Central Bank Digital Currency(CBDC) for Commercial Banks

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The Dawn of CBDC : A Historical Economic Policy

March 2020, onwards the CBDC discussions have acquired more credence than before. Although matters of national security and sovereign control over domestic markets are of prime importance, there are unmistakable signs of worry in the way money is moved and governments resort to deploying stimulus funds with unprecedented speed and scale.

The disadvantages associated with physical money became all too clear in the past year. However, our electronic forms of payment have their fair share of risks and vulnerabilities. Heavily reliant on message-based reconciliation, they are unusable under circumstances of disruption in communication channels.

A tokenized CBDC appears as the third form of central bank money that emulates the features of banknotes in the digital format and built-in properties attests to and transfers ownership even in an offline environment.

Benefits of CBDC in Commercial Banking

Variegation

International standards recommend that financial market infrastructures offer to settle in central bank money. CBDC serving as a parallel payment mode would heighten resilience and access to central bank money. The European Central Bank and the Fed have both emphasized the importance of payment systems. The mention of the latter conforms to CBDC as a resilient payment system in its statement on the FedNow service.

Diversification across both public and private platforms to offer payment networks has also been highlighted.

Realtime Settlement

Tokenised CBDC allows for end-to-end, real-time settlement, both across borders and peer-to-peer, thus altering the way people transact. The Bank of International Settlements (BIS) also affirms that global settlement should happen in sovereign currency and would include CBDC’s (Principle 9: “Money Settlements”).

Utility

One of the greatest innovations in CBDCs entails offshore settlement and as an alternative to foreign exchange reserve assets. Tokenization makes way for uniqueness and authenticity to be constantly associated with each unit of currency. Therefore, two foreign banks may settle in CBDC irrespective of the issuing authority.

Balancing the Private and Central

With regards to all of the above-stated points, it is rather crucial for commercial banks to note that new currency tables are constantly being turned and often crossing over the bounds of tradition. Private currencies will be appropriate under certain use-cases and vice versa for CBDC.

Recent Development on CBDC

  • World Economic Forum states that over 40 central banks are already conducting experiments with blockchain technology, as a key driver of CBDC. The BIS confirms that 80% of the central banks are experimenting with CBDCs, with another 10% close at heels.
  • China, Sweden, and France, among the largest world economic powers, have advanced the greatest lengths in terms of experimentations with CBDC. Few of the smaller banks, including, the Central Bank of Bahamas, have gone even further in the space by availing themselves of CBDC functionality. This is also for the purpose of solving weather-related system malfunctions and maritime transport of money.
  • In many nations, the development of the CBDC must follow the government’s approval. The process is already initiated for the US, wherein the Digital Dollar Foundation (DDF) is awaiting legislative change as the Federal Government narrows down its focus. The UK has also declared its quest for further research to go into the CBDC and its launch of d-GBP.
  • The South African Reserve Bank is pursuing a CBDC for domestic interbank payment and efficient settlement.

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