We saw during 2019 increased interest in various projects for a Central Bank Digital Currency (CBDC) launch as a recurring theme. CBDC is a digitised sovereign currency, created and issued by, and a liability of, the country’s monetary authority. As such they are viewed as legal tender which is a core difference to cryptocurrencies and stablecoins. Those who made it up the Davos slopes to the World Economic Forum (WEF), were met with ideas and discussions taking place on how CBDC could be a potential solution to multiple challenges, including financial inclusion and efficiencies in the global payment systems.
At the centre of these discussions was an Insight Report from the aptly named Centre for the Fourth Industrial Revolution. The report was the distilled insights from central bank researchers, global policy makers, international organisations and experts from numerous relevant institutions. The title of the report “Central Bank Digital Currency Policy-Maker Toolkit” follows up on a previous WEF white paper on “Central Banks and Distributed Ledger Technology: How are Central Banks Exploring Blockchain Today?” published in March last year spurred by a BIS report in January that forty central banks were currently, or soon would be, researching and experimenting with CBDC.
In the second half of 2019, Cambodia became one of the first countries to utilise a blockchain-powered payment system to reduce money transfer costs and improve financial inclusion. The application, known as the Bakong Project, connects financial institutions and payment providers, enabling users to pay and make transactions in real-time without fees. Other early adopters include the Central Bank of Uruguay and the Bank of Thailand who are both using the WEF toolkit to evaluate their proposed CBDC launch. Elsewhere, the Eastern Caribbean Central Bank is planning to be a first user of a CBDC with a launch expected in 2020.
Alongside this, seven central banks, including the Bank of Japan, the Bank of England, the European Central Bank (ECB) as well as the BIS, have all announced that they have formed a working group to share findings of the "economic, functional and technical design choices, including cross-border interoperability" of CBDC. It is no secret that China has also developed its own CBDC. Designed as a new payments solution, the People's Bank of China plans to launch the digital yuan initiative once testing is complete. The sentiment in Davos was that this could be as early as Q1 2020.
In the United States ex-CFTC Chair Christopher Giancarlo has confirmed the formation of a Digital Dollar project that will consider the benefits of a CBDC. He was quoted as saying in Davos “The Project will ultimately seek to identify options for a CBDC solution that enhance monetary policy effectiveness and financial stability”. While noting the obstacles such as privacy, security, fraud and money laundering he stated that a digital dollar in the US “is seen as critical to a possible orderly recalibration of the dollar’s attractiveness relative to other digital currencies to support stable international monetary conditions”.
Another Central Bank Group has been formed by Britain, Japan, the euro zone, Sweden and Switzerland to assess potential use cases for digital currencies. Co-chaired by ECB board member Benoit Coeure (Head of the BIS initiative on digital currencies) and Bank of England Deputy Governor Jon Cunliffe “the group will assess CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies”.
With all these Central Banks racing towards issuing CBDC’s, Giancarlo also mentioned the innovation coming from the private sector (which is where he is now working!) and called out the Facebook-supported Libra stablecoin project, and digital coins from Goldman Sachs, JPMorgan and Walmart, among others. These private initiatives he stated “are important. They help advance innovation. They are also causing us to take a new and more clear-eyed view of money – especially the efficacy of traditional analogue fiat money in the new digital economy”. Given Jamie Dimon at JPM famously stated Bitcoin was a “fraud” and a “bubble that won’t end well” it is interesting to see JPM in that list!
All this meant that those enjoying a warm Glühwein on the snowy slopes of Davos will have noticed a change from the chilly atmosphere on cryptocurrencies at WEF 2019 as they witnessed the prospect of CBDC’s becoming a reality. It may be that WEF 2020 was the defining moment for the activation of our Crypto/Digital/CBDC functionality in our Treasury, sales and trading systems!