Future of Finance


Is this how CBDCs will happen in the major global currencies?

[MAR 2023]

A Future of Finance webinar March 23 at 2pm UK time

When it came to digital money useable on blockchain networks, the choice between central bank money and commercial bank money used to feel binary: Stablecoins and tokenised deposits and e-money were stopgaps pending the introduction of CBDCs. But as the threat of Stablecoins that were either global or issued by unregulated non-banks has receded, a more traditional hierarchy of money has asserted itself. CBDCs are likely to become the central bank digital money foundation on which myriad forms of digital commercial bank money will blossom.

What is the event about?

Central bank digital currencies (CBDCs) originated in need (to put fiat currency on blockchain networks) but also fear. Central banks were fearful that private forms of money based on blockchain technology would rob them of control of national and international monetary conditions. These fears were crystallised by the prospect of Facebook issuing a multi-currency Stablecoin called Libra.

Having crushed Libra – whose remnants were sold to digital asset bank Silvergate in January 2022 – developed market central banks around the world are now bringing Stablecoins within the regulatory perimeter by privileging banks as issuers and prescribing what assets they can use to back a Stablecoin. This has released much of the pressure on the major central banks to issue CBDCs.

There are currently just four CBDCs actually in issue – the Bahamas Sand Dollar, the  Eastern  Caribbean Dcash, the Nigerian eNaira and the Jamaican JAM-DEX – and all are developing slowly, with limited take-up. Significantly, all four were issued in developing economies, where the benefits of CBDCs in promoting financial inclusion and fighting financial crime are easiest to capture.

Of another 93 countries exploring a CBDC – as monitored by the Atlantic Council CBDC Tracker – the most advanced (Brazil and Kazakhstan) fit the pattern. In all, just 17 are at the pilot testing stage. Of them, the Swedish eKrona project is the only one being pursued by a Western economy. 72 central banks are still developing or researching their plans, and the rest have stopped doing even that. 

True, the Bank for International Settlements (BIS) website records ten CBDC experiments in progress, with various combinations of banks and central banks taking part, and it is not hard to find others where the BIS is not involved. So the leading central banks have not lost interest in CBDCs, but they do now seem relaxed enough to let the private sector lead the digitisation of money.

This reflects a consensus that a CBDC in a developed market must not disintermediate the commercial banks through which central banks influence monetary conditions. Nor are most central banks credible providers of customer-facing services such as digital wallets, foreign exchange and checking customers are not money launderers, terrorists or sanctioned businesses or individuals.

There is an even more profound sense in which central banks are content to cede the leadership role, and it is this: CBDCs are emerging as the foundation of a layered system of issuance and distribution in which asset-backed Stablecoins issued by regulated banks, tokenised cash on deposit at regulated banks and e-money backed by cash held at regulated banks will provide the bulk of digital monies.

In other words, the axes of exploration and experiment in CBDCs are no longer about getting fiat currency on to blockchain networks to provide the cash leg of tokenised transactions, or about retail versus wholesale versions of a CBDC, but about a CBDC as a liability on a central bank balance sheet more akin to reserves than to notes and coins.

Although notes and coins seem certain to survive in most jurisdictions, the number and value in circulation is bound to shrink as money digitises. Unless they are replaced by a retail CBDC, that means consumers will gradually lose access to the only form of central bank money available to them. But the nature of the commercial bank monies available to the public looks set to change.

At present, consumers and businesses access commercial bank money through bank deposit accounts and payment platforms (such as credit cards) linked to those accounts. Once a CBDC is issued, they are likely not only to be able to pay and get paid in Stablecoins and tokenised deposits and e-money, but to exchange any of these instruments for any other form of tokenised asset.

Banks will in effect be issuing bank-branded, tokenised currencies which will compete for the business of companies and consumers on price (rates of interest) and functionality (benefits and features, such as shopping vouchers or limited purpose payments such as university fees or automated tax payments at the point of sale) can be programmed into the tokenised currencies.

The JPMCoin tokenised deposit and the ANZ and NAB Stablecoins offer a glimpse at this future already. A digital money such as the JPMCoin is useable between clients of the bank only. Some monies may be useable in some types of transaction only. Some counterparties will accept one form of digital money and others another. Networks, and networks of networks, will emerge.

For a networked marketplace of that kind to work, the various forms of digital money have to be interchangeable, which means the systems on which they are issued and exchanged have to be inter-operable. That is a challenge, given that existing payments market infrastructures – notably the Real Time Gross Settlement Systems (RTGSs) operated by central banks –  can be expected to survive.

The interoperability challenge will be exacerbated but the fact that different digital monies will be issued on to different blockchain protocols and on to centralised technology platforms that already struggle to exchange information efficiently. Technical standards, and perhaps even entirely new (decentralised and centralised) financial market infrastructures, might prove necessary.

Fundamental changes are already apparent in the two major use-cases for digital money: cross-border payments and capital markets settlements. They are both instances where reserve-like CBDCs have already been proven to work in a variety of experiments and settings. Correspondent and custodian banks, payments market infrastructures and central securities depositories (CSDs) are on notice.

But the long-term threat to incumbents from CBDCs lies in the steady re-shaping of the Internet-based economy. E-commerce is shifting from the centralised, platform-based, data-exploiting corporations of the present (Web 2.0) to a decentralised, peer-to-peer, data-owning future (Web 3.0). This is a threat, but it is also a massive opportunity for imaginative issuers of digital money.

Why Watch?

The debate about CBDCs, informed by a long series of experiments involving central banks, banks and financial market infrastructures (FMIs), is moving towards a number of conclusions. CBDCs will be based on a familiar division of labour between central and commercial banks; innovation will be led not by central banks but by commercial banks; the pressure for different networks to inter-operate will intensify; cross-border payments and settlement of capital market transactions will be the earliest use-cases; and the transition to the Web 3.0 economy will distinguish ruthlessly between the quick incumbents and the dead. If you work in central banking, or correspondent banking, or global custody, or at payments market infrastructure, or at a central securities depository (CSD), or at bank or non-bank issuer of a Stablecoin or a tokenised deposit, this webinar is for you.

What topics will be discussed?

  1. How successful have the CBDCs issued so far been in fulfilling their goals?
  2. What are the principal lessons for central banks from the first CBDCs to be issued?
  3. Why have CBDCs been restricted so far to developing economies?
  4. Is the two-tier model of a CBDC now settled?
  5. How can a CBDC be made to work on current payments market infrastructures?
  6. Why will the development of digital money be led by the private sector rather than the public?
  7. What lessons can be learned from the tokenised deposits and Stablecoins issued so far?
  8. How can balkanisation of payments be prevented if banks become the principal issuers of digital money?
  9. What is needed to make different CBDC-based networks inter-operable both domestically and internationally?
  10. What are the implications for incumbents of cross-border payments and capital markets becoming the earliest use-cases for digital money settlement?
  11. Who has the greatest incentive to issue programmable digital money?
  12. What will be the impact of the transition to a Web 3.0 economy?


Ricardo Correia, Senior Technology Executive at R3 https://www.linkedin.com/in/ricardo-m-correia/

Gilbert Verdian, CEO at Quant https://www.linkedin.com/in/gverdian/

Barney Reynolds, Partner, Global Head Financial Institutions, Governance & Advisory at Shearman and Sterling https://www.linkedin.com/in/barnabas-reynolds-financiallawyerlondon/

Keith Bear, Fellow at the Centre for Alternative Finance, Judge Business School at the University of Cambridge https://www.linkedin.com/in/keith-bear-2b7407/