1. Retail CBDC
Switzerland examined a specific facet of introducing a retail Central Bank Digital Currency (CBDC) by investigating how various strategies aimed at mitigating risk transfer would impact the CBDC’s ability to meet its intended goals. These strategies include measures like applying an unappealing interest rate to the retail CBDC, imposing limits on the quantity of CBDC, and preventing the conversion of physical cash and reserves into CBDC. The study focused on how these strategies influence the CBDC’s capacity to serve as intended, considering aspects such as its use as a medium of exchange and the unique demands and challenges within a small open economy possessing a secure currency and low government debt.
When a retail CBDC is issued, there’s a shift of risk from commercial banks to the central bank. These mechanisms, particularly those mentioned earlier, hinder the effective use of CBDC as a means of exchange. In the context of a small open economy with a strong and stable currency, the study delved into specific demands and obstacles that arise when contemplating a retail CBDC.
A delicate balance exists between restricting risk transfers to central banks and achieving the desired purposes of the CBDC. If the goal is to provide the public with a form of legal tender, then limitations on the quantity of CBDC held should not apply, and individuals should be able to fully exchange deposit claims against banks for CBDC. Implementing an unattractive interest rate for CBDC could help control its demand during normal circumstances. However, during financial crises, the unattractive interest rate might be less effective in curbing demand due to the relatively minor costs incurred over a short period.
When the objective is to enhance the resilience of the payment system as a backup, widespread CBDC adoption becomes essential. This scenario requires CBDC to be either non-interest bearing or possibly offering positive interest up to a certain quantity threshold. The concept here involves applying an appealing interest rate within a specific limit and then transitioning to an unattractive interest rate beyond that limit. This approach would allow CBDC to serve both as recognized legal tender and as a backup payment system, although it might also increase the risk of substantial withdrawals during financial crises.
If the intention is to diversify payment systems and promote financial sovereignty, encouraging active use of CBDC for everyday transactions becomes crucial. Ultimately, the implications of launching a retail CBDC are closely tied to its specific design. Failing to manage demand could lead to real or potential risk transfers to the central bank responsible for issuing the CBDC. On the other hand, curbing demand might hinder the fulfillment of certain intended objectives linked to its introduction.
Source:
https://www.snb.ch/en/mmr/papers/id/working_paper_2021_19
2. Project Helvetia – Wholesale CBDC — Settling tokenised assets in central bank money
Project Helvetia constituted a multi-stage investigation undertaken by the BIS Innovation Hub, the Swiss National Bank (SNB), and financial infrastructure operator SIX. The central focus of this project was to explore the potential methods through which central banks could enable settlements using central bank money in a future financial landscape characterized by an increased prevalence of tokenized financial assets based on distributed ledger technology (DLT). The primary areas of examination encompassed operational, legal, and policy considerations.
This collaborative endeavor involved examining how the offering of central bank money for wholesale settlement could be adapted in a scenario where distributed ledger technology (DLT) and tokenization gain traction within financial markets. The project consisted of two distinct proofs of concept (PoCs) aimed at facilitating settlement of tokenized assets:
- The first PoC involved the issuance of an innovative wholesale central bank digital currency (w-CBDC).
- The second PoC entailed the creation of a connection between the new securities settlement platform of SDX and the pre-existing central bank payment system.
The project unfolded in two main phases:
- Phase I leveraged the testing environments of the Swiss real-time gross settlement system known as the SIX Interbank Clearing (SIC) system, as well as the SIX Digital Exchange (SDX), a platform dedicated to trading and settling tokenized assets.
- Phase II extended the work conducted in Phase I by introducing commercial banks into the experiment, integrating wholesale central bank digital currency (w-CBDC) into both the core banking systems of the central bank and commercial banks, and executing end-to-end transactions.
