Live CBDCs: What we probably need to know

Estimated reading time: 8 minutes

One cannot deny the burning question faced by consumers and businesses around the world today. It is fuelled by the many reports of China experimenting with digital currencies and which in turn has spurred many central banks to kickstart or put more impetus behind their own CBDCs (central bank digital currencies). Businesses and individual consumers alike are curious about how they will pay for their purchases, and the technologies they can leverage to enable smoother, more seamless payments, transactions and settlements.

So, it seemed timely when a group of expert panellists from JP Morgan, Temasek, NZIA and BIS had gathered during Singapore’s Fintech Festival to talk about commercialistion and live adoption of CBDCs or central bank digital currencies. The audience soon found out that CBDCs is an ongoing discussion that has been going on even before early news about China CBDCs.

The moderator, Toh Wee Kee from BIS (Bank for International Settlements) set the context, inviting the audience to think of digital currencies in terms of who issued them – a commercial bank or a central bank.

“Another perspective is whether it’s going to be a single currency platform or a multi-currency platform.”

Then he introduced the Bahamas’ sand dollars, “one of the first live CBDC projects in the world” and talked about NZIA which is one of the technology partners that helped to implement the Sand Dollar.

Another digital currency he introduced was the JP Morgan digital coin (JPM Coin), “…which facilitates real-time value movement, allowing customers to transact around the clock.” JP Morgan was represented by Naveen Mallela, its Global Head of Coin Systems.

The final panelist, was from Temasek, Laura Loh. Temasek is one of the collaborators of Project Ubin, a joint project between DBS Bank, Temasek, JP Morgan, the Monetary Authority of Singapore (MAS) and the industry at large, to enable a blockchain-based, multi-currency payments platform.

What do all these projects for digital money eventually supposed to lead to?

Wee Kee hypothesised the ultimate goal of digital coins technology as enabling a shared platform by central banks for international settlements and using multi-CBDCs. He referred to one project to enable this as, “…still a project in the works, and very much in experimental phase.”

The point of it all

Wee Kee framed his first question to NZIA as, “Central banks have been experimenting with CBDCs for many years, yet only a small handful have gone live. How has the Sand dollar implementation been, and what were the key challenges you faced?:

NZIA’s COO, Vinay Mohan responded, “We have been incredibly fortunate to be among the first in the world to go to trial and take a retail token-based CBDC to production.”

The Sand dollar which went live last year, is the digitised version of the Bahamian dollar which is the sovereign currency of the Republic of Bahamas.

“The singular challenge we faced was this hadn’t been done before!” Vinay said.

“There was no playbook, this was completely uncharted waters. We were making big decisions on behalf of the people of the nation, and building long-term infrastructure without any sort of precedent as far as legality, regulation, policy, technology, design, were concerned.”

He explained that they had to work with a very wide range of stakeholders to try understand what sort of choices needed to be made and understand what needs to be done in a country that has not just difficulties with fintech infrastructure, but also physical infrastructure.

“How do you implement something which is supposed to be a real-time national infrastructure, secured by sovereign policy, when you can have a hurricane that can come and go across a country, at very short notice?” Vinay hypothesised.

Commercial bank initiatives

For Naveen, the challenges at JP Morgan had been two-fold. He agreed with Vinay about there being no playbook on what to do. JP Morgan would not only be creating one of the first few digital coins of its kind in the industry, it would also be the first time they did something they traditional would not.

“We are quite conservative in terms of the financial products that we launch. So, for us the challenge is two-fold.”

One of the things they had to do first was to explain what it was not. “This is about educating and explaining to our stakeholders and regulators, ‘This is not crypto, this is not a stable coin…it’s actually a deposit based on blockchain.'”

This involves a process of explaining the problems that the digital coin wants to solve, Naveen explained, adding that the whole organisation also needed to get comfortable with the idea.

“This is about externalising our core banking system, externalising that ledger on a shared platform, and that… that is a big deal for a bank.”

Naveen shared he was faced with a slew of questions around how blockchain basically works, and then needing to have conversations around programmability, smart contracts, mutual validation, and where liabilities lie. “So it is around getting the organisation comfortable with some of these (abstract) constructs,” he shared, emphasising also challenges from the legal, regulatory and cyber side.

