CBDC developments — December 2022
About the author: Atakan Kavuklu is one of the key contributors to the CBDC Tracker. He works as an consultant for IBM where he specializes in digital money & assets and voluntarily supports the activities of the Digital Euro Association. Atakan Kavuklu has a degree in International Economics and Development.
Note: The following are notable highlights of the CBDC Tracker December 2022 update. For more details and news, please visit CBDC Tracker.
Euro Area:
- The European Central Bank (ECB) announced that five companies that were selected to carry out experimental will work on front-end prototypes that can be integrated with the back-end infrastructure by the Eurosystem. Among the participants are CaixaBank (a Spanish financial services company specialized in digital banking) for peer-to-peer online payments, Worldline (a French payments company) for peer-to-peer offline payments, EPI for point of sale payments initiated by the payer, Nexi (an Italian PayTech company) for point of sale payments initiated by the payee and Amazon for e-commerce payments. The ECB published material to develop front-end prototypes compatible with the Eurosystem’s back-end infrastructure. The back-end infrastructure should not restrict participants’ potential to innovate. The prototyping exercise is expected to be completed in the first quarter of 2023.
- Furthermore, the ECB also published the second progress report on the investigation phase of a digital euro. It outlines the developments made since the first progress report, which was published in September 2022 (you can also find a summary here). The report confirms the ECB’s tendency for implementing a hybrid CBDC model, in which digital euro is a liability on the balance sheet of the Eurosystem (and, thus, must retain full control over digital euro issuance and settlement), while supervised intermediaries are responsible for all end user facing roles in the ecosystem. Supervised intermediaries would be the direct counterparts for the public and be in charge of offering user-facing services, such as opening accounts or wallets, on- and offboarding, encompassing KYC and AML checks and providing devices or interfaces to make digital euro transactions, and transaction management tasks, including initiation, authentication, validation and post-settlement activities, i.e. reconciliation. The design of the Eurosystem’s involvement in the processing of user data should be minimised, while ensuring the ability of the Eurosystem to perform its tasks (settlement verification and recording). The ECB has not yet taken a decision on the technology that would be best suited for a digital euro. The report also details funding and defunding capabilities. Users would be able to convert their digital euro holdings into cash or private money and vice versa, which the ECB notes as an essential feature for a successful adoption. When receiving a payment, liquidity exceeding a possible holding threshold could be automatically pushed to a linked private money account chosen by the end user. This would ensure a seamless payment experience even if there were quantitative limits on the holdings of individual users. Similarly, a reverse waterfall functionality could ensure end users to make a payment even if the amount exceeded their current digital euro funds. Here, additional liquidity would be pulled from the linked private money account, thus completing the transaction in digital euro at its full value. Temporary deviations should be minimised and be cleared after a single calender day. Additionally, to ensure that everyone has access to a digital euro, a digital euro scheme should establish a set of common rules, standards and procedures that supervised intermediaries would need to adhere to. Accordingly, a Rulebook Development Group will be set up to facilitate the drafting and development of the digital euro scheme rule book. Work on the digital euro scheme rulebook is expected to commence in January. In 2023 the ECB will further assess a number of design and distribution options (including programmable and cross-currency payments) and in the second half of the year present a high-level design including the final set of all design choices. The Governing Council will review the outcome of the investigation phase in autumn 2023 and decide whether or not to move to a realisation phase.
France:
Banque de France (BdF) in partnership with IBM and HSBC demonstrated a series of experiments for the use of wholesale CBDC in enabling transactions across borders and technology platforms whilst facilitating the lifecycle of digital assets and currencies in wholesale markets. Although the BdF and HSBC run separate DLT infrastructures, a connection via bridging software can enable transactions and cross-network DLT consistency. Distributed ledgers based on IBM’s Hyperledger Fabric and R3’s Corda were integrated using IBM Research’s Weaver interoperability tool. A combined proof of concept tested the issuance and distribution of a CBDC, bond subscription in primary and secondary markets followed by coupon redemption, and execution of cross border and cross network payments. It proved that each transaction flowed correctly through the network of systems, automatically triggering the required events, whilst retaining visibility and control over the CBDC in circulation.
Australia:
The Reserve Bank of Australia (RBA) — together with the Digital Finance Cooperative Research Centre (DFCRC) — published an update on the state-of-play regarding the possible CBDC issuance with a focus on higher-income economies with seamless electronic payments systems. The RBA merely observes smaller jurisdictions introducing CBDC by adopting ‘turnkey’ CBDC solutions from fintech firms. While the RBA expects further adoption in similar economies with payments modernisation and financial inclusion as their prime motivations, it concludes that it seems unlikely that there will be actual issuance of retail CBDCs in higher-income countries anytime soon, based on where most jurisdictions currently stand in terms of experimentation and policy thinking. However, it conjectures that wholesale CBDCs could potentially be implemented sooner, reflecting that, conceptually, they arguably represent only a modest technological modification to the settlement/reserve accounts that central banks currently provide, and might be less of an issue politically than retail CBDCs. The RBA suggests further rigorous testing to acquire hard evidence on possible benefits of CBDC, deeper understanding of high impact use case categories and a detailed technology assessment to determine the choice of technology based on CBDC use cases, rather than vice versa. At last, it notes that limitations on the store-of-value aspect of retail or wholesale CBDC could, in turn, lead to a shift towards retail or wholesale stablecoins rather than central bank-initiated currency.