The outcomes of Project Helvetia were positive. Within a highly realistic environment closely resembling live operations, the project demonstrated the feasibility of utilizing new technologies to employ central bank money for settling securities transactions. Moreover, it highlighted that central banks interested in such endeavors have multiple avenues to explore. The results indicated that not only is it viable to establish connections with existing systems, but also the potential exists to introduce an innovative form of central bank money — referred to as wholesale central bank digital currency (w-CBDC).
Source:
https://www.bis.org/publ/othp35.pdf
3. Project Mariana – FX settlement with wCBDC
Project Mariana represents an expansion of prior experiments conducted with wCBDCs, aimed at enhancing the efficiency, safety, and transparency of FX trading and settlement. It is a collaborative proof of concept (PoC) involving the BIS Innovation Hub, Bank of France, Monetary Authority of Singapore, and Swiss National Bank.
The project builds upon past experimental endeavors in three key dimensions, drawing inspiration from emerging decentralized finance (DeFi) technology.
- Within this initiative, the focus is on joint trading and settlement in wCBDCs utilizing an automated market-maker (AMM). This marks an evolution from previous cross-border wCBDC projects that concentrated solely on settlement. AMMs are smart contracts that leverage liquidity pools to automatically swap tokenized assets, contrasting with the traditional method of matching buyers and sellers via limit order books.
2. Project Mariana evaluates a shared standard for fungible wCBDC tokens, incorporating design elements aligned with central bank prerequisites. This standardized technical framework enables (i) compatibility among various wCBDCs within the same protocol, particularly the AMM, and (ii) the implementation of governance mechanisms at the token level without the need to exert control over the underlying platform or rely on a third-party platform operator.
3. The project also explores the mobility of assets across diverse blockchain-based networks through bridges, expanding upon previous initiatives that tested wCBDCs.
It’s crucial to emphasize that the project is purely experimental and should not be interpreted as an indication that any of the participating central banks have intentions to issue CBDCs or endorse DeFi or any specific technological solution.
Project Mariana is primarily centered on an experimental setup that focuses on FX spot trading and settlement utilizing hypothetical euro (EUR), Swiss franc (CHF), and Singapore dollar (SGD) wCBDCs, involving both commercial banks and central banks. More specifically, it investigates the viability of establishing an international FX interbank market using wCBDCs on a blockchain-based network. This network is interconnected with domestic platforms through bridges to facilitate the transfer of wCBDCs.
The project is still on-going and the final report is expected to be published by end of 2023.
Source:
https://www.bis.org/publ/othp_mariana.pdf
4. Project Jura – Cross border settlement
Project Jura represents a collaborative effort involving multiple stakeholders, including Banque de France, the BIS Innovation Hub Swiss Centre, Swiss National Bank, and a private sector consortium.
The project focused on exploring cross-border settlement using wCBDCs denominated in euros and Swiss francs, along with a tokenized French financial instrument hosted on a third-party DLT-based platform. The primary objective was to facilitate payment-versus-payment (PvP) and delivery-versus-payment (DvP) settlements between French and Swiss banks while investigating ways to extend the safety and security of central bank-backed money across international borders.
This experiment introduced a novel architecture that may instill confidence in central banks to issue wCBDCs on foreign third-party platforms and grant non-resident financial institutions access to wCBDCs. By enabling various wCBDCs to coexist on a single platform, it allows for direct cross-border payments between financial institutions. Furthermore, the inclusion of other tokenized assets creates fresh opportunities for cross-border settlement involving FX, securities, and other financial instruments.
Importantly, this experiment was conducted in a near-real environment, involving real-value transactions and strict adherence to prevailing regulatory requirements.
Corda, developed by R3, was selected as the underlying permissioned DLT technical platform for the SDX (SIX Digital Exchange, a licensed exchange and CSD for tokenized assets) platform and the DAR (Digital Asset Registry, a new DLT-based registry for tokenized commercial papers issued under French law). Corda operates on a decentralized peer-to-peer network of computer nodes and follows a need-to-know principle, with data shared exclusively among transaction counterparties.
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