Urszula McCormack, Dale Rayner, Max Allan and Emily Fox look at the latest developments in central bank digital currencies (CBDCs) worldwide. What did 2023 bring – and what can we expect in 2024?
In our regular update, we share the shifts happening in the world of CBDCs. The tail end of 2023 saw significant developments for the e-CNY – including cross-border retail trials in Hong Kong and SIM card tests in the PRC. An important research project was completed by the Reserve Bank of Australia, but there’s more to unpack and unfold before a CBDC is introduced in Australia. India, Korea and Japan are among nations preparing to start pilots or gradually introduce a CBDC. And cross-border tests showed how it might successfully work in transactions across Europe and Asia.
Still, the scene is a tale of two sides. The US shows no sign of warming to the concept, in the face of fierce objections.
What will 2024 bring? The ‘world-first’ e-CNY will continue to trailblaze; others across Eurasia will seize the chance to test waters with pilots. Yet one of the biggest nations, home to one of the most common currencies, is unlikely to make a move. Whether this will cool other efforts is unclear – but we’re actively watching this space.
Want to know more about how CBDCs might reshape the payments industry? Read our Featured Insight on the Future of Money.
Across Asia…
The Bank of China Hong Kong launched an e-CNY trial, testing cross-border payments of China’s CBDC at a new shopping festival. The trial involved mainland customers making purchases using e-CNY at over 200 retail outlets in Hong Kong.
Closer to the e-CNY’s home, the People’s Bank of Chinalooked to further integrate its CBDC into everyday transactions. An offline e-CNY payments trial uses specialised sim cards with near-field communication capabilities.
The director of the Digital Currency Research Institute of the People’s Bank of China Changchun Mu made it clear that the e-CNY should become a payment option across ‘all retail scenarios’. He also encouraged payments providers to improve e-CNY interoperability, unify QR codes for e-CNY payments and upgrade their own tools in the longer term to integrate with the CBDC.
The Bank of Korea narrowed down the choices for its CBDC pilot to Jeju, Busan and Incheon. One of these regions will host the pilot. The following step will see some franchises chosen to start taking CBDC payments at a consumer level in a pilot next year. Residents and tourists will have the chance to take part.
The Bank of Japan started discussing the development of a CBDC pilot programme with 60 companies, including Sony, Toyota and East Japan Railway.
The Reserve Bank of India (RBI) is planning to introduce its CBDC (wholesale and retail pilots launched in November and December 2022 respectively) in the call money market. The RBI is gradually expanding the scope of its CBDC pilots to cover different “use cases, designs and technological considerations”.
The Hong Kong Monetary Authority (HKMA) issued its e-HKD Pilot Programme Phase 1 Report. This summarised six of the case studies undertaken as part of the 2023 Pilot Programme, including full-fledged payments, programmable payments, offline payments, tokenised deposits, settlement instructions for Web 3 and settlement of tokenised assets. It concluded that “the HKMA has not yet reached a policy decision on whether or when to introduce and e-HKD”, with HKMA to conduct further reviews into business and implementation issues.
In Australia…
The Reserve Bank of Australia (RBA) released the results of its joint research project with the Digital Finance Cooperative Research Centre into potential use cases for an Australian CBDC. The results from the project indicated that a CBDC has the potential to support increased efficiency and resilience in some areas of the payments system and provided valuable insight into how a CBDC could be used to enhance the functioning of the payments system. However, there are also a range of legal, regulatory, technical and operational issues that require further consideration.
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- 16 pilot use cases focused on improving the background processes of the financial system, in particular making payments and settling transactions.
- The finance sector could save as much as several billion dollars per year via selected use cases, according to an analysis prepared for The Australian Financial Review.
The project tested a range of potential uses, including:
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- Deposits: Westpac and the Commonwealth Bank trialled using a blockchain-based CBDC to trade and pay for certificates of deposit, highlighting the potential benefit of a CBDC in interbank markets.
- Settling the sale of cattle: A NSW cattle auction was settled by two farmers on a start-up technology platform using a CBDC, which can be easily integrated into software platforms.
- Escrow for the building industry: financing a construction project using an escrow account verified by blockchain, confirming that the funding was available.
