Several advanced and prominent central bank digital currency initiatives are setting the global standard in research, identification of credible policy objectives, use cases and technological design. These projects are also among the first to outline approaches to the on-the-ground realities and practicalities of implementation.
The People’s Bank of China’s digital currency/electronic payment project is by far the biggest in scale and furthest along in implementation. The PBoC is working alongside private sector players to distribute digital M0 among its population. The most recent joint venture is with the Society for Worldwide Interbank Financial Telecommunication, where SWIFT will obtain a local licence and manage local network management activities, all in compliance with Chinese regulations. Despite the scope of SWIFT’s activities, which are limited, it signals China’s growing intention explore how their systems could integrate with global payment infrastructure.
Cambodia is another country taking a public-private approach. Its Bakong initiative, however, is not purely a CBDC system. Instead, it is working to reinvent its core infrastructure, allowing more payment players to participate, generating greater innovation and competition.
The Swedish Riksbank was an early explorer of retail CBDC, identifying a strong policy objective and use case amid the declining use of cash. One important objective of the e-krona project is to solve issues with bank deposit disintermediation. The project remains under review, however, as the benefits are debated in government.
The Monetary Authority of Singapore has made iterative progress on its project since 2016. The focus now is on using its payment network prototype, developed in collaboration with JPMorgan and Temasek, to continue to serve as a test network. It will facilitate collaboration with other central banks, as well as the financial industry as they work together to develop next generation cross-border payment infrastructure.
The Bahamas’ sand dollar project offers a number of big lessons for implementing a CBDC and tackling on-the-ground realities of deployment during a pandemic. The result has been a number of novel innovations which tackle offline payment and settlement issues, ensuring inclusion through low-cost access and creating a resilient network.
These countries are leading the world when it comes to CBDC, providing a guide for how others could develop their own projects.
China could use its advanced position to help internationalise the renminbi
The People’s Bank of China’s research into central bank digital currency, started in 2014, began to bear fruit last year. Digital currency trials were announced across four cities: Shenzhen, Suzhou, Chengdu and Xiong’an, with lotteries aiding participation. Over 2m Shenzhen citizens signed up for the lottery, with 50,000 winning a wallet containing 200 digital yuan. China plans a broader roll-out of its CBDC in 2022, through its digital currency/electronic payment project, known as E-CNY.
Chinese authorities are pondering how to introduce the currency without disrupting the current financial system. The digital currency may even complement existing financial services and payments providers rather than compete with them. Mu Changchun, head of the PBoC’s digital currency research institute, said last year that the digital currency will not compete with payments giants WeChat Pay and Alipay. Changchun said, ‘WeChat and Alipay are wallets, while the digital yuan is the money in the wallet.’
China is also paying close attention to the impact of its digital currency on the banking system. Four state-owned banks will distribute the digital currency and will be central to its existence. This two-tier model, where consumers still must have accounts at commercial banks, distinguishes itself from the one-tier model, where consumers would have their own account at the central bank. A two-tier model ensures that commercial banks can still offer financial services to their customers. There are also suggestions that the PBoC could relend digital currency deposits to commercial banks to replace their funding. This may give the central bank even more oversight of the use of its digital currency and could lead to more monetary policy tools.
There is discussion about whether the digital currency can be used for making cross-border payments more efficient and play a role in the internationalisation of the renminbi, but thus far China’s efforts have been focused domestically. We may expect iterative expansion along the belt and road in the next cross-border phase.
The PBoC is reaching further with its experiments by introducing a phone-free digital yuan, where a smart card-like device can be used for payments. This will dispense with the need for an internet connection, important in a country where 40% of people, chiefly those living in the countryside, do not use a smartphone. This card would provide more inclusive access to the digital yuan, increasing its use and furthering China’s lead in the technology.
