Tag: central bank digital currencies

What the World Economic Forum’s global report on central bank digital currencies reveals, BFSI News, ET BFSI

Banking & Finance

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Research on the feasibility and real-world applications of central bank digital currencies (CBDCs) is continuously going on. While some renowned research organizations have studied and investigated it in the past, the World Economic Forum (WEF) is the most recent one to do so. On November 19, the WEF published a first-of-its-kind global report to help lawmakers and the private sector grasp the principles and regulations around CBDCs and stablecoins.

The resource suite compiled by the WEF consists of eight white papers that have been contributed by the WEF Digital Currency Governance Consortium on stablecoins and CBDCs. The consortium comprises over 85 private and public-sector member organizations from over 30 countries of the world and is by far the largest one and featuring a great diversity of stakeholders and public-private collaboration from various groups including. members of civil society and academia. The resource suite was developed after an analysis of 18 months.

  • The eight white papers in the report are :
    • The Role of the Public Sector and Public-Private Cooperation in the Era of Digital Currency Growth
    • Regulatory and Policy Gaps and Inconsistencies of Digital Currencies
    • Digital Currency Consumer Protection Risk Mapping Paper
    • What is the Value Proposition of Stablecoins for Financial Inclusion?
    • Blockchain-Based Digital Currency and Tools for Cross-Border Aid Disbursement
    • Privacy and Confidentiality Options for Central Bank Digital Currency
    • Defining Interoperability Paper 8 CBDC Technology
    • CBDC Technology and Considerations

The eight papers of the report have established the following facts :

  • The first paper concludes the following:
    • Policy-makers in both public and private organizations should plan their approach to stablecoins and CBDCs, considering the domestic conditions, policy goals and political-economy constraints.
    • Stablecoins are riskier to regulate, with their rapidly-growing issuance and limited regulatory coverage.
    • CBDCs are relatively safer to regulate due to their limited issuance and the lower possibility of foreign access with initial deployment.
  • The second paper throws up the following:
    • Gaps and inconsistencies are being faced by private and public sector players in exploring the full potential of digital currencies.
    • These gaps are due to insufficient policy development in relation to innovation.
    • The policies should focus on creating both domestic and cross-jurisdictional coordination structures.
  • The third paper emphasised the need for adequate consumer education about the risks and potential of stablecoins.
  • The fourth paper presents the risks posed by stablecoins and capacities that need to develop to benefit the unbanked and underserved users.
  • The fifth white paper raises the need to engage with the government, tech firms, aiding agencies and the public to utilize the blockchain-based technology for the betterment of the masses, governance and especially the underserved.
  • The sixth paper underscores the following points:
    • Ensuring privacy of a CBDC system is most vital, and needs regular engagement across public and private sectors.
    • A forum should be developed where governments and other stakeholders can correctly communicate their objectives about security and cryptographic solutions.
  • The seventh paper focuses on the need for ensuring interoperability, the ease of using different digital payments easily along with financial services.For this businessmen, policymakers, technologists and regulators need to collaborate with each other.
  • The last paper analyses the following:
    • Key technology considerations and choices for CBDC to meet various policy goals.
    • Merits and demerits of using blockchain as a primary part of CBDC technology infrastructure.
    • Crucial cybersecurity vulnerabilities for CBDC.

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JP Morgan, BFSI News, ET BFSI

Banking & Finance

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A full-scale, multiple central bank digital currency (mCBDC) network could potentially save global corporations up to $100 billion in transaction costs annually, according to a joint research report from Oliver Wyman and JPMorgan.

The report estimates that of the nearly $24 trillion in wholesale payments that moved across borders via the correspondent banking network each year, global companies incur more than $120 billion in total transaction costs. This excludes potential hidden costs in trapped liquidity and delayed settlements. “The case for CBDCs to address pain points in cross-border payments is very compelling. The bulk of today’s wholesale cross-border payments process remains suboptimal due to multiple intermediaries between the sending and receiving banks, often resulting in high transaction costs, long settlement times, and lack of transparency on the status of the payments,” said Jason Ekberg, partner, corporate and institutional banking at Oliver Wyman.

