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�Overview: Regional and international perspectives of CBDCs & other Virtual Assets��COMESA Central Bank Governors Symposium

Professor Robert Wardrop

Co-Founder, Cambridge Centre for Alternative Finance

University of Cambridge Judge Business School

November, 2023

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Today’s talk

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CBDC and stablecoin developments in the US, UK and EU
Commercial initiative: Multi-token Network
Take-aways from BIS Innovation Hub CBDC Proof-of-Concepts
CBDCs in a three-tier money system: competing or complementing ?

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1. State of play in CBDC developments in the US, UK and EU.�

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The Bank for International Settlements and the seven central banks are studying how to launch CBDCs and have flagged key issues that will need to be addressed, including interoperability and confidentiality.

In the U.S., Federal Reserve leaders have questioned the need for a CBDC, given the sophistication of existing payment systems. Offering retail accounts at the Fed would also fundamentally alter the structure of the U.S. banking industry.

The Bank of England and the U.K. Treasury have formed a taskforce and plan to consult on the merits of a CBDC.

In Europe, with more decentralized banking and payment systems, the European Central Bank has shown greater enthusiasm for implementing a CBDC, saying it could drive innovation.

Source: CBDC tracker

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1. State of play in the US�

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United States

Timeline

In March 2022, the Biden administration signed an Executive Order on ensuring responsible innovation in digital assets. The EO calls for reinforcing American leadership in the financial system, maintaining the stability of the financial system and exploring a possible CBDC.

In September 2023 US Federal Reserve vice-chair Michael Barr affirmed his institution’s cautious policy on central bank digital currency (CBDC), reiterating that it “has made no decision on issuing a CBDC”.

Cross-border Projects – focusing on technology

Individual Federal Reserve banks, including those in New York and Boston are are pursuing CBDC prototypes for both wholesale and retail applications (Project Hamilton and Cedar).

Partnerships and Projects: The Federal Reserve Bank of Boston is collaborating with the Massachusetts Institute of Technology's Digital Currency Initiative on "Project Hamilton.” “Project Cedar” is a join wholesale cross-border CBDC project with the Federal Reserve Bank of New York and Monetary Authority of Singapore. In 2023, their new report found that distributed ledger technology (DLT) could improve interoperability and speed in their cross-border multi-currency payments.

In March 2022, the Biden administration signed an Executive Order on ensuring responsible innovation in digital assets. The EO calls for reinforcing American leadership in the financial system, maintaining the stability of the financial system and exploring a possible CBDC. The order encourages research efforts of the Fed, calls for US involvement in cross-border, multilateral testing and promotes standard-setting efforts by US. In May 2022, former Vice Chair of the Federal Reserve Board of Governors, Lael Brainard, testified to Congress regarding the Fed's authority to issue a CBDC. She also expressed concerns that given developments in Europe, the US might fall behind on the technological advantages of CBDCs. In September 2022, seven reports were released which dove into the issues of consumer and investor protection, illicit finance and environmental risk mitigation, design principles for a US CBDC and US leadership in digital asset technology. Most recently, US Treasury Undersecretary for Domestic Finance Nellie Liang announced the creation of an interagency working group to explore the development of a CBDC during a speech at the Atlantic Council. She noted that this group will comprise representatives from the Treasury Department, the Federal Reserve, the National Security Council and other respective government agencies. Chair Powell has repeatedly stated that the Fed would seek Congressional authorization before the US issues a retail CBDC. Over the past six months CBDCs have become an issue in the ongoing presidential campaign, with several GOP presidential candidates speaking out against the development of a digital dollar.

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1. State of play in CBDC developments in the UK�

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United Kingdom

April 2021, the Bank of England announced an upcoming partnership with HM Treasury to launch a CBDC Taskforce to explore the viability of a digital pound.
January 2022, the House of Lords undertook an inquiry intoconcluded in its report launched that there is no convincing case for why the UK needs a central bank digital currency.
February 2023, the Bank of England and HM Treasury released a consultation paper outlining the case for a digital pound. The paper concluded that it is too early to decide whether to introduce the digital pound but that preparation towards that decision is ongoing.