Bakong debuted in late 2020, aiming to promote use of the local currency
Bakong, Cambodia’s newly introduced mobile platform, is not a fully-fledged central bank digital currency. Rather, the nation says it is a ‘backbone payment system’, a unified, interoperable service that allows customers of different banks and payment service providers to send money to one another. But Bakong does incorporate features of distributed-ledger technology in a closed-loop system, safeguarding privacy and integrity.
The focus is on retail payments and Bakong fits in where other countries would have a real-time gross settlement system, which Cambodia previously lacked. The wholesale payments system is unchanged and operates through the national clearing system, though the central bank has said it is keeping an eye on other central banks’ work on distributed ledger technology.
Bakong is designed to be a back-end structure that won’t compete with current payment services providers and banks. Cambodia was well placed for something like Bakong, as it had a high rate of mobile phone ownership but a low rate of financial inclusion.
As well as boosting financial inclusion, Bakong could also encourage the use of Cambodia’s riel. The economy is dollarised and an interoperable payment system that works like an RTGS would make using local currency more convenient, encouraging its circulation. The riel is held back by a lack of large denominations, making significant transactions cumbersome. ‘We aim to improve financial inclusion, efficiency and safety, as well as promote the use of our local currency,’ Serey Chea, director general of the National Bank of Cambodia, told OMFIF last year.
Some of the challenges in launching Bakong have been making it fit with the current network of financial services providers – banks, payment service providers and telecoms companies – without making them redundant.
Another has been to introduce standardised quick response codes across the system, which need to replace current QR codes used by payment firms and banks for customer transactions.
Cambodia is looking to the develop the system in the future. Bakong has taken steps to allow cross-border transactions. ‘We are working on cross-border operations and have already signed a memorandum of understanding with Malaysia’s Maybank,’ Chea said. ‘We want to allow migrant workers – many of whom are women – to send money back home free of charge and have more control over their finances.’
Project Ubin lays foundations for Singapore’s retail central bank digital currency
In July 2020, the Monetary Authority of Singapore completed the final phase of its central bank digital currency project, Project Ubin. Project Ubin’s goal was to develop a simple yet efficient alternative to the existing system, based on central bank issued digital tokens. Five stages of blockchain experiments, involving over 40 financial and non-financial firms, were carried out over half a decade. With each stage, spearheaded by MAS, reports were released that explained the technical details.
In the first two stages, MAS partnered with a consortium of financial institutions. Teaming up with R3, a distributed ledger technology company, in the first phase in 2016, MAS looked at prototype design principles. Together with five technology partners, the second phase the following year was concerned with developing software for three different models for decentralised interbank payment and settlement. In the third phase, delivery-versus-payment capabilities were advanced. These demonstrated settlement finality, interledger interoperability and investor protection. The accompanying technical report also expanded on resiliency considerations and a framework to govern posttrade settlement processes, such as arbitration.
The Bank of Canada, Bank of England and MAS collaborated on Ubin’s fourth phase, which assessed models for improving cross-border payments and settlements. In 2019, BoC and MAS were successful at using CBDCs to perform cross-border and cross-currency payments. Project Ubin’s final stage tested the commercial viability and value of a blockchain-based payment network and its ability to integrate with commercial blockchain applications. Temasek, JPMorgan and Accenture worked with MAS on this last phase, which culminated with the creation of a multi-currency network prototype.
After the completion of Project Ubin, MAS has continued working on the prototype to develop next generation cross-border payments, infrastructure and deploy blockchain technology. Sopnendu Mohanty, chief fintech officer at MAS, said that a shared taxonomy across different parties or standards is needed, with the transformation of the payment system being an urgent task.
Apart from the technical knowledge it produced, one of the lasting legacies of Project Ubin may be greater collaboration between financial and non-financial institutions. While MAS is staying quiet on if they will release a CBDC in the near future, experiments and discussions will continue. It may not be long before we see a Singaporean retail central bank digital currency.
Falling cash use and the emergence of private competitors are driving the Sverige Riksbank to rethink money
The Sverige Riksbank’s e-krona project, first started in 2017, launched its pilot last December. The endeavour, due to last until November 2022, serves as a learning experience of what has been called the world’s most cashless society.
