CBDC developments — July 2023
About the author: Atakan Kavuklu is one of the key contributors to the CBDC Tracker. He works as a 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 July 2023 update. For more details and news, please visit CBDC Tracker.
Euro Area:
The European Central Bank (ECB) published the fourth progress report on the digital euro investigation phase. It emphasized that a digital euro will offer basic services, including (i) opening/holding/closing of a digital euro payment account, (ii) non-automated and automated funding and defunding from a non-digital euro payment account, (iii) waterfall/reverse waterfall services (iv) provision of a basic payment instrument, and (v) initiating and receiving payment transactions, free of charge. To foster network effects, intermediaries will be compensated for the operational (excluding intial investment) costs of services they provide, as they are for comparable electronic payments, while legislative safeguards will prevent merchants and other third party providers from being overcharged by intermediaries. An inter- PSP fee arrangement aims to maintain a fair balance of incentives between the two types of PSP. The Eurosystem would bear its own costs, as it does for banknotes. Additionally, intermediaries would be expected to support the porting of the user’s digital euro access as well as their transaction history and recurring payments, at the request of the user by pulling relevant data directly from the old intermediary. The ECB foresees an emergency portability function to safeguard digital euros as well in case an intermediary is unavailable. Regarding fraud detection and prevention, the ECB is exploring how a central support service could support intermediaries in their fraud management activities, for example through risk scoring of transactions. Furthermore, at least one dedicated entity per country (for example a post office) would provide access to digital euro services for the unbanked via cash. A staggered roll-out is planned, in which POS payments would only be added at a later stage. Also, online and offline functionalities will be released simultaneously from the outset. Offline functionality will settle transactions using “secure hardware” to avoid hacking and forging, transactions will be settled immediately between devices, payments received will be transferable to another device without first connecting to the internet, and the Eurosystem will not see users’ personal details or their payment patterns. Finally, the Governing Council will review the outcome of the investigation phase in autumn 2023 and decide whether to instigate a subsequent project phase.
France:
The Banque de France (BdF) published an updated set of conclusions and lessons learned from its twelve DLT based wholesale CBDC experiments. These experiments explored three models for issuing wholesale CBDC directly on DLTs: interoperability, distribution, and integration. The experiments revealed eight key takeaways, including the importance of issuing a wholesale CBDC alongside a retail CBDC to ensure the anchoring value of central bank money for both types of payments. The report highlighted that wholesale CBDC could improve cross-border payments and settlement security for various financial assets. The Banque de France experimented with an automated market maker to optimize wholesale CBDC liquidity on its DL3S infrastructure. The bank expressed support for the Eurosystem’s exploratory work and offered its DL3S solution for settling tokenized transactions with central bank money. The report also emphasized the significance of exploring interoperability among different wCBDC DLTs on a global scale to avoid replication of issues experienced with existing settlement systems.
Russia:
- Russia’s digital ruble project has moved a step closer to becoming a reality as the State Duma, the lower chamber of the Russian Federation’s Federal Assembly, passed the digital ruble bill in its third reading. The legislation now proceeds to the Federation Council, the upper chamber, and ultimately to the president for approval. The bill defines legal terms like “platform,” “participants,” and “users,” and sets general guidelines for the CBDC ecosystem. The Bank of Russia (BoR) will act as the main operator of the digital ruble infrastructure and will be responsible for all stored assets. The primary purpose of the digital ruble is to serve as a payment and transfer method, not as a savings account. Individual customers can make free payments and transfers, while corporate clients will incur a fee of 0.3% of the payment amount.
- Russian President Vladimir Putin signed the digital ruble bill into law on July 24, 2023. It will take effect on August 1, 2023, with all but one rule ready to be enforced. The new legislation officially empowers the BoR to launch the first CBDC pilot with real consumers in August. The full-scale introduction will occur gradually, and initial testing will involve a limited number of customers and operations with a nationwide launch expected as soon as 2025. The legislative framework is set to begin testing the digital ruble on real operations, starting with a pilot group of employees from selected banks and the Bank of Russia. Later, medium-sized trade and service enterprises from various industries will be involved. Offline payment options are mentioned as part of the experimentation for the digital ruble. The pilot phase will last as long as necessary, with the aim of refining the system based on customer and business feedback. The new legislation empowers the Russian central bank to launch the first CBDC pilot in August. According to Bank of Russia governor Elvira Nabiullina, Russians will not be forced to use the digital ruble.
China:
- The Bank of China has partnered with China Telecom and China Unicom to test SIM card near-field communication (NFC) payments for the e-CNY on specific Android smartphones in certain regions. This aims to provide a more convenient and universal payment method for particularly the elderly. The SIM card hardware wallet shares its balance with the main wallet, eliminating the need for separate top-ups. In order to make payments, users are only required to move their mobile phones close to point of sales terminals, even with a switched-off smartphone. The three parties involved plan to explore further applications in different sectors and IoT devices.
- China’s digital yuan transactions reached 1.8 trillion yuan ($249.33 billion) by the end of June according to People’s Bank of China (PBOC) Governor Yi Gang, a significant increase from 100 billion yuan in August of the previous year. This highlights China’s prominent position in developing CBDCs, although adoption is still in its early stages. The digital yuan has mainly been utilized for domestic retail payments, with around 950 million total transactions and 120 million wallets opened. Despite this, e-CNY circulation only constitutes 0.16% of China’s M0 money supply. E-CNY’s transaction velocity is higher and more efficient than cash.