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1. State of play in CBDC developments�

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Some studies have concluded that no single design option could provide all the key capabilities needed for functional consistency (the principle that different forms of money have the same operational characteristics) across the digital pound and commercial bank money.

A complete solution would need to combine the suitable design option(s) for each key capability and include common ecosystem services provided by an FMI and TSPs.

Source: “Functional Consistency across Retail Central Bank Digital Currency and Commercial Bank Money”, Lee Braine, Shreepad Shukla and Piyush, 16 August 2023

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1. State of play in CBDC developments in the EU �

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In October 2023, the ECB announced design of a digital euro that would be widely accessible to citizens and businesses through distribution by intermediaries e.g. banks.
The preparation phase will start on 1 November 2023 and will initially last two years. It will involve finalising the digital euro rulebook and selecting providers that could develop a digital euro platform and infrastructure.
Project Mariana examined cross- border interoperability using wCBDC based on a uniform technical standard, as a way to future-proof CBDC development.

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UK Stablecoin consultation�

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Bank of England’s Prudential Regulation Authority doesn’t want banks to get involved in stablecoins or e-money using their primary banking brand. The only way in which banks should use DLT for money is for tokenized deposits.

A key driver of the bank restriction on stablecoins is the potential confusion for retail clients who might not understand the difference between a tokenized deposit backed by insurance versus an uninsured stablecoin.

The concern is that if a stablecoin suffers a run, it could trigger a run on the entire bank. Hence, any stablecoin issuance by a banking group would have to use a separate non-deposit-taking brand and be insolvency remote.

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Smaller stablecoins must hold at least 30% of their reserves at commercial banks. and significant stablecoins must keep 60% or more at banks. A significant stablecoin is one with at least €5 billion in reserves or more than ten million users.��With large amounts of money to be deposited at banks, it creates a significant interconnectedness between crypto and mainstream finance. Hence, no more than 10% of the stablecoin reserves can be held at one bank.��Also, restrictions are imposed on banks themselves: stablecoin deposits from a single coin cannot make up more than 2.5% of the bank’s assets.��

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EBA clarification of stablecoin reserve requirements�

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US Stablecoin comments from the Fed�

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Vice Chair of the Federal Reserve Michael Barr wants to see the Federal Reserve have a significant role as regulator of stablecoins. “Private money that’s linked to the dollar basically borrows the trust of the Federal Reserve in its issuance.”

“We think there’s very strong interest in having strong federal regulation of stablecoins that make sure that the Federal Reserve can approve stablecoin issuers, can regulate stablecoin issuers, can enforce against stablecoin issuers,”

A Stablecoin Bill its way through Congress – grants extensive powers to State regulators.

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Paper 141: Will the real stablecoin please stand up?

The authors question whether intraday fluctuations in stablecoin prices make the stablecoin an appropriate means of payment. Intraday peg deviations happen the most often for commodity (gold) backed stablecoins, likely because of the time lag between buying and selling commodities.

Regarding stablecoin usage:t he primary purpose is for settling crypto trades and for DeFi liquidity.

When it comes to mainstream payments, it implies the answer is to provide alternative solutions to address stablecoin’s claimed benefits.

For example, one stablecoin use case is making cheap cross border payments. If programmability and instant settlement are attractive, CBDCs could provide this.

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BIS Project take-aways: Interoperability

