In 2019 we have seen a flurry of excitement around digital currencies, both those issued by the private sector and by central banks, and those for use only by financial entities or more broadly by households. For central bank issued digital currencies (CBDCs), private sector-developed technology solutions – many of which are already live on enterprise blockchain platforms today – can dramatically reduce implementation costs and time to market.
Following the introduction and adoption of stablecoins within the cryptocurrency ecosystem, initiatives like Facebook’s Libra and JPM Coin have pushed digital currencies further into mainstream consciousness and driven impassioned debate and collaboration amongst businesses across the globe. Meanwhile, blockchain-based solutions have driven innovation in the custody, settlement, and processing of non-cash financial assets.
This is a global trend. Senior officials across Europe are having a very public debate about the merits of a pan-European payment solution, while countries as diverse as Thailand, China, Russia, Bermuda and the UK are actively exploring the potential of creating digital central bank money for retail use. The US, conversely, seems to be taking a ‘wait and see’ approach, with Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell stating their reluctance to issue a digital dollar within the next five years.
Minimising the heavy lifting
For many countries on a quest to digitise, the end goal is clear, but the path by which to reach it is still less so. The solution is ultimately rooted in public and private sector collaboration, and the good news for central banks is: a lot of the hard work has already been done.
End-to-end solutions are being built on platforms such as Corda which record both cash and financial assets and combine trading, settlement and custody services into one seamless experience. A central bank issued currency issued on Corda would take advantage of these same payment and asset rails.
Central banks can use blockchain platforms and plug in to these new interconnected networks that were previously disparate and mutually incompatible. This significantly reduces the workload of bringing a digital currency to market, and enables policymakers to focus on policy and monetary control, rather than building and rolling out an entirely new technology infrastructure from scratch.
Ready for technology adoption
In 2019, digital tokens emerged as catalysts for the integration of existing financial networks into new blockchain ecosystems. For example, SIX, the Swiss stock exchange, is building a digital exchange that will facilitate trading in traditional stocks, bonds and exchange-traded funds while also introducing new types of digital assets. A key ecosystem-wide benefit is enabling atomic delivery-versus-payment, using central bank money as the preferred payment instrument. The ball is already rolling: the Swiss National Bank (SNB) and Bank for International Settlements (BIS) is working with SIX to explore such integrations.
In Asia, the Bank of Thailand continues to move ahead with its CBDC project, building a blockchain-based prototype solution that settles interbank transactions with its eight commercial bank partners using a digital currency. Rather than designing the protocols from scratch, the solution was built on Corda, which is already used by a network of over 300 companies from a diverse selection of industries.
Other central banks have initiated work to completely rethink and redesign their public payment schemes, with a focus on open access and true real-time payments. This includes the UK’s RTGS Renewal Program and the FedNow Service in the US. However, most have not yet included blockchain in their technology refresh. As Lael Brainard, member of the US Federal Reserve’s Board of Governors, recently noted, “payments are the economy’s circulatory system.”
We would urge the public sector to consider future-proofing the long-term health of that circulatory system by anticipating the future settlement demands created by new blockchain-based financial services.
Meanwhile, private sector innovation pushes ahead at pace. Mastercard is one of the most active innovators in this sector. The payments giant recently announced a pilot of a new blockchain-based solution for cross-border payments using the Corda platform, with a goal of connecting global faster payments infrastructures. This is just one of many exciting payments applications being built on top of Corda.
A cashless future?
Simultaneously, an increase in digital payments has signaled that a cashless society may be achievable. However, without a CBDC, countries headed towards a cashless society would only have access to money created by private sector entities.
As central banks have a mandate to provide a safe and efficient payment system, it is highly unlikely they can allow digital money to be exclusively issued by risky private sector entities. After all, money issued by the private sector has default risk (somewhat tempered by government backed deposit insurance schemes), while central bank-issued money does not.
Therefore, for a resilient cashless society to exist, central banks must offer an alternative monetary substitute for consumers, perhaps leveraging technical progress from private sector players.
In fact, Riksbank, the oldest central bank in the world, recently began testing a digital version of the Swedish currency, dubbed the e-krona. A CBDC would provide a public sector alternative to a private-sector dominated payments infrastructure in Sweden. Additionally, the ECB has started to explore how a CBDC could work in the euro area, researching potential technical features with R3 and Accenture.
For both wholesale and retail digital currencies, true innovation and sustainable long-term solutions will be centered around collaboration between the private and public sectors. These initiatives are driving an unprecedented period of evolution across global markets.
In another ten years’ time, markets are likely to look unrecognizable to their current form. Fiat currencies will be fully digitized and new types of private sector digital currencies and tokens will be traded in marketplaces that may not exist today. Blockchain-enabled synchrony between central banks and the broader global financial ecosystem will make this vision a reality.