Sweden:
The Riksbank is continuing to investigate the possibility of issuing a digital complement to cash, known as the e-krona. This would preserve public access to government-issued money even if cash were to be marginalised further. In addition, the e-krona could strengthen the resilience of the payments market. No decision has yet been taken to issue an e-krona. In December 2020, the Government launched an inquiry to analyse whether Sweden needs an e-krona among other things. Its findings will form an important foundation for the Riksdag’s decision on whether an e-krona should be issued. The inquiry was due to report on November 2022, but has been extended until March 2023. The Riksbank has been running a pilot project with Accenture since 2020. The aim of the pilot has been to learn more about what a technical solution for an e-krona could look like without determining any specific model or technology from the outset. The second stage of the pilot was completed in 2022 and the third stage will continue well into 2023.
Philippines:
The International Monetary Fund (IMF) is recommending several phases and “extensive” pilot projects for the Bangko Sentral ng Pilipinas (BSP) wholesale central bank digital currency (CBDC). Special attention is required for cybersecurity issues, laws and regulations that will cover implementation. A wholesale CBDC is being considered in the Philippines as a possible means to enhance existing payment and settlement functions to address three main issues in the Philippines’ national payment system: (i) frictions on cross border foreign currency transfers; (ii) settlement risk exposure arising from the use of commercial bank money in the equities market; and (iii) current challenges in operating the automated intraday liquidity facility. While the BSP charter, amended in 2019, does allow for the issuance of wholesale CBDC, the regulatory framework “may need to be revisited to ensure governance and financial stability risks are addressed.”
Brazil:
President of the Central Bank of Brazil, Roberto Campos Neto, has named 2024 as a potential release year for its Digital Real. The bank will work with financial institutions to conduct a pilot program before releasing the CBDC to the masses. President Neto listed “greater inclusion, lower cost, intermediation, competition with reduced barriers to entry, efficiency in risk control, monetization of data, complete tokenization of financial assets and smart contracts” as motivations for the introduction of the retail CBDC.
China:
As part of its e-CNY pilot, the People’s Bank of China (PBOC) has reportedly launched “hongbao” red packets. This allows users to send each other digital yuan-filled red packets. The announcement comes just one month ahead of the Lunar New Year, when the Chinese traditionally give out red envelopes filled with cash to family and friends as a symbol of well wishes. This addition is just another small feature to widen acceptance and adoption of the e-CNY.
India:
The Reserve Bank of India (RBI) has started pilot testing its digital rupee (e₹-R) retail central bank digital currency (CBDC), on December 1, 2022 in Mumbai, New Delhi, Bengaluru and Bhubaneswar with the participation of four banks: State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank, later extending to nine more cities (Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla) and another four institutions (Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank). The pilot will be conducted in a closed user group of participating customers and merchants. The CBDC will be issued in the same denominations currently used for notes and coins. Users will be able to transact with e₹-R through a digital wallet offered by the participating banks and stored on mobile phones/devices. Transactions can be both Person to Person (P2P) and Person to Merchant (P2M). Payments to merchants can be made using QR codes displayed at merchant locations.
UK:
The Bank of England has put out a request for proposal (RFP) for proof of concept work on a central bank digital currency (CBDC) wallet. The project aims to explore the end-to-end user journey as a way to sharpen functional requirements for both the Bank and private sector, make a potential CBDC product more tangible for internal and external stakeholders, eg. as a prototype for future user testing, support the Bank’s work towards the BIS Innovation Hub’s ‘Project Rosalind’, by testing integration of a front-end with the Rosalind API and deliver (1) a mobile wallet app (built on both android as well as iOS); (2) wallet website; and, (3) an example merchant website, and (4) back-end server to serve mobile app and website, including calling the core ledger API and stored user data and transaction history. The deadline of the RFP was 23 Decemeber 2022.
Japan:
The Bank of Japan (BOJ) will reportedly begin preparations to conduct a retail central bank digital currency (CBDC) pilot next Spring (2023) year. During the two-year pilot programme, the BOJ will collaborate with private-sector banks (3 megabanks and regional banks) to test deposits and withdrawals from accounts, as well as whether the currency can function in an emergency without internet access. Depending on the trial results, it will decide whether to launch a digital currency as early as 2026.
Ukraine:
The National Bank of Ukraine (NBU) presented a draft concept for its potential e-hryvnia CBDC. It considers three design options. The first would be a retail CBDC with smart contract functionality to implement targeted government (G2P) payments. The second option envisions a e-hryvnia for usage in operations related to virtual asset operations, including on crypto exchanges. The third option include cross-border payments functionality, although it’s not clear that this is being looked at at the retail or wholesale level. The NBU continues to work on the draft concept of the e-hryvnia with participants of the payment market, the virtual asset market, and state authorities. Going forward, the NBU will design an e-hryvnia concept that will comprehensively take into account the interests and needs of market participants and potential users.
References:
https://www.ecb.europa.eu/paym/intro/news/html/ecb.mipnews221221.en.html
https://www.ecb.europa.eu/paym/intro/news/html/ecb.mipnews221207.en.html
https://www.rba.gov.au/speeches/2022/sp-ag-2022-12-08.html
https://www.coindesk.com/policy/2022/12/13/brazil-central-bank-plans-to-launch-a-cbdc-in-2024/
https://www.digitalmarketplace.service.gov.uk/digital-outcomes-and-specialists/opportunities/18948
