A report from the 2020 Central Bank Workshop and Collateral Conference

Central Bank Digital Currencies (CBDCs) have been high on policy makers’ agenda for the past few years. Numerous central banks around the world have issued reports on the viability, use cases and even potential structures for a tokenised or account-based form of central bank money, based on distributed ledger technology or existing technology. The theory has largely been proved to be effective and now it is time to bring these CBDCs to life.

“No more experimentation,” says Sopnendu Mohanty, Chief FinTech Officer at the Monetary Authority of Singapore (MAS). “It is time for production”.

Central banks around the world cite three main reasons why CBDCs are an idea whose time has come:

  • more efficiency, especially in the settlement and post trade area
  • greater transparency for transactions
  • improvements for cross border payments

A further reason given by central banks from less developed countries is that they could be used for increased financial inclusion. The Arab Monetary Fund, for instance is incorporating CBDCs in its wider Project Buna that has the specific aim of improving cross border payments and increasing access to financial systems.

Why are central banks so keen to adopt this new technology, when existing financial market infrastructures are already working well?

“In many economies we already have very efficient infrastructures so there is no real pressure to jump to a new technology,” says Sebastien Kraenzlin, Head of Banking Operations at the Swiss National Bank. But nevertheless, I think there could be additional efficiencies to be gained, especially in the post trade area such as reconciliation. Before deciding to introduce a new technology, central banks need to fully understand the potential benefits and make sure that the safety and reliability of the existing infrastructures will be maintained.”

Diversification and Design

“CBDCs are part of a broader debate about diversification in finance,” says Ousmene Mandeng,  Senior Advisor at Accenture Global Blockchain Technology. “Diversification by actors, by mediums, by currencies and by geography. It is all about equipping money with new functionalities and extending what central bank money can do.”

The ECB and the Eurosystem recently issued their own report on the viability of a digital euro, in particular focusing on the scenarios that may lead to the issuance of a digital euro. These include a significant decline in the use of cash, private payment mechanisms such as bitcoins becoming credible mediums of change, monetary policy, and others.

“We think a digital euro is a very viable option, for the Eurosystem as a whole” says Peter Wierts, Senior Economist at the Dutch Central Bank (DNB), and a member of the Eurosystem’s taskforce on digital euro experimentation. “But there are important policy challenges such as those related to risks to financial stability and disintermediation in the banking system. We think it is important that those policy challenges are reflected in the design of the digital euro.”

"It is all about equipping money with new functionalities and extending what central bank money can do."


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.

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Conference report

One topic that spanned both our November 2020 Central Bank Workshop and Collateral Conference, was the evolution of CBDCs. Experts from across the globe exchanged their views on the potential CBDCs have to increase settlement and post-trade efficiency, create greater transparency on transactions, and realise significant improvements for cross-border payments.