Sibos panel: Appeal of CBDCs is programmable nature

Speakers at Sibos discuss CBDC models and benefits

By Leanna Reeves | 6 October 2020

As central banks show increased interest in developing their digital currencies, understanding, and grasping the benefits of implementing Central Bank Digital Currencies (CBDCs) remains at the core of the debate.

Arwen Smit, author and senior adviser at MintBit, believes the decline in the usage of cash is not the only driver for adopting sovereign digital currencies.

“Where it might differ from existing alternatives is that it is attractive to managing risk of private money creation,” she said during a Sibos panel discussion today.

“This is why the US Federal Reserve is researching CBDCs – it’s to counter private currencies such as Libra. Public policy objectives are being explored. CBDCs are not only digital – they also have a characteristic of being programmable, which is why it could apply to a country like Sweden.”

On a geopolitical angle, CBDCs will also appeal to countries such as China, as the country aims to protect monetary sovereignty – an implicit link to compete with the dollarisation of the global market, according to Smit.

Last month, director of the European Central Bank (ECB) Christine Lagarde affirmed that the central bank was looking into developing a digital euro – which would ensure that sovereign money stays central to European payments.

Markos Zachariadis, professor of Information Systems at Alliance at the University of Manchester, agrees that CBDCs will provide greater access to payments for consumers and businesses.

“It can be a more programmable system, so that opens up new directions with this technology but also the fact that you can provide access to data and this will open new possibilities for both consumers and business models,” he said at the event.

When constructing CBDCs, Smit believes there are three key forms that individuals use. The first one is direct issuance – which is a direct claim on the central bank. In this case, the central bank would handle retail payments, KYC, and AML for instance. This would come at a high operational cost, according to Smit.

Another form consists of hybrid CBDC, meaning the CBDC is a claim on the central bank, in which it records retail balances and intermediaries handle retail payments.

Finally, the two-tier issuance of CBDC represents the closest model to our current one. The CBDC is a claim on the intermediary as the intermediary handles the retail payments and the central bank the wholesale payments.

Alistair Milne, professor of financial economics at Loughborough University, believes the most attractive model is the idea that the value is held at the central bank and remains at the liability of the central bank, but that technology allows third parties delegated control.

The implications of CBDCs on the banking and real sector means that the moment a central bank becomes liable and that would have been a useful payment mechanism, money multiples cannot be done – meaning there is no frictional banking, according to Zachariadis.

However, Milne says that if you have a central bank – a ledger issuing CBDC – then it is still conceivable that banks put high-quality loans against that ledger as collateral in a fairly automatic way and that would, in turn, generate money.

“The suggestion that if CBDC is widely adopted would rule out fractional reserve banking is often a little overstated,” he added.
 

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