Previous projects explored the legal, technical and economic impacts of the e-krona, including possible consequences for bank balance sheets and its fit with the Riksbank’s mandate. The pilot wants to answer these questions in a more practical manner by giving users an e-wallet which they can use to store, spend and send retail central bank digital currency.
The Swedish central bank sees two reasons for issuing a retail CBDC. First, Swedes are using less cash. The Riksbank notes that, as of 2018, only 13% of survey respondents made their most recent purchase with cash, compared to 39% in 2010. Second, the emergence of private challengers to monetary sovereignty – such as Facebook’s Diem – is pushing the central bank to explore CBDC. ‘The state needs to have a role in the payment market,’ the bank remarks on its website, to maintain the stability of the monetary system. As an intermediary step, the bank submitted a request to Sweden’s parliament that a panel of experts explore the merits of CBDC and requested a review of the concept of legal tender to ensure continued, universal access to money.
The Riksbank said it would test various designs, including token- and account-based solutions, on R3’s Corda platform, in collaboration with Accenture. The latter has previously worked on CBDC projects in Canada and Singapore. The RIX central payment system will serve as a platform for banks to acquire e-krona and users will have to activate their wallets through these banks before they can use the digital currency. However, once this is completed, the CBDC can be used for everything from retail payments to transfers, and the Riksbank has announced it will explore the possibility of offline transactions.
The e-krona’s distributed ledger technology network will be entirely separate from RIX, granting the system an added layer of resilience. The central bank will still control the DLT network, granting access to new nodes.
As the Swedish government explores the feasibility of e-krona, a great deal on focus will be on the effects of disintermediating deposits on the banking sector. Sweden and the world is set to learn several important lessons from its pilot.
World can learn lessons from the Bahamas as they plan their own digital currencies
While 2021 started with only one live central bank digital currency project – the Bahamas’s sand dollar which launched in October 2020 – it won’t end the year with so few. Central banks are piloting new CBDC endeavours, exploring possible design options, policy implications and impacts on intermediaries. As such, the archipelago is at the forefront of a wave of technological change and will provide an object lesson for others.
The Bahamas’ environmental features made the development of a CBDC a priority. Spread across 700 islands and keys, the nation is prone to natural disasters, has an unstable power supply and sees increasing financial inclusion as a key issue. The central challenge behind the sand dollar, then, was creating a simultaneously resilient, inclusive and convenient payment network.
The Central Bank of the Bahamas developed a retail CBDC with potential wholesale applications, which could be used both to settle transactions between financial institutions and by consumers. Initially, digitalised Bahamian dollars were held by six authorised institutions, which in turn could transfer funds between themselves.
Consumers, in the meantime, use an app to store, move or pay with the sand dollar. Reuters reported in December 2020 that Bahamians were finding the CBDC easy to use and convenient, showing early signs of success. Businesses, meanwhile, were happy to avoid high credit card transaction fees.
The sand dollar is built on a proprietary software stack, Cortex, developed by technology partner NZIA. This set-up can manage all aspects of CBDC issuance, including movement, usage, risk management, compliance, engagement and accessibility, as NZIA noted in the September 2020 OMFIF DMI Journal. At the same time, the platform is open-ended, allowing participants to build on top of the network. In addition to the programmability of the network, the CBDC itself is programmable, allowing the government issuer to, for example, set an expiration date or only allow certain uses for the funds.
The launch of the CBDC required new legal, regulatory and physical infrastructure. As part of this rollout, parliament passed a digital assets and registered exchanges bill, facilitating the registration, regulation and management of digital token exchanges. In addition, project engineers were required to set up low cost, redundant networks to ‘support the backbone of the existing network connections servicing the country.’ As more CBDCs come online, the Bahamas will prove to be a useful guide.
Chris Papadopoullos, Pierre Ortlieb and Levine Thio are Economists at OMFIF. This is an excerpt from the February edition of the DMI journal.