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Project	Motivaton and aims
mBridge	initiated in 2021 with China, Hong Kong, Thailand and the United Arab Emirates. seeks to solve some of the key inefficiencies of cross-border payments, such as high costs, low speed and transparency, and operational complexities. At the same time, the project aims to safeguard currency sovereignty and monetary and financial stability for each participating jurisdiction, guided by the principles of "do no harm", compliance and interoperability. Platform is underpinned by custom-built distributed ledger technology (DLT), a set of comprehensive legal rulebook documents including the mBridge Platform terms, jurisdiction- and CBDC-specific terms, external terms and a fit-for- purpose governance structure
Mariana	The Bank for International Settlements (BIS) and the central banks of France, Singapore and Switzerland. The project tested the cross-border trading and settlement of wholesale central bank digital currencies (wCBDCs) between financial institutions, using new decentralised finance (DeFi) technology concepts on a public blockchain. The project demonstrates technical feasibility of so-called automated market-makers (AMMs) for cross-border trading and settlement.
Rosalind	Project Rosalind is a joint experimentation of the BIS and the Bank of England. It aims to develop prototypes for an API. Based on a two-tier distribution model (central bank at the foundation of the retail CBDC system and customer-facing activities carried out by the private sector), the objective is to explore how this interface could best enable a central bank ledger to interact with private sector service providers to safely provision retail payments.
Dunbar	Project Dunbar brings together the Reserve Bank of Australia, Bank Negara Malaysia, Monetary Authority of Singapore, and South African Reserve Bank with the BIS Innovation Hub to test the use CBDCs for international settlements. It intends to learn about the benefits of multi-CBDCs and how it could make cross-border payments cheaper, faster, and safer. See how we faced and solved critical challenges in designing a multi-CBDC shared settlement platform.
Mandala	Project Mandala is a PoC run by BISIH Singapore Centre, the Reserve Bank of Australia (RBA), the Bank of Korea (BOK), the Central Bank of Malaysia (BNM), and the Monetary Authority of Singapore (MAS), with the collaboration of financial institutions. It explores the feasibility of encoding jurisdiction-specific policy and regulatory requirements into a common protocol for cross-border use cases such as foreign direct investment, borrowing and payments. The envisioned compliance-by-design architecture could enable a more efficient cross-border transfer of any digital assets including CBDCs and tokenised deposits.

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BIS Projects: takeaways for CBDC design

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Individual countries could face unique in-jurisdiction legal and structural challenges, like regulatory and legal safeguards in place for payments between countries with different legal structures, including customer identification, customer due diligence, and sanctions screening for compliance with regulations and policies for Bank Secrecy Act/Anti-Money Laundering (BSA/AML). Developing rulebooks, contingency procedures and monitoring capabilities can all help highlight challenges or areas where more clarity might be needed.

Establish interoperability between a CBDC and other key payment systems and arrangements within a jurisdiction to facilitate the easy flow of funds necessary to achieve accessibility, resilience and diversity in payments.

protect the privacy or confidentiality of consumer payment data;

allow sufficient transition time for the existing financial system to adjust;

maintain flexibility in design architecture to accommodate evolving user needs over time

how resilience and security could be best guaranteed now and in the future.

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Commercial development: Multi-token Networks

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in the third quarter, the beta version of MTN will be available in the U.K. and act as a testbed for developing live pilot applications and use cases with financial institutions, fintechs and central banks. The first phase of the applications will be powered by tokenized bank deposits.

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From a two-tier to a three-tier money system?

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Diagram 1. A three-tier money system. Arrows represent backing relations from the issuer to the holder of the liability; dashed arrows represent backing relations yet to be explored; dotted arrows correspond to an equivalence based on the use of a particular technology (i.e., stablecoins differing from e-money issuers by using DLT instead of centralized systems). The central bank money (i.e., cash, reserves, rCBDC) is first-tier money. Commercial bank money (i.e., deposits), which is–partially–backed with central bank money, is second-tier money, along with tokenized deposits (i.e. digital representations of bank deposits that are traded on a DLT system). Money issued by e-money issuers, which is fully backed with bank deposits, is third-tier money. Also, stablecoins, backed with bank deposits, cash, and assets, are third-tier money. Cryptos remain tokens traded as goods or assets without serving as backing in the money system—thus, they are outside the three-tier money system. Source: authors’ design.

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Final thoughts

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Disparate approaches to both CBDCs and Stablecoins in three key developed economies suggests that a complex, fragmented regulatory environment will evolve for virtual assets.
In a three-tier money system, CBDCs will likely co-exist with other types of money serving different needs.
BIS PoCs have confirmed the technical viability of CBDC implementation and highlighted the importance of interoperability, privacy and other design features.

Impact on monetary policy remains a work in progress.

Regulatory fragmentation as a result of disparate regulatory frameworks is a barrier to more efficient cross-border payments via CDBCs, tokenised assets or other forms of payment.

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Thank You