CBDC teaser

Central bank digital currencies could have a significant impact on instant remote settlement for securities transactions, according to a recent joint report from Accenture and Swift.

More than half the world’s central banks are actively exploring the use of central bank digital currencies (CBDCs), according to a recent paper outlining the implications for international payments by consultancy Accenture and payments network Swift, titled ‘Exploring central bank digital currencies: How they could work for international payments’.

While CBDC plans are still at a preliminary stage in most countries, development is at an advanced stage in China, Sweden and the Bahamas, while the UK, US and EU have stepped up efforts in this year. “Central banks are looking at CBDCs for different reasons,” says Harry Newman, head of payments strategy at Swift.

Central bank reasons for exploring digital currencies outlined in the report include efforts to reduce the use of physical money, a drive for financial inclusion, enabling innovation in wholesale applications, and improving payment efficiency to reduce cost and risk.

“The attraction of a CBDC is that you can have an exchange of value and the settlement of it in central bank money at the same time,” Mr Newman notes.

If they are built as a digital island, CBDCs may not be particularly helpful

Harry Newman, Swift

The threat from private initiatives being used for transactions — such as Facebook’s proposed cryptocurrency, Diem — has also spurred policy-makers’ efforts to establish reserve-backed currencies within the existing monetary systems.

The ongoing exploration of CBDCs is likely to leverage existing payments rails where possible, because central banks are experimenting with a range of distributed ledger technology (DLT) platforms, according to the report.

“If they are built as a digital island, CBDCs may not be particularly helpful,” Mr Newman says. “There’s no need to reinvent the wheel. It’s unlikely that CBDCs will completely replace normal transactions or accounts — they’re probably going to be complementary to what goes on today.

“Central bank digital currencies will need to be integrated and interoperable in order for them to have utility value,” he adds.

Platforms and tokenisation

The DLT platforms central banks have been experimenting on for their pilots include R3’s Corda platform, used by Sweden’s Riksbank to develop the e-krona, and ConsenSys's Quorum platform used by the Hong Kong Monetary Authority.

According to the report, it is unclear which platform will come out on top over the next 10–20 years and, therefore, the development of a digital payment ecosystem based on DLT will not be realised in the near term unless a solution is devised for this problem.

The report outlines how existing infrastructure could help facilitate payments across platforms and looks at how cross-border transactions might work on two different networks (DLT and non-DLT), and between entities on two different DLT networks (one network built on Corda, and the other on Quorum).

The tokenisation of CBDCs — an encrypted digital version of a tradable asset — is one of a number of options to achieve effective transactional operability, Mr Newman says.

“A digital token could be transported easily between people, but other options include more account-based issuance of a CBDC where a bank could hold two sorts of accounts: one in commercial bank money and one in central bank money,” Mr Newman says. “The token could rely on distributed ledger technology, but not necessarily.”

The report outlines areas of international payments that could be that could be changed by the implementation of CBDCs. 

“When you make a payment today, it will often cross different forms of money in its journey. CBDCs could allow 24/7 operation between countries to ensure quicker and more effective settlement,” Mr Newman says.

“Longer operating hours could help speed up payments. If a payment arrives internationally and the receiving country is shut to an incoming payment — such as during a bank holiday — then potentially CBDCs might be able to help in that space.”

Opportunities for innovation in wholesale markets, such as enabling instant remote settlement for securities transactions or foreign exchange, are also outlined in the report.

A securities platform, for example, might be able to use CBDCs to form an end-to-end solution to settle trades, while in the retail market a CBDC might enable new ways of doing business, particularly in an e-commerce setting.

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