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On Monday, Benoît Cœuré, the head of the BIS Innovation Hub, said that “when it comes to wholesale CBDC it is very likely that blockchains will be involved.” Many of the world’s central banks are collaborating on CBDC research with the BIS Innovation Hub, which recently released a CBDC paper.
Cœuré spoke at the OECD 2020 Global Blockchain Policy Forum.
There are two choices for central bank digital currencies (CBDC), token-based, blockchain or account-based. But most financial institutions targeted by a wholesale CBDC already have central bank accounts. Referring to these accounts, Cœuré said, “it’s not wholesale CBDC, it’s the traditional way of doing it.” And often it’s the tokens that are desirable.
A common driver for a wholesale CBDC is the adoption of distributed ledger technology (DLT) by many financial market infrastructures (IMFs) around the world. Tokenizing central bank money makes on-chain payments much easier. Therefore, the Swiss National Bank and SIX Digital Exchange have long been exploring a wholesale CBDC. They are now teaming up with the BIS and plan to share more details in December.
If there is no CBDC, the other alternative is to integrate the DLT ledger with the existing payment tracks, the real-time gross settlement system (RTGS). In the case of Switzerland, the owner of the SIX exchange also operates the SECOM system.
We present a third path. And this is the IMF’s choice not to settle in central bank money and instead to use private money. However, Cœuré said that to ensure the stability of global financial systems, “key financial market infrastructures need to be settled in central bank money”.
It didn’t sound so good for Fnality, which is creating a settlement system just for these IMFs, in which account balances at central banks back up tokens. Cœuré later talked about the coexistence of stablecoins with CBDC, or in the case of wholesale CBDC, said that “central bank money-backed settlement tokens are also part of the discussion.”
Cœuré highlighted another use case for wholesale CBDC, which is for emerging market countries that do not have an RTGS. Wholesale CBDC could be one way to achieve a similar result.
Wholesale CBDC Challenges
Wholesale CBDCs are very different from retail CBDCs and present their own unique challenges. Cœuré has divided the problems into two segments, those that apply equally to RTGS systems and those that are new.
The biggest challenge is new, the potential fragmentation between account-based money and tokenized money. A tokenized wholesale CBDC is a new form of money. The question is how the two coexist and whether only account-based money is used to conduct monetary policy. On the other hand, if tokens are treated differently, bankers may not attempt to trick the system (our observation, not Cœuré’s). The central banker noted the potential complexities for monetary policy implementation.
A typical problem CBDC has in common with RTGS is whether or not to allow access to non-banks, as the Bank of England and others have publicly discussed. There is also the question of whether to offer interest in a world of negative rates. How is night credit provided and must access hours be extended beyond business hours? As financial systems become increasingly interconnected and settlement times get shorter, working hours in one country may have little or no overlap with others on the other side of the world.
Overall, Cœuré wanted to keep central bank money as a public good and encourage innovation. “We have to let the private sector innovate. And for that, we need diversity and we need an ecosystem. But we want central bank money to be at the heart of it all, “he said.