Eswatini:
The Central Bank of Eswatini (CBE) has published a consultative paper that sets out the design characteristics of a potential retail digital lilangeni. The Bank has partnered with Giesecke+Devrient (G+D) to advance its research and exploration of CBDCs and is now entering the experimentation phase of its CBDC project. The digital lilangeni aims to provide secure access to central bank-issued money for the public, foster digitalization in the domestic economy, promote financial inclusion, and anticipate future digitalization trends. The digital lilangeni will enable various online and offline use cases, efficient government-to-person and person-to-government payments, and potential cross-border transactions. The CBE plans to implement two types of wallets for the digital lilangeni: hosted wallets managed by financial institutions and hardware wallets held by individuals. It will be based on a two-tiered operating model, where the CBE operates the core infrastructure and intermediaries are in charge of distributing CBDC to end users, once obtained from the CBE, and handle all customer-facing activities. It will be unremunerated, transactions will be free of charge to consumers, and it will enable true and full interoperability with the existing payment methods and wholesale and retail infrastructures. Offline functionality will ensure continued usage even in the absence of an internet connection, during power outages, or simply in certain rural areas. Some payments with — and wallets that store — digital lilangeni will be equipped with programmability features for value-added and innovative use case scenarios.
South Korea:
The Bank of Korea (BOK) provided updates on its CBDC proof-of-concept work in its 2022 Payment and Settlement Systems Report. This included investigating smart contracts, near-field communications (NFC) based offline payments and cross-border payments. Also, the BOK connected 14 banks with its simulated CBDC system to verify its functioning. It handled 2,000 transactions per second but slowed down as it reached capacity, so further improvements are needed. The bank also tested a zero-knowledge proof (ZKP) protocol to improve privacy, but it slowed the processing speed markedly. Moreover, the BOK is apparently launching pilots in three regions (Jeju, Busan and Incheon). Even if you are not a resident of the area, you can make payments, but there is a geographical restriction that you can only use it within a specific region. This follows a comprehensive investigation phase including multiple proof of concepts.
Hong Kong:
The Hong Kong Monetary Authority (HKMA) has yet to determine if it should issue CBDC, but it continues to experiment. While CBDCs offer efficiency savings, they don’t solve all payment problems, especially cross-border payments. Connecting CBDCs to existing real-time gross settlement systems is crucial for international trade. Some CBDC projects, like mBridge, use distributed ledger technology (DLT), offering efficiency advantages in multi-party transactions. However, the panel also weighed the merits of centralised systems. The private sector might deliver tokenized deposits and stablecoins faster than CBDCs, but regulators must ensure responsible provision by private sector entities without jeopardizing financial stability. The HKMA together wirh 16 firms are exploring various options to determine the most suitable form of digital money including programmable payments, tokenized deposits, settlement of tokenized assets and offline payments. Cross-border payments applications are especially thorny due to the legal challenges of connecting payments across multiple jurisdictions, which requires a lot of political will across multiple jurisdictions.
Nigeria:
The Central Bank of Nigeria will reportedly be piloting the use of near field communication (NFC) stickers that bring enhanced functionality to eNaira featurephone apps in an attempt to enhance CBDC adoption. Users will be able to stick them to any phone so they can conveniently make payments to merchants.
Palau:
The Republic of Palau has collaborated with Ripple Labs to mint its inaugural stablecoin, the XRP Ledger (XRPL) based Palau Stablecoin (PSC). The island state doesn’t have a central bank and the US dollar is the country’s main medium of exchange. The Ministry aims to reduce payment costs within the Palau and enhance access to financial services, particularly for underserved communities and socio-economic groups, using digital solutions. Ripple has provided more details on the U.S. dollar-backed Palau Stablecoin (PSC) proof-of-concept (PoC). Each PSC will be valued at one U.S. dollar guaranteed by a 1:1 reserve in fiat currency and issued on the XRP Ledger (XRPL). Palau’s Ministry of Finance (MOF) will supervise the system and trigger the issuance and redemption of stablecoin units, while always guaranteeing the 1:1 reserve. The PoC will roll out in phases, with the first three-month phase involving about 200 government employees and local merchants. If the first phase is successful, additional phases will roll out later in the year (2023).
** This is a GovCoin and not a CBDC as Palau doesn’t have a Central Bank** Focus on developing strategies for cross-border payments and a USD-backed digital currency for Palau.
Bahamas:
The Central Bank of the Bahamas (CBOB) published its monthly Sand Dollar update. At end-June there were $1,093,373 of Sand Dollars in circulation (about 0.20% of total currency in circulation). The CBOB is actively expanding its Sand Dollar outreach activities. In New Providence and North and Central Andros, the Sand Dollar rebate program was launched with Super Value and Quality Supermarkets. Ambassadors were selected to assist with outreach efforts, offering help to users and merchants. Sand Dollar adoption also expanded to events and large merchants, with plans for further expansion in Eleuthera, Grand Bahama, and Bimini. Additionally, technical upgrades now allow all Sand Dollar wallet holders to top-up their wallets from commercial bank accounts via online banking transfers. The original Sand Dollar mobile wallet is undergoing improvements, including a smoother interface, self-service tools, and a list of frequent contacts.
https://mp.weixin.qq.com/s/Il2p2rKE116xMh97Ml0wQg
https://www.omfif.org/2023/07/hkma-advancing-with-cbdc-experiments-but-not-ready-to-commit/
https://sunnewsonline.com/cbn-upgrades-enaira-app-with-nfc-chip-widens-sensitisation-2/
https://www.palaugov.pw/wp-content/uploads/PALAU-STABLECOIN-FAQs-2.17.23.pdf
https://www.forbes.ru/finansy/491668-cb-nazval-sroki-massovogo-vnedrenia-cifrovogo-rubla
https://www.bok.or.kr/eng/bbs/B0000179/view.do?nttId=10078478&menuNo=400063
https://it.chosun.com/site/data/html_dir/2023/07/31/2023073101135.html
