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Frankfurt conference showcases substantial progress in CBDCs

The CBDC Conference is expected to become the leading annual event for Central Bank Digital Currencies (CBDCs), bringing together participants from around the world to review progress made in the field. This year’s event took place in Frankfurt, Germany on 29-31 August and was attended by Christopher Yahchouchi, Data and Strategy Manager at eMcREY and Dr Gordon Clarke, the company’s leading expert in Financial Market Infrastructures (FMIs) and CBDCs.

The conference explored CBDC experimentation around the world, examining specific projects, design and policy considerations. Ongoing projects were presented by twelve Central Banks including those of the Bahamas, Brazil, France, Ghana, Jamaica, Japan, Kazakhstan, Nigeria and Thailand. Several reported high levels of public trust in their projects, thanks to previous Central Bank-led policy and project successes.

It was apparent that there is a clear divergence in approach between advanced and emerging economies. For now, developed economies are preparing to react to geopolitical events and advances in the cryptocurrency markets if necessary. The G7 and Europe have done extensive experimentation and have prepared viable platforms, but do not plan to implement a CBDC unless circumstances change; for example, if there is widespread adoption of either a CBDC from a western economy, a cryptocurrency initiative from Big Tech or a global stablecoin. Similarly, substantial uptake of private cryptocurrencies and assets might impact monetary sovereignty, and control of the money supply in countries with weaker currencies. Whatever happens, financial instability must be avoided and, therefore as one speaker commented, “regulation is the friend of innovation.”

The picture is different in less-developed economies, where use cases for CBDCs are predicated on financial inclusion, simplifying money distribution (for example in island nations) increasing control over the informal economy and combating corruption. Emerging economies have a much stronger case for fast CBDC deployment than large, richer countries. As with mobile money, we may well find emerging economies in the lead on CBDCs to meet their specific market needs, but that also means they will be taking bigger risks.

There was widespread agreement around the necessary conditions for successful implementation of CBDCs:

  • Executive sponsorship at a high level in the Central Bank
  • Clear and measurable objectives
  • Early involvement of stakeholders
  • Adoption programmes to ensure usage levels meet project objectives
  • Addressing policy before technology
  • Striking an acceptable balance between privacy and anonymity.

At the same time, significant questions remain, including whether the focus should be on wholesale or retail CBDCs, whether the monetary policy benefits and risks are sufficiently understood and what are the benefits from the commercial banks’ perspective. On the technical side, there is no definite conclusion yet about how the functional advantages of blockchain solutions can be deployed for real-world benefit, comprehensible to users.

Presenters and delegates felt that CBDCs present good opportunities, such as incorporating micro-payments functionality and improving recurring payments by using smart contracts. Programmable payments allow Central Banks to exercise domain controls on the use of public money, for example for time-limited relief payments. Offline bearer instruments can promote financial inclusion in the hardest-to-reach geographical areas and customer segments although, as one speaker observed, “whatever we do, offline use will never be as offline as cash.” Meanwhile, developed economies see scope for substantial improvement in digital cross-border settlement methods for trade payment and remittances, with substantial experimentation continuing under the guidance of the BIS Innovation Hubs.

The conference demonstrated that substantial progress has been made in CBDCs over the past 3-4 years, with six public systems now running, and there is a general willingness to openly share learning and experiences. Rolling out national programs is a challenge few are currently willing to embrace, although some Central Banks, particularly in less-developed economies, will continue to take steps towards this. The clear message from the event was, “CBDCs are here to stay,” but the conditions for their implementation will be specific to individual countries and the impact on monetary stability needs careful consideration. Central Banks are striking a balance between being innovators and ensuring that standards, regulations and adoption programs can properly support their initiatives.

Dr Gordon R. Clarke