03 November 2020

Sibos Academy: Defining Central Bank Digital Currencies

In October the new Sibos Academy stream launched as part of Sibos. Facilitated by the SWIFT Institute, the exciting new Sibos Academy provides expert, educational and community-focused content to foster dialogue through diversity of thought. The inaugural session jumped into a very hot topic – Defining Central Bank Digital Currencies (CBDCs).

Staying true to the title of the session, the panel kicked off with a ‘tour de table’ aiming to pin down the elusive definition of what a Central Bank Digital Currency actually is. Just why is it so elusive?  Well, as demonstrated by this panel, on the one hand it can mean different things to different people, and on the other hand it can support central banks to address different issues depending on the local context.

Economically speaking, we can say that it is any form of central bank account held by a non-bank. While this concept is not new, the key question at hand is whether we should widen the range of account holders and if so how far (e.g. non-banks to private citizens). Operationally, a key differentiator is that a CBDC remains a liability of the central bank, whether via an account held at the central bank or with a financial intermediary. 


A new currency?

No, not a new currency per se, but in a nod to the ‘digital’ in CBDCs, we can go further and bring in a multitude of defining and differentiating characteristics such as:

  • CBDCs are digital assets,
  • accounted for on a digital ledger,
  • a ledger that can be distributed or not,
  • are central bank backed and central bank controlled.

How is it different to what already exists?

In the context of the declining use of cash in some economies, CBDCs can be seen as an attractive means for central banks to manage the risks of private money creation (think Libra).  Furthermore, where public policy objectives are being explored, CBDCs are not only digital but also programmable.  What is exciting about CBDCs is the possibility for innovation in the payments architecture that underpins the customer interface, enabling new services and more (e.g. something as yet unimagined).  Maybe at first CBDC solutions won’t seem much different to the card and mobile money solutions….it is all about what may come in the future.


Do CBDCs rule out fractionally reserved banking?

A key question, and one that has generated a great deal of literature, but in the view of the panel the risks are overstated and distract from the main point and benefit, and that is of the potential richness when you move on to digital programmable money and new capabilities.


Is blockchain necessary to be part of CBDC?

Not necessarily, but it could be, and that depends on your definition of blockchain.  The set of technologies blockchains can incorporate such as cryptographic elements to secure data, or to improve access and identity, could be elements used in CBDCs. As a result of these elements there would be certain benefits such as transparency on the data.

Moving away from the theme of blockchain and alternative database technologies, and zooming in on ledgers, the question to address is whether we envisage a single ledger or multiple ledgers. The commercial bank model of today comprises multiple ledgers, which is why we need settlement. Once you move to a single ledger, you can have almost instantaneous settlement. Getting practical we also need to think about how we can use the CBDC. Can you spend it at the supermarket? If so, for this to happen there would need to be integration into existing payment schemes, mechanisms and payment ledgers. Integration into a single ledger is much more feasible.


Retail, wholesale, both or neither?

Without the luxury of a crystal ball, the panellists agreed that the answer will likely vary per jurisdiction.

  • The wholesale side already has access to central bank liability, and so for CBDC to appeal, it would need to bring in additional characteristics (e.g. 24/7, and the ability to transact without the direct involvement of the central bank). Generally wholesale is more likely in advanced economies (with the exception of e-Krona in Sweden).
  • On the retail side it depends on the market context and particular needs in each jurisdiction. There is a focus on the potential for financial inclusion (albeit not proven), however, this must be accompanied by a robust identity infrastructure.  Retail CBDCs are likely to be a harder option than wholesale due to scale, although this may vary according to demand.

Opportunities and risks

Closing the session the panel discussed privacy implications and what could drive or impede implementation.

It was seen that there is an opportunity for central banks to go beyond their natural remit – to have a consistent framework for citizen identity, but they couldn’t do that alone, and would need collaboration and assistance from government.

As with all things new there are risks and a need for caution. If successful digital money will carry a data footprint, which brings with it implications such as the possibility of government surveillance and the commercial use of that footprint data.

Another possible implication to consider is that if countries start encouraging others to hold their objects (digital assets) we may move into a situation where money exports value systems, and different countries will push different value systems through their forms of money.

  • Aaron Klein – Fellow in Economic Studies, Brookings Institution (moderator)
  • Alistair Milne – Professor of Economics, School of Business and Economics, Loughborough University
  • Harish Natarajan – Global Lead Payments, World Bank
  • Arwen Smit – Author & Senior Advisor, MintBit
  • Markos Zachariadis – Greensill Professor in FinTech, Alliance Manchester Business School, University of Manchester

The recording of this session will remain available to Sibos delegates for on-demand viewing through to May 2021 accessible here: Defining Central Bank Digital Currencies

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