A blogpost by Erwin Voloder, Senior Policy Fellow, EBA
I’m excited to represent the European Blockchain Association for the second year in a row at the European Blockchain Convention in Barcelona on February 16-17. This time, to discuss how to shape CBDCs for consumers and businesses with a diverse panel of industry experts.
Moreover, I have the pleasure of sharing the stage with James Wallis of Ripple, Laurent Marochini of Société Générale, Emma Landriault from Scotia Bank and Nadia Filali, Caisses des Depots. With CBDCs around the corner, we will explore the current state of play and dive into what policy makers should think about when designing their CBDCs and how the decisions they make now are laying the foundation for how the public will receive digital cash in the future.
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Retail CBDCs – chance or risk?
Central Bank Digital Currency research, proof-of-concept and pilots have spread rapidly in the last couple of years. According to the Atlantic Council, countries making up over 90% of global GDP are looking into different combinations of wholesale and retail CBDCs. Most notably, pilot projects for retail CBDCs have launched in China, India, Nigeria, and Ghana, with proof-of concepts ranging from Japan, New Zealand, Thailand, Norway, Sweden, Ukraine, the Russian Federation and others. The Eurozone and United States are also undergoing research, with an expected decision for the implementation phase of a digital euro coming sometime in the second half of 2023. Further, many high-level projects exploring different use cases are being advanced through the global outlet of the Bank for International Settlements Innovation Hubs.
Unlike wholesale CBDCs which refer to the settlement of interbank transfers and related wholesale transactions in central bank reserves, retail CBDCs represent digital public money, available to consumers and businesses as a claim against the central bank, not dissimilar to cash. In fact, wholesale CBDCs already exist and need not be applied with distributed ledger technology. For example, in Europe, the TARGET2 system already facilitates wholesale digital transactions through a centralized ledger.
For consumers, the main focus and attention is on the ways a retail CBDC could impact their daily lives as a new, digital form of public money. For policy makers, this is also a highly political topic which needs to be addressed accordingly. One of the most cited drawbacks of introducing retail CBDCs is that they will infringe on user privacy and give central banks a granular look at peoples’ spending habits. This fear is also fueled by the idea that in some jurisdictions, retail CBDCs are being combined with nascent social credit systems to encourage civil obedience through indirect financial coercion. The other side of that argument is that CBDCs will have to balance consumer protection with Anti-Money Laundering (AML) and Counter-Terrorist-Financing (CTF) regulations to prevent digital cash from being used in illicit transactions.
Communication – a crucial CBDC success factor
Indeed, this is not the only challenge policy makers face. Others include the threat of bank disintermediation and lending to foreign currency substitution if a country’s CBDC were to become an attractive store of value in another jurisdiction. Today’s consumers and businesses want choice in how they pay, and they want those payments to be safe, simple and speedy. Retail CBDCs have the chance to vastly improve retail payment systems through atomic settlement and provide another outlet of consumer choice.
However, like all political projects, they need to rest on a strong value proposition if they are to be adopted en masse. Nigeria has recently begun to restrict the flow of physical cash in circulation in a bid to encourage the use of digital means of payment including the eNaira. The European Central Bank on the other hand has recently announced that the digital euro will not be programmable money, attempting to assuage concerns that the project is building towards a dystopian future. The way governments and policy makers communicate their CBDC projects will have the biggest impact in ensuring their future success. Without public support, CBDC initiatives could easily flounder. Stablecoins, which already have a considerable head start both in terms of usage and interoperability inside web3 could take the place of CBDCs in the hearts and digital wallets of citizens.
Let’s discuss at EBC23
I’m excited to represent the European Blockchain Association for the second year in a row at the European Blockchain Convention in Barcelona on February 16-17. This time, to discuss how to shape CBDCs for consumers and businesses with a diverse panel of industry experts.
Moreover, I have the pleasure of sharing the stage with James Wallis of Ripple, Laurent Marochini of Société Générale, Emma Landriault from Scotia Bank and Nadia Filali, Caisses des Depots. With CBDCs around the corner, we will explore the current state of play and dive into what policy makers should think about when designing their CBDCs and how the decisions they make now are laying the foundation for how the public will receive digital cash in the future.