The role of policy in the successful development of CBDC

More and more countries around the world are considering whether to adopt a central bank-backed digital currency (CBDC) that would offer everyday end-users such as businesses and households a digital equivalent of cash. CBDCs differ from other cashless instruments because they represent a direct claim on the central bank rather than a private institution. But what’s the current state of development of CBDCs? What policy issues do they raise? How are regulators approaching them? And what role can the private sector play in the emergence of CBDCs, and of stablecoins, backed by a reserve asset?

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To discuss these questions and more, 101 Blockchains recently hosted a webinar featuring a high-level panel of experts, including Jack Fletcher, Government Relations Manager, Digital Currencies at R3; Dirk Schrade, Deputy Head of Payments and Settlement Systems at the Deutsche Bundesbank; and Dr Chris Ostrowski, Managing Director of the Digital Money Institute, OMFIF.

The discussion ranged widely across the drivers and implications of CBDCs, which – as OMFIF’s Dr Chris Ostrowski explained – have recently seen an explosion of interest from central banks.

“The fascinating thing about this space in the past 18 months or so is how pretty much every central bank has become very eager to talk and hear more about what a CBDC is, and how it might benefit their currency, their country and even central banks themselves,” he said. “In 2019, when we first invited central banks to come to meetings about CBDCs, they weren’t interested. Now they’re eager to come.”

He cited three reasons for this change of heart: first, the rise of Bitcoin; second, the Facebook-sponsored Libra/Diem stablecoin project; and third, the headway that China is making in CBDCs.

Zeroing in on the evolution of CBDCs, R3’s Jack Fletcher explained how R3 has been involved in CBDC projects since 2016, when it worked on a domestic wholesale use case for the Bank of Canada. He explained: “Part of what we’re seeing certainly in the wholesale space is the development of tokenization of financial assets. With tokenization and exchanges at wholesale level, there’s a real benefit to having a payment leg within an exchange. Having it on the same network means you reduce risk and have finality, with a kind of atomic exchange that supports these other two features. As the CBDC space develops we’ve also seen the rise of retail CBDC. With the possible exception of China, probably the most interesting retail space we’re seeing is in Sweden – and R3’s Corda is the platform that’s being used within the Riksbank CBDC project that’s currently underway.”

The debate also covered the policy implications of CBDCs. Dirk Schrade from Deutsche Bundesbank discussed one of the key issues facing policymakers around CBDCs: end-user privacy. “There is a trade-off between privacy and regulatory compliance,” he said. “Privacy is very important, particularly here in Germany, where more than 50% of respondents in the euro systems consultation said this is their most prominent concern. But I doubt that there can be full anonymity as there is with cash. If you look at the use cases for cryptocurrencies and for solidly anonymized payments, it’s quite obvious that a central bank cannot cater to those needs. There are a lot of possibilities, but I believe in the end there will not be anonymity, and we will have to apply some know-your-customer requirements.”

With CBDCs continuing to move up the global financial agenda, this webinar is highly recommended for industry professionals responsible for implementing and managing CBDC policies, and those that have an interest in finding out where the future of CBDCs may lie. To view the one-hour discussion in full, click here.