Project highlights included ANZ being nominated as a distributor of CBDCs to selected pilot participants on behalf of the RBA. We assisted ANZ, which was chosen to test three use cases across Super Fund payments, offline payments and the tokenisation of carbon credits.
Following this report, the RBA identified a number of key takeaways, including that the project highlighted:
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- areas where CBDC could add value in wholesale payments, including by facilitating atomic settlement in tokenised asset markets
- opportunities for a wholesale CBDC to act as a complement to (rather than substitute for) new forms of privately issued digital money (i.e. tokenised bank deposits and asset-backed stablecoins)
- that further applied research is needed to better understand operational design issues for new forms of ledgers, including scalability and throughput considerations, and interoperability between ‘on’ and ‘off’ chain ledgers
- the importance of a modern regulatory framework that supports both innovation in digital financial services and financial stability.
The RBA has also indicated it is in the early stages of planning for a new project assessing how different forms of digital money and infrastructure could support the development of tokenised asset markets in Australia, and will publish a joint report with the Commonwealth Treasury around the middle of 2024 that will provide a stocktake on CBDC research in Australia and set out a roadmap for future work and regulatory changes relating to payments and stable coins already under consultation.
Elsewhere abroad…
In the US, Federal Reserve Bank Vice Chair for Supervision Michael S. Barr confirmed the Federal Reserve remains a long way off making a decision about whether to introduce a CBDC. He emphasised that consumer protection, fostering competition and maintaining trust are 3 key areas of focus for the bank as the payments system evolves. His comments were timed with the House Financial Services Committee passing the republican-led CBDC Anti-Surveillance State Act, which aims to stop the Federal Reserve from ever issuing a retail CBDC.
In the UK, the Bank of England appointed Sarah Breeden as its next deputy governor. Why do we note this? Because Breeden is a former member of its CBDC task force. In a pre-hearing ahead of her appointment, Breeden highlighted the importance of having a national conversation about the potential benefits and drawbacks of a CBDC. The project has faced mixed reviews due to concerns about privacy and the potential for the Government to track what people spend their money on.
Working together, worldwide…
Can retail CBDCs mimic the ‘good things’ about cash? The HKMA, Bank of Israel and the Bank for International Settlements (BIS) published results from Project Sela, which (in essence) answered this question. The project considered the feasibility of a retail CBDC and its ability to retain the desirable characteristics of cash. A new type of intermediary between a central bank and consumers was used: an Access Enabler. Accessibility, competition and preventative cybersecurity – areas where cash can bring benefits over digital money – were among focus areas. The result? Access to a retail CBDC doesn’t compromise cybersecurity – as long as it has an appropriate preventative design.
Project mBridge also continues, “bridging” (pardon the pun) Mainland China, Hong Kong, Thailand and the United Arab Emirates, with BIS’ support and multiple observing members including the likes of the World Bank, the International Monetary Fund and central banks from around the world. A brochure summarising its key elements was issued in October 2023. You can listen to Bénédicte Nolens, Head of Bank for International Settlements (BIS) Innovation Hub Hong Kong, in an engaging discussion on the latest developments in the digital currency space at our 2023 Digital Future Summit here.
Meanwhile, cross-border experiments across Europe and Asia achieved promising results. The BIS, the Banque de France, the Monetary Authority of Singapore and the Swiss National Bank completed a joint test of the cross-border trading and settlement capabilities of a wholesale CBDC in Project Mariana. The project involved trading a euro, Singapore dollar and Swiss franc CBDC on a public blockchain using a common token to bridge the different currencies. The Project was successful, however further experimentation is needed.
With results like this – what is stopping (or slowing…) the uptake of CBDCs? General Manager of the BIS Agustín Carstens revealed that one of the biggest barriers to CBDC integration is the current legal framework that most countries operate in. A 2021 study by the International Monetary Fund found that around 80% of central banks are either unable to issue CBDCs or the law is unclear.
Still, positive experiments and changes were the call card of 2023. Another example to round out this post: the UK and Singapore have committed to work together to create and implement global regulatory standards for cryptocurrencies and digital assets.
We are involved in several CBDC and tokenisation projects and we love nothing more than helping our clients experiment, build new infrastructure and drive innovation. Subscribe to KWM Pulse using the button below for more.
