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With China set to launch the world’s first Central Bank Digital Currency (CBDC) by the end of the year, pressure is mounting on the world’s other major central banks to join the digital revolution.
When discussing the topic at Swell 2020, both David Mills from the Federal Reserve Board (FRB) and the European Central Bank’s (ECB) Ulrich Bindsell admitted that their organizations were lagging behind the central banks of China, Sweden and the Bahamas in pioneering progress towards CBDCs.
The annual Ripple Swell Global conference brings together the world’s trusted leaders in financial services and blockchain technology, though in a virtual setting this year. Speaking from Frankfurt, Ulrich suggested that the ECB’s measured stance on CBDCs was partly based on the conservative approach to adopting new payment technologies shown by many Europeans.
Like much of the world, the US and Europe has seen a trend towards fewer cash transactions, especially since the pandemic. However, this decline is generally slower than in the rest of the world where mobile payments have thrived in places where people have little or no access to traditional banking services. David noted how some of the CBDC innovators are motivated by existing friction in their current financial infrastructure.
“They’re trying to leapfrog certain types of technologies to modernize their broader payments and financial ecosystem,” he said. “[The US already has] a pretty robust electronic payments ecosystem. For more developed economies…there’s a lot of interest and focus on this technology as a new innovation on top of existing modernization efforts.”
The lack of traction so far in Europe means that many of the continent’s leading electronic payments services are non-European businesses. Much of the ECB’s current interest in CBDCs is driven by worries around loss of monetary sovereignty if it does not offer a digital alternative to cash.
“The situation where central bank money would no longer be usable for citizens is the main scenario we have in mind,” explained Ulrich. “Electronic payments have been so convenient that it’s a matter of evolution for central banking to offer central bank money to everyone in the modern form…it would be more of a revolution to not do so.”
Both David and Ulrich agreed that the ECB and FRB have a responsibility to balance the desire for innovation with the need to maintain existing infrastructure. The FRB is especially interested in how a CBDC could run on existing rails and transfer across multiple platforms efficiently.
This issue of interoperability will be key to the success of any CBDC. With each central bank pursuing a digital currency that meets its own specific needs, the resulting solutions and technologies are likely to vary. But to thrive in a global economy, each initiative will also need to be built using shared open protocols and standards that will enable interconnections with traditional financial systems and other CBDCs.
Open and effective partnerships between central banks and the blockchain industry is critical, not least because of the power of the ECB and FRB. Ulrich noted the potential of an ECB-issued digital currency to crowd out other initiatives and called for industry-wide collaboration.
“That’s the first important message to the industry,” he said, “that they should be part of the solution.”
This may also require a realignment of expectations. While it’s common for fintech innovators to tout the revolutionary potential of their services, David expects the near future of CBDCs to be about incremental enhancements to the existing system.
“Early CBDCs will ultimately look closer to eMoney or prepaid cards,” he predicted. “Technology is great in that it expands what’s feasible to all of us. But we still have to apply constraints where we meet two objectives that compete with one another. Those mature conversations around CBDCs are what I expect to see more of in the next few years.”