UBS 27th Reserve Manager Seminar, 1 July 2021
Dear Seminar Participants,
I’m delighted to speak to you today and most grateful to Max, UBS and the conference organisers for the invitation. I have been involved now for almost three years in a number of projects on central bank digital currencies (CBDC) with Accenture and currently work on CBDC projects with the central banks of France, South Africa, Sweden and Switzerland, and while debate and engagements around CBDC among central banks have advanced significantly, there remain many fundamental doubts about the utility of CBDC. In my brief prepared remarks, I shall make an attempt to address some of those. In essence, the point I will try to make is that CBDC is to expand not replicate existing central bank monies.
To start, we should remind ourselves why we are having the discussion about CBDC in the first place. The emergence of new payment instruments like bitcoin and probably more so the idea of a libra have transformed considerations for what money is and what is should do. While there have been innovations in payments for some time with new payment applications and integration into new devices like mobile phones, those mostly rely on existing payment infrastructures and payments relations. Bitcoin and libra have pointed into an entire new direction by being token-based and relying on blockchain-enabled financial market infrastructures. It seems odd if central banks in large part in reaction to those developments were now moving into a different direction. Central banks should offer a medium that can connect with these new developments.
Some central banks argue, we already have CBDC since reserves are in a digital format. The innovation with the CBDC is the adoption of tokens as a new format of money or medium with properties akin to digital bearer instruments. Central bank money today only consists of bank notes, physical tokens and reserves or book-entry or scriptural money. The adoption of tokens would complement existing monies and offer advanced functionalities to provide new use cases and enable central bank money to be deployed on a wider range of payment platforms enhancing diversification and competition in payments and allow new actors to benefit from the advantages of offering settlement in central bank money.
Central banks focus on CBDC for retail payments. The case for a retail CBDC may be more limited and rest mostly on normative assumptions that the general public should or wants to have access to central bank money. The general public has in many countries several forms of payments and may not perceive much difference between paying with a debit or credit card, PayPal or Google Pay. Central bank money is not needed for making retail payments and the decline in cash in some advanced economies is indicative that the general public does not see a need for central bank money. Retail CBDC may bring systemic advantages if it leads to a diversification of the payment infrastructure. In contrast, central bank money is the preferred medium for large value transactions and the impact of CBDC will likely be greatest for those transactions.
Several central banks have recently argued that CBDC based on accounts will likely be the preferred approach for CBDC. CBDC based on accounts would represent merely an extension of existing payment systems and favour the incumbents. The scope for financial innovation would be limited if non-existent and it would not make CBDC available as a native instrument on token-based financial market infrastructures.
The advantages of blockchain remain in doubt. While blockchain is a relatively new technology, recent advances offer a level of maturity that will likely match most payment applications in particular for wholesale use cases. Blockchain is considered the best technology to administer and move tokens. It can significantly change existing payment relations by offering peer-to-peer payments, fostering a more decentralised and collaborative environment and eliminating the need for complex clearing and netting. It provides significant advantages for shared validation of transactions and an immutable collectively maintained record.
Tokens are often associated with anonymity and hence with some assumption that they may give rise unduly to illicit transactions. This does not hold. Tokens can exhibit complex provisions that enable controls at instrument and holder level through wallet-based restrictions. For retail, wallets can be distributed similar to accounts by banks in a multi-tier distribution model, replicating the cash cycle, to existing bank clients fully in line with existing know-your-customer rules. The wallet can afford the same types of disclosure as accounts. The additional controls that can be embedded into tokens further allow to impose restrictions at the transaction level.
To conclude, central banks have a historical opportunity to extend functionality and utility of central bank money to meet actual and future payment needs and support diversification and competition in payments. The debate about CBDC should not be about how digital central bank money is to be made available to the general public. They are various possible approaches and several could have been offered for decades. The debate should be how central bank money can improve payments and support financial innovation. Here, CBDC is set to play a key role.