Critical elements

The research specifically outlines four critical elements required for mCBDC implementation, which include (i) the building blocks, from minting and redeeming of CBDCs to FX conversion and settlement; (ii) the roles and responsibilities of central banks, commercial banks, and service providers; (iii) the key design considerations covering data, technology, privacy, and credit extension; and (iv) the governance framework.

Naveen Mallela, global head of coin systems at Onyx, said: “Central banks around the world who are at various stages of CBDC development are considering how to build an infrastructure where systems operate and work together with the necessary controls in place. In this report, we put forward robust design considerations for a successful mCBDC network and demonstrate how it can be practically implemented, using ASEAN corridors as an example.”

Opportunities for participants

Acknowledging that a mCBDC network challenges traditional correspondent banking systems, the report cites opportunities for participants – commercial banks, payment operators, market makers and liquidity providers – to add new capabilities, and welcomes new stakeholders like technology providers and other third-party service providers.

“The development of CBDCs brings new tangible opportunities such as subscription-based mCBDC corridor access or smart contract-enabled cash management services. The ability to pivot effectively and quickly is key, and ultimately we aspire for a cross-border payments system that is transparent, inclusive and efficient for all parties across central banks, corporates, and commercial banks,” Mallela said.



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CBDCs are designed to be very stable: IMF

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“About 80–100 Central Banks around the world, including in G20 nations, are exploring central bank digital currencies (CBDC) and are in some sort of pilot or testing stages,” said Tobias Adrian, Financial Counsellor and Director – Monetary and Capital Markets Department, IMF at the Global FinTech Fest.

The three-day Fest, which concluded on September 30, was attended by over 26,000 delegates from 121 countries. Policymakers, technocrats, investors, founders, economists, bankers, participated in the Fest. The event was organised by National Payments Council of India (NPCI), Fintech Convergence Councill (FCC), and Payments Council of India (PCI) of Internet and Mobile Association of India (IAMAI).

Differ from bitcoin

“CBDCs are designed to be very stable, stable in value, with a low transaction cost and backed by the Central Bank for added consumer confidence, very different from bitcoins which fluctuate in value and are more like an investment asset,” Tobias Adrian said.

Also see: The time for central bank digital currencies has come

There could be a lot of innovations in Central Bank issued digital currencies, especially across payments and lending platforms.

“CBDCs could indeed be somewhat similar, not necessarily the same, to bitcoin assets, could be based on blockchain technology, could be available in wallets. It depends on whether the design is based on existing payment systems or using very powerful blockchain technologies,” he added.

Drawbacks

Meanwhile, he warned that cybersecurity could be a major challenge for CBDCs. “You need to make sure that the system is resilient against cyberattacks.” It’s not the technology alone, but the intersection of technology and human.

Also see: Central bank digital currency can boost innovation in cross-border payments: RBI Deputy Governor

Secondly, CBDCs might undermine existing banks so banks need to upgrade their technologies to compete.

Finally, the lack of universal cellphone access may limit CBDC penetration.

On expensive cross-border payments, Adrian envisioned that cross-border transfers would be a lot cheaper for a small amount of payments. There are some wallet exchanges available that allow one to convert US dollar into rupee stable coin, with an implicit fee that is cheaper. However, there are a lot of discussions going on between Central Banks of various countries to make cross-border payments cheaper.

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Dy Guv, BFSI News, ET BFSI

Banking & Finance

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New Delhi: The RBI is working on phased introduction of its own digital currency and is mulling pilot projects in wholesale and retail segments in the near future, Deputy Governor T Rabi Sankar said on Thursday. He also said several countries have implemented specific purpose Central Bank Digital Currencies (CBDCs) in the wholesale and retail segments.

