Should the Major Central Banks Actually Introduce CBDC?

Since 2016, about a hundred central banks have been considering the introduction of a Central Bank Digital Currency (CBDC). It began as central banks watched the development of new technology and the growth of Bitcoin, followed by Alt coins and then stable coins. When Facebook announced the birth of Libra, later Diem, as a possible international currency and payments system in June 2019, interest and concern was intensified. The initial project was later abandoned in May 2021, partly because of the long delays in obtaining a payments license from FINMA, the Swiss Financial Markets Supervisory Authority. The Swiss were being advised by twenty central banks, so it was unlikely from the start that a payments license would be granted. Central banks were no doubt relieved when Facebook withdrew the application. Facebook’s project then moved back to the U.S. in the form of a payments system with a single stable coin, USDP. That did not work either, so Facebook gave up entirely and sold the remaining assets to Silvergate Capital in May 2022.

Central banks were indeed opposed to the development of a digital currency which could compete with sovereign currencies, especially given that Libra/Diem would provide Facebook with even greater access to data of its over two billion users. But that was not the only reason for the failure. A currency can only work if it commands the trust of the users of the currency. Facebook had a history of misusing data, and that was the underlying cause of its failure. The importance of trust in the issuers of a currency should be a vital element in the development of a CBDC.

Central banks have spent several years considering the principles which should apply to CBDC, its functional and economic design (should CBDC accounts bear interest?), and the technology to be used. Research continues together with the development of proof of concept and pilot projects. The leading central banks have conducted many pilot projects, usually focusing on the use of the new technology in the wholesale markets with the aim of speed, efficiency, and the tokenization of wholesale CBDCs often in domestic markets. Wholesale CBDC refers to a type of liability on a central bank’s balance sheet, designed to settle wholesale (large value) financial transactions, such as interbank transfers and securities transactions. These could then become “bearer instruments” so that whoever holds the token, as recorded on the digital ledger, is presumed to be the rightful owner.

The years following 2016 saw a large number of pilot projects, such as Project Jasper (Canada), Project Ubin, (Singapore), Project Stella (EU and Japan), and Project Jura (French and Swiss commercial banks as well the Banque de France, the Swiss National Bank, and the BIS Innovation Hub).The various “proof of concept” pilot projects have been concerned with clearing and settlement of the capital markets, but they have not yet been implemented, as they raise questions of “governance and ownership,” and the “regulatory, legal and monetary issues,” as well as issues of transparency and enforcement. None of the leading central banks have agreed to or encouraged the tokenization of assets for these reasons and especially for Anti-Money Laundering/Countering the Financing of Terrorism (AML/CTF) considerations and the delicacy of providing access to their CBDC by non-resident financial institutions, especially in a time of heightened geopolitical risks.

Nevertheless, central banks continue their research and have either completed or are in the process of carrying out cross border projects, such as Project Helvetia, completed in January 2022. It successfully integrated the wholesale CBDC to the core banking infrastructure of the country. In June 2022, the Bank of England commenced work on Project Rosalind, which is aimed at…