currency now:

2: Japan are piloting a CBDC

The central Bank of Japan (BoJ) are conducting a controlled pilot for a central bank digital currency (CBDC) to see how a digital yen would function from a technical standpoint.

The BoJ said it will begin a Proof-of-Concept (PoC) and wants to test the digital fiat in a controlled environment before deciding whether or not to proceed.

The bank made its intentions clear in a feasibility report, where it stated that it intends to work in conjunction with the central banks of other leading economies, many of whom are also piloting CBDCs.

More: Japan CBDC pilot.

3: Sweden are experimenting with a CBDC

The Riksbank are experimenting with an e-Krona:

The use of banknotes and coins is declining in society. At the same time, technological advances with regard to electronic money and payment methods are proceeding rapidly. The Riksbank sees potential problems with the marginalisation of cash and has therefore initiated a pilot project to develop a proposal for a technical solution for Swedish kronor in electronic form, an e-krona. No decisions have yet been taken on issuing an e-krona.

More: Swedish e-krona.

4: The UK is studying a digital currency

The Bank of England has published a discussion paper on central bank digital currency (CBDC) together with an associated BoE webinar.

The BoE describe an electronic form of central bank money as:

A Central Bank Digital Currency (CBDC) would be an electronic form of central bank money that could be used by households and businesses to make payments. The Bank has not yet made a decision on whether to introduce CBDC, and intends to engage widely with stakeholders on the benefits, risks and practicalities of doing so.

Source: Bank of England

For more from the Bank of England visit:

• Central Bank Digital Currency: opportunities, challenges and design

• Bank of England Governor Andrew Bailey on the future of cryptocurrencies and stablecoins - click here for video.

• Speech by Sir Jon Cunliffe, Deputy Governor Financial Stability, Bank of England - It's time to talk about money

5: Central bank digital currencies (CBDCs) "deserve consideration"

Central bank digital currencies (CBDCs) "deserve consideration" as an additional means of payment, says a report from the Bank for International Settlements (BIS).

BIS state that in 2019 70% were currently, or soon will be, engaged in CBDC work. Since then, Canada, Italy and Thailand, among others, have taken significant steps on the issue.

Central banks around the world are stepping up their efforts to study CBDCs and, whether wholesale or retail, the goal is to create safe and reliable settlement instruments for transacting in the digital economy.

Benoît Cœuré, head, BIS Innovation Hub

More: CBDCs deserve consideration.

6: The FED is getting hypothetical

The Federal Reserve Bank of Boston is working with the Massachusetts Institute of Technology (MIT) to develop a "hypothetical" digital currency platform.

The FED have announced that partners are working on a "multiyear effort to build and test a hypothetical digital currency oriented to central bank uses."

Given the dollar’s important role, it is essential that the Federal Reserve remain on the frontier of research and policy development regarding CBDC

Federal Reserve governor Lael Brainard

For more: Fed partners MIT on 'hypothetical' digital currency.

7: There is huge variance in the approaches being taken by central banks

While central banks around the world are investigating the creation of their own digital currencies, there is huge variance in the approaches being taken, a Bank for International Settlements (BIS) working paper shows.

In countries where digital payments are already very advanced, and cash use is declining, central banks may respond in particular to ensure the ongoing availability of a public sector-provided means of payment. In countries with a lower penetration of digital payments, financial inclusion may be an important driver.

More: BIS examines the rise of the CBDCs.

8: Virtual testing platforms are being built to help central banks assess and explore national digital currencies

Mastercard has built a virtual testing platform to help central banks assess and explore national digital currencies.

Central banks around the world are warming to the concept of creating their own digital currencies. A recent survey from the Bank for International Settlements found that 80% are working in some way on CBDCs, while 40% have moved beyond conceptual research to experimentation.

Mastercard is looking to support these efforts with its new platform, which promises to enable the simulation of issuance, distribution and exchange of CBDCs between banks, financial service providers and consumers.

This new platform supports central banks as they make decisions now and in the future about the path forward for local and regional economies.

Raj Dhamodharan, EVP, digital asset and blockchain products and partnerships, Mastercard

More: Mastercard launches CBDC testing platform for central banks.

9: The IMF have been thinking about it

Should central banks issue a new digital form of money? A state-backed token, or perhaps an account held directly at the central bank, available to people and firms for retail payments?

Christine Lagarde, Singapore Fintech Festival, 2018

To help explore the ramifications of this question you’ll need to grab a copy of The Currency Cold War by David Birch - click here.

And finally…..

10: It all started in Swindon

A quarter of a century ago, a window into the money of the future opened in Disney World’s twin town in England, Swindon. 

Yes, Swindon.

(July) …saw the Silver Jubilee of the launch of the world’s first central bank digital currency (CBDC), Mondex, in my home town of Swindon. I sure a great many people have never heard of it, but it is important to remember what was an important milestone on the road to digital money worldwide.

Dave Birch

To celebrate Mondex’s Silver Jubilee, Dave Birch has published a blog: The Dawn of Digital Currency and Consult Hyperion have posted a podcast: 25 years ago Mondex was launched.

The blog and the podcast are more than a nostalgic look at money and Swindon in the 1990’s. The trials and findings help us frame our thinking about digital currency.

The Currency Cold War by David Birch

The way that money works now is a blip. It’s a temporary institutional arrangement agreed in response to specific political, technological and economic circumstances.

As these circumstances change, so money must change. Many people think that it will undergo a pretty significant change in the very near future and we need to start planning for the coming era of digital currency.

The historian Niall Ferguson wrote in 2019 that:

If America is smart, it will wake up and start competing for dominance in digital payments.

Competing for this new currency dominance could mean a new cold war in cyberspace with, for example, Facebook’s private currency facing off against China’s public currency facing off against a digital euro. Or would a digital dollar win this new space race?

For more about The Currency Cold War by Dave Birch - click here.

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Thanks

Mike