A CBDC is a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.

Sankar said developing a domestic CBDC could provide the public with uses that any private virtual currency (VC) offers and to that extent might retain public preference for the rupee.

“It could also protect the public from the abnormal level of volatility some of these VCs experience,” he said while participating in an online discussion organised by The Vidhi Centre for Legal Policy.

Introduction of CBDC, he said, has the potential to provide significant benefits such as reduced dependency on cash, higher seigniorage due to lower transaction costs and reduced settlement risk.

“Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option. There are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits,” he said.

The Deputy Governor said it would be the RBI’s endeavour, “as we move forward in the direction of India’s CBDC”, to take the necessary steps which would reiterate the leadership position of the country in payment systems.

He said CBDCs are likely to be in the arsenal of every central bank going forward. Setting this up will require careful calibration and a nuanced approach in implementation.

Sankar stressed that drawing board considerations and stakeholder deliberations are important, while technological challenges have to be looked at as well.

“RBI is currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption,” he said.

Some key issues under RBI’s examination include, the scope of CBDCs, the underlying technology, the validation mechanism and distribution architecture.

“However, conducting pilots in wholesale and retail segments may be a possibility in near future,” the Deputy Governor said.

Sankar further said legal changes would be necessary as the current provisions have been made keeping in mind currency in a physical form under the Reserve Bank of India Act.

He said consequential amendments would also be required in the Coinage Act, Foreign Exchange Management Act (FEMA) and Information Technology Act.

“As is said, every idea will have to wait for its time. Perhaps the time for CBDCs is near,” he remarked.

He also highlighted some the risks associated with digital currencies, like sudden flight of money from a bank under stress.

“There are associated risks…but they need to be carefully evaluated against the potential benefits,” he added.

The finance ministry, in 2017, had set up a high level inter-ministerial committee to examine the policy and legal framework for regulation of virtual / crypto currencies. It had recommended the introduction of CBDCs as a digital form of fiat money in India.

The RBI has also been exploring the pros and cons of introduction of CBDCs since quite some time.



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Central Bank of Bahrain, Bank ABC, and J.P. Morgan to partner on digital currency settlement solution, BFSI News, ET BFSI

Banking & Finance

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CBB is partnering with J P Morgan and Bank ABC in a pilot scheme to introduce instantaneous cross border payment solution leveraging state of the art technology and digital currency.

For payments from buyers to suppliers, Bank ABC and J.P. Morgan will pilot the transfer of funds in US dollars from and to the Kingdom of Bahrain. As a result, suppliers will be paid faster, and buyers will be able to make payments in shorter periods of time holding funds in advance. The Central Bank of Bahrain will act as a close partner in the pilot between Bank ABC and J.P. Morgan and going forward would look to extend the collaboration to Central Bank Digital Currencies (CBDCs).

Ali Moosa, Vice Chairman of Wholesale Payments at J.P Morgan, said, “JP Morgan ONYX has been setup with the mandate to lead the buildout of next generation clearing and settlement infrastructures, and we are excited to collaborate with a leading central bank and regulator like the CBB, as well as an innovation-focused partner like Bank ABC, to do so.”

Bank ABC’s Deputy Group CEO, Mr. Sael Al Waary commented, “We’re excited to work with the CBB and JP Morgan on this groundbreaking pilot to build a more efficient payments infrastructure that addresses current cross-border payment limitations. We anticipate significant changes around the world as a result of digital currencies, which will be critical in enabling future digital economies.”

H.E. Rasheed Al-Maraj, Governor of the Central Bank of Bahrain, said, “The Central Bank of Bahrain is delighted to announce this partnership, which is in line with our vision and strategy of continuously developing and enriching the capabilities extended to stakeholders in the Kingdom’s financial services sector through emerging technologies. Through this pilot with J.P Morgan and Bank ABC, we aspire to address the inefficiencies and pain-points which exist today in the traditional cross-border payments arena.”



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