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David Woolcock 7 min read

Central Bank Digital Currencies (CBDC) – The R, The M and The W of The Issue

Over 100 countries are exploring a CBDC at one level or another with research projects abounding and some actually testing and a few actual distributions of a CBDC to the public.

These recent trends seem to be more focussed around the retail application of CBDC. One example of the vision was in the January minutes of the Bank of England CBDC Technology Forum –

“A vision for a CBDC is to provision a public payment infrastructure for central bank money which would provide a universal settlement mechanism in a future of rapidly evolving digital ecosystems. Such a CBDC might encourage innovation by allowing a wide and varied range of private sector firms to develop more advanced services, in a safe and interoperable manner that fosters advantageous competition.”

However, the Economic Affairs Committee published a report, “CBDC: a solution in search of a problem?” All this is concerning the rCBDC (r = retail) user case with the report concluding there is “no convincing case for why the UK needs a central bank digital currency” (rCBDC). The committee found that while a CBDC “may provide some advantages, it could present significant challenges for financial stability and the protection of privacy.” As such I will leave the retail debate to others.

mCBDC is, however, another matter. This is much more concerned with International Payments that many see as ripe for reform. The BIS in a recent report on the Multiple CBDC (mCBDC) Bridge project put mCBDC as –

“a wholesale central bank digital currency (wCBDC) co-creation project that explores the capabilities of distributed ledger technology (DLT) and studies the application of mCBDC in enhancing financial infrastructure to support multi-currency cross-border payments.”

Joining up multiple CBDC systems using common interoperable platforms offers fantastic potential and could change the way we settle foreign exchange transactions in the most unprecedented way since the development of CLS. mCBDC could be issued as a form of Central Bank money that acts as both a liquid safe settlement asset and an anchor for the payments system. It could also be the solution to the flaw with the CLS system, which is that it only handles 18 currencies and therefore leaves trillions of dollars’ worth of settlements outside it’s PvP mechanism ($9 trillion daily according to BIS figures – see below) and a lot of this is in emerging or recently emerged currencies.

“The settlement of FX trades can lead to significant risk exposures when one counterparty to a trade sends a currency payment to the other and needs to wait before receiving the currency it is buying. Over the past two decades, market participants have made significant progress in reducing FX settlement risk. Nevertheless, due in part to higher trading activity, the 2019 Triennial Survey indicates that close to $9 trillion of payments remain at risk on any given day.”

This is graphically illustrated by the fact that PvP protection has fallen from 50% in the 2013 survey to 40% by 2019.

This has all lead to some changes for the 2022 Triennial Survey which will include collecting data on FX settlement. In addition, those local Foreign Exchange Committees conducting regular FX turnover surveys will also begin to collect FX settlement data from 2022. This will define the debate and as night follows day it is sure to lead to calls for these risks to be reduced or eliminated, thus continuing a constant refrain from Central banks and Regulators. So could the w in CBDC be the answer? A wholesale CBDC (wCBDC) that would allow cross border payments, that currently go through a correspondent banking model, to be replaced with a more atomic solution? Certainly cross border payments have not kept pace with domestic payments system innovations which have moved inexorably to faster or instant payment processing.

So away from the rCBDC “glory” solutions that attract so much press and political debate a true back to basics solution is quietly but surely developing. This is typified by Project Jura which is certainly worth a close look at for those involved in the OTC Wholesale Markets. It, for me, summarises where we are headed as we look to make markets safer. The BIS Innovation Hub summarises Project Jura and is certainly worthy of the last word on this exciting new initiative. Before we get to that do look out for our further examination of this subject including the differing protocols competing for use in the design of CBDC be it r, m or w! For now though -

Jura explores the direct transfer of euro and Swiss franc wholesale central bank digital currencies (wCBDCs) between French and Swiss commercial banks on a single DLT platform operated by a third party. Tokenised asset and foreign exchange trades are settled safely and efficiently using payment versus payment (PvP) and delivery versus payment (DvP) mechanisms. 

The experiment is conducted in a near-real setting, using real-value transactions and complying with current regulatory requirements. It is a public-private collaboration involving the Banque de France, the BIS Innovation Hub Swiss Centre, the Swiss National Bank and a private sector consortium. 

Issuing wCBDC on a third-party platform and giving non-resident financial institutions direct access to central bank money raises intricate policy issues. Jura explores a new approach including subnetworks and dual-notary signing, which may give central banks comfort to issue wCBDC on a third-party platform and to provide non-resident financial institutions with access to wCBDC. 

The project complements the ongoing G20 work on cross-border payments. The proposed solution design not only addresses existing deficiencies but could also open up new approaches to conducting international financial transactions, including foreign exchange, securities and other financial instruments.”


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