cryptocurrencies, where are the digital currencies of central banks

Cryptocurrencies, where are the digital currencies of central banks

by Maurizio Sgroi

All major jurisdictions are working on the construction of central bank digital currencies (CBDC). The in-depth analysis by Maurizio Sgroi for Econopoly of the Sole 24 Ore

A little big success, one could say by observing the first cross-border fund transfer experiment of a central bank digital currency between different institutions presented by the Bis of Basel. Perhaps it is an exaggeration to bother the story, but only because the theme is exotic and therefore necessarily not very popular. And yet the fact is relevant: for the first time there has been a passage of central bank digital currency (CBDC) - using a blockchain (Distributed Ledger Technology, DLT), in full Bitcoin spirit.

The test allowed “three participating central banks to control the flow of their CBDC and to monitor the transactions and balances of their issued CBDC,” Bis explains. And the successful outcome of the experiment has given way to a new phase - the third of a project begun years ago - which aims to arrive at a ready-to-use network to be made available to central banks in open source ".

The first phase of this project involved the Hong Kong Monetary Authority (HKMA) and the Bank of Thailand (BOT) - Project Inthanon-LionRock - and was completed in January 2020. It took another eighteen months to get to phase two , which involves other stakeholders, while it is not yet clear how long it will take to complete phase 3.

The point remains: transferring funds between countries, using CBDC on a DLT, will become too enticing an opportunity not to be considered. It is no coincidence that Benoît Cœuré, head of the BIS Innovation Hub, speaks of the prototype as “part of our efforts to design CBDC technology”.

To make the operation interesting, the simple reason is that the transfer took place in a matter of seconds compared to the days normally required for a cross-border payment with current systems. And at half the cost.

There is also another reason: the experiment is the result of an institutional collaboration between the BIS innovation hub of Hong Kong, the Hong Kong monetary authority, the Thai central bank, the Digital currency Institute of the People's Bank of China and the Central Bank of the United Arab Emirates. Certainly an original collaboration, also due to the political significance that can be attributed to it.

The technical reasons for this evolution are obviously numerous. The prototype of multiple Central Bank Digital Currencies (mCBDCs) "demonstrated the potential of using digital currencies and DLT technology for real-time, cheaper and safer cross-border payments and settlements". Furthermore, the platform operates seven days a week, 24 hours a day. In the words of Bénédicte Nolens, head of the BIS Innovation Hub, in Hong Kong, "Faster and cheaper cross-border wholesale payments, even to jurisdictions that do not benefit from a vibrant correspondence banking system, would be positive for trade and economic development ".

It is worth remembering that this "internationalization" of a CBDC was not born out of a stroke of genius by some central banks - or at least not only - but is part of a specific G20 mandate to create "cheaper, faster and cheaper cross-border payments. more resilient ". So it is not a sport event, but the consequence of a precise strategy that starts from afar and that will lead to a substantial change in the financial ecosystem that revolves around payments, international but not limited to.

The indication of the G20, in fact, is part of the broader scenario that sees more and more central banks engaged in the development of digital currencies, an object that has only recently begun to gain access to public opinion thanks to the considerable work of dissemination and analysis done by central banks.

Central banks have not only helped explain and study the phenomenon, but have expressed a growing number of positions in favor of the adoption of this technology.

So we got to today. All major jurisdictions are working on building a central bank digital currency. Some smaller countries, such as Jamaica, also recently announced that they are ready to launch. While among the large countries, China - which participates in the cross-border payment experiment - has been experimenting with an e-yuan in some city contexts for some time and is also preparing for a targeted use of digital currency for the upcoming 2022 Winter Olympics.

It is too early to say that nothing will be the same after the mCBDC test. But that moment will come, few now doubt it among those who follow these events. The problem is how this transition will be handled. The risk that all central banks have is to "disintermediate" commercial banks too much, ending up by cutting them out of payment systems.

Which nobody wants, and first and foremost central banks, which are certainly not equipped to manage retail customers. For this reason, among the various hypotheses circulated in recent months in the eurozone, it has emerged that of limiting the amount in digital currency available to each economic entity to only a certain amount. And then of course there are difficult privacy issues at stake. But it is a question of surmountable difficulties. The process for the "digitization" of cash is now well underway. Where it will lead us is a whole other story.

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