Remarkable progress has been made in central banks’ exploration of the future of digital currencies, especially in tackling technical challenges. But the path to issuing a central bank digital currency remains tricky and only a few central banks are poised to take the leap.
A new report from OMFIF’s Digital Monetary Institute, in partnership with Giesecke+Devrient Currency Technology, emphasised a need for urgency in issuing a retail CBDC. Launched on 11 February with a live panel discussion, ‘CBDCs: It’s time for action’ found a split in expected time to issuance. While almost a fifth of surveyed emerging market central banks saying that they expect to issue within two years, no developed market institutions had set similar timelines (Figure 1). Emerging markets are evidently leading the way, while momentum in developed markets needs to be reinvigorated.
Figure 1. Varying timelines on CBDC issuance
When do you expect to issue a central bank digital currency? Share of respondents, %
Source: CBDCs: It’s time for action
Part of the reason for the delay here in developed markets’ central banks might be to do with the dynamic innovation taking place in private sector payments. In developed markets, the private sector tends to be the driver of innovation, dominating the provision of payments over central banks.
Keeping money public
The CBDC debate took a major turn on 23 January after US President Donald Trump’s executive order ruled out the possibility of a US CBDC in favour of digital assets and stablecoins.
As a global leader, many smaller central banks, including those from emerging markets, look to the US to learn from its CBDC work, such as Project Hamilton and the involvement with the Bank for International Settlements. By prohibiting the issuance of a CBDC, the US risks losing its influence and leadership in this area to the detriment of the global community.
The executive order instead points to stablecoins to carry the role of preserving the dollar’s sovereignty, indicating a turn to private sector efforts, instead of public via CBDCs. However, this raises concerns. Speaking at the launch event, Wolfram Seidemann, chief executive officer of G+D, echoed what Piero Cipollone, member of the European Central Bank’s executive board, said earlier in February: ‘there is a fear that the global promotion of US dollar-backed stablecoins would further disintermediate banks’.
With stablecoins as the dominant form of money in the hands of the private sector, central banks may no longer be able to guarantee that money remains a public good. Ultimately, it is important to keep money public and CBDCs are able to ensure that it remains secure, universally accessible and transparent.
Addressing structural issues
The panel also explored the wider potential of a CBDC over other solutions, such as instant payments systems. While IPS can enhance the speed and ease of transactions, CBDCs could deliver a more comprehensive approach. They have the potential to address the broader structural issues like inclusivity, resilience and interoperability while serving as a platform for innovation.
As Seidemann put it, ‘by providing a common and interoperable standards and granting access to market participants that goes beyond traditional players, a CBDC can create a new market based on that public infrastructure that allows those market participants to create new products and services’.
Furthermore, Peerapong Thonnagith, deputy director of digital currency policy and development at the Bank of Thailand, described how this might work based on the bank’s CBDC research,. He said that a CBDC could ‘provide a common standard and common solution of the wallet system, so that service providers can commonly adopt into the system along with other service providers since it is a common infrastructure’.
Many of the frictions in payments systems relate to the challenges of switching between different types of money, provided by different entities. By creating a universally interoperable base layer, a CBDC – into which all types of money can be converted – can provide a bridge solution to remove these frictions.
Another important function CBDCs could provide over IPS is offline functionality, especially for emerging markets. This feature could be key to improving financial inclusion by serving individuals in remote areas. Offline functionality could also reinforce operational resilience and guarantee economic stability during natural disasters or outages.
With the ability to address these structural issues, CBDCs can help create a more resilient, inclusive and efficient global payments landscape. The ultimate role of a CBDC is to help establish trust in the financial system. As a public alternative complementing private sector innovation, a CBDC may preserve the central bank’s role as the anchor of trust and financial stability, and ensure payments remain a public good.
The panel concluded with a sense of urgency to ‘enter into the next stage’ of the CBDC debate. It was a call for ecosystem players to continue to innovate the payments landscape and introduce the benefits of a CBDC to all individuals.
Katerina Liu is Research Analyst, Digital Monetary Institute at OMFIF.
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