Temasek’s Laura explained about Partior, an open platform project with collaborators from Project Ubin, by first describing how the financial industry has not been immune to recent technological revolution. “In fact, we have seen a lot of innovation in this space coming from multiple players like cryptocurrencies, stable coins, and even last-mile fintech and messaging solutions out there, all coming together to try solve the payments problems.”

Implementation challenges

In response to Wee Kee’s earlier question about challenges of taking digital coins into live implementation, Laura added that besides the education process, there also needed to be a broader engagement with ecosystem participants to ensure they were not building in isolation. This is to ensure, “… that the product and the distributions that we deliver will be something that customers want to buy, and not something that we think they want.”

To add to the challenge is the lack of regulatory clarity around market infrastructure projects like this, as well as benefits which are theoretical at best and which cannot yet be proven unless there is enough traction through the industry.

Naveen had observed, “But, there are a lot of people taking a wait and watch approach. Hence the lack of speed in my view (of digital coins going live).”

Vinay weighed in from central banks’ perspective, saying it’s not a bad thing for central banks to adopt a wait and watch approach.

Each implementation is unique

According to Vinay, “A major learning I took away from the Sand dollar implementation is there shouldn’t be one thing called a CBDC.

“Just like how I don’t believe there is one global financial system… it’s a fragmented, unique, highly sovereign-specific aspect that each country has.”

The fundamental philosophy that money is a public good – that’s a huge mindshift, and for a central bank to take along all the stakeholders to essentially ensure there’s none to minimal disintermediation, or changes to legacy infrastructure that’s been built on decades is a big step forward.

“These are not projects you can fail. These are commitments, they’re on public record and you have to be absolute.”

Wee Kee also pointed out another difference between CBDCs by central banks and digital currencies by commercial banks.

“You have actually taken the route of transacting on commercial bank money, on the liabilities of JP Morgan, on the liabilities of DBS Bank, for example.,” he observed of commercial banks’ digital money initiatives.

Naveen sees both types of currencies wanting to solve similar problems and explained that a lot of use cases that need solving for, actually does not require new forms of money, but new infrastructure.

The uniqueness of Central Bank Digital Currencies

Vinay explained, “If you envision CBDC as not just tokenised version of the national dollar, but a sophisticated value chain of players across the ecosystem, bringing together authorised financial institutions (FIs), bringing together every day people, and the education process required to lift the profile of adoption, teaching people who are unbanked how to use their private keys for example – if you think about CBDCs in that way, I would say there are two areas and for two totally different kinds of economies.

“First is the emerging economies where it is quite expensive to be poor. It is hard for populations to get out of the vicious cycle. Here, CBDCs provide much needed national infrastructure to leapfrog a lot of payment systems to open up opportunities for people at the bottom of the pyramid.”

The other end of the spectrum sees mature and sophisticated economies like UK or Singapore. “With CBDCs, we see emerging crypto market assets and even a whole new grade of enterprises being developed. He gave the example of tokenised artwork. Tokenisation digitises the ownership of artwork into tradeable tokens, improving liquidity of the artwork and turning them into investment options.

Complementary roles

Laura sees CBDCs as complementary to Partior’s offerings.

“Partior is an infrastructure that can support either M1 or M0 money,” she explained while also observing challenges with distributing government aid, that CBDCs can help with.

“Aside from us trying to tackle the wholesale correspondent banking problem which is fraught with inefficiencies of cost, how do we actually enable net new capabilities, new business models and enable more features that existing systems and infrastructures are unable to support?” she explained what Partior wants to achieve.

She also sees how wide and proper infrastructures can issue and ensure aid like food stamps, child benefits, and tax refunds can directly reach the people.

“In Singapore itself, the government tried to get NTUC vouchers to the people, but some of these vouchers were stolen instead. It’s a crying shame. We see with CBDCs, once you get it directly to the customers’ wallet, that’s a whole new value proposition there.”

Laura added, “We do see multiple forms of digital currencies coexisting. And because they address different use cases from either being a store of value or medium of exchange, a unit of account, you know, it would be up to the consumers to choose, which digital currencies they think are most applicable to particular use cases.”