This reflects the wider debate on how digital currencies should be positioned. Either they can be used by everyone, from financial institutions to individuals, or they can just be used by financial institutions as an adjunct to existing central bank money, largely for financial market transactions.
Some central banks such as the Bank of Canada and People’s Bank of China are exploring ways to make CBDCs as widely available and cash-like as possible. But most other central banks are moving in the other direction.
“I think you can see a consensus emerging because if you look at the DNB, the ECB and the Bank of England reports you do see a general preference for the intermediary model,” says Wierts. “Central Banks are not consumer banks and they cannot do this all alone. Intermediaries will play an important role.”
This is the model that is investigated by the Swiss National Bank, whose Project Helvetia, in conjunction with the BIS Innovation Hub, examined how money - and central bank money in particular - could be integrated into a DLT infrastructure to settle transactions between financial institutions, i.e. either by issuing a wholesale CBDC – which is restricted to financial market players – or just as a link between the DLT infrastructure and the existing payment system.
“We concluded that the settlement of tokenized securities can be carried out successfully in both ways. The first approach, via the issuance of a wholesale CBDC, is more innovative and comprehensive because you would get all the key functionalities and potential of DLT. It is more effective than if you have to interoperate two systems”, explains Kraenzlin.
Having established why CBDCs make sense, and what format they might take, the question then becomes when we might see them? Different jurisdictions are moving at different speeds. The Chinese central bank has already undertaken an experiment in Shenzhen distributing a USD30 digital wallet to 50,000 people chosen by lottery. Few others are moving at this speed.
“The issuance of a digital euro is not currently foreseen as being imminent,” says Wierts at DNB. It will be several years, not one or two, before it happens. “But the Eurosystem needs to prepare itself and that process of preparation has already started.”
Many point to the major catalytic force that the COVID-19 pandemic is having on the whole process, in particular how it is accelerating the reduction in the use of cash. In the Netherlands for instance cash has gone from being 80% of the money stock to just 20% over the last century. In terms of payments, it is even more dramatic. In 2017, cash was used in 41% of point-of-sale transactions. In 2019 that had fallen to 30%. In the height of the Pandemic in 2020 cash had fallen to just 13%.
“This raises a fundamental question for society: do we want to maintain a public means of payment for general purposes?” Says Wierts.
The answer to this question is almost certainly yes, for reasons of preserving the fiat money system and market stability. Indeed, one of the main incentives for central banks to issue their own digital currencies is to keep ahead of private sector alternatives, especially considering the rapid rise in the price of Bitcoin and tech companies’ plans to issue their own digital currencies.
As the saying goes, ‘for things to say the same, everything must change.’
By moving with purpose and direction on CBDCs, central banks can maintain their position at the heart of the global monetary system. If they do not, they might find that role has been taken by someone else.