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As China launches 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 issue at Swell 2020, both David Mills of the Federal Reserve Board (FRB) and Ulrich Bindsell of the European Central Bank (ECB) admitted that their organizations were lagging behind the central banks of China, Sweden and the Bahamas in groundbreaking advances in CBDCs .
The annual Ripple Swell Global conference brings together the world’s trusted leaders in financial services and blockchain technology, but in a virtual environment this year. From Frankfurt, Ulrich suggested that the measured stance of the ECB on CBDCs was partly based on the conservative approach of many Europeans to the introduction of new payment technologies.
As in much of the world, the US and Europe have seen a trend toward fewer cash transactions, especially since the pandemic. However, this decline is generally slower than in the rest of the world, where mobile payments thrive 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 frictions in their current financial infrastructure.
“They are trying to skip certain types of technology to modernize their broader payments and financial ecosystem,” he said. “[The US already has] a pretty robust ecosystem for electronic payments. For more developed economies … there is great interest and focus on this technology as a new innovation in addition to the existing modernization efforts. “
The past lack of traction in Europe means that many of the continent’s leading electronic payment services are non-European companies. Much of the ECB’s current interest in CBDCs stems from concerns about the loss of monetary sovereignty if it doesn’t offer a digital alternative to cash.
“The situation in which the central bank money can no longer be used for the citizens is the main scenario that we are thinking of,” said Ulrich. “Electronic payments have been so convenient that it is a matter of development for the central bank to offer central bank money to everyone in a modern form. It would be more of a revolution not to do so.”
Both David and Ulrich agreed that the ECB and the FRB have a responsibility to balance the desire for innovation with the need to maintain existing infrastructure. The FRB is particularly interested in how a CBDC can run on existing rails and efficiently broadcast across multiple platforms.
This interoperability issue will be key to any CBDC’s success. With each central bank pursuing a digital currency that suits their specific needs, the resulting solutions and technologies are likely to vary. To be successful in a global economy, any initiative must also be built using common open protocols and standards that allow interconnection with traditional financial systems and other CBDCs.
Open and effective partnerships between central banks and the blockchain industry are vital, not least because of the power of the ECB and the FRB. Ulrich pointed to the potential of a digital currency issued by the ECB to crowd out other initiatives and called for industry-wide collaboration.
“That is 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 is common for fintech innovators to advertise the revolutionary potential of their services, David anticipates that in the near future, CBDCs will be about incremental improvements to the existing system.
“Early CBDCs will end up being more concerned with eMoney or prepaid cards,” he predicted. “Technology is great in that it expands what we can all do. However, we still need to apply constraints if we achieve two competing goals. From these mature conversations about CBDCs, I expect more to come in the next few years. “
If you are a bank or financial institution interested in learning more about CBDCs, contact us or watch the full session today.