Around the world, interest in central bank digital currency (CBDC) is growing in response to changes in payments, finance and technology, and on the back of rising digital adoption triggered by COVID-19.
A 2021 survey of central banks conducted by the Bank of International Settlements (BIS) found that central banks are ramping up CBDC development as modern technology and the global pandemic are facilitating a global shift toward cashless economies. 86% of central banks are actively researching the potential for CBDCs, up from 80% the previous year, 60% are experimenting with the technology and 14% are deploying pilot projects, the research found.
CBDCs, which intend to act as digital banknote created by the state, are currently being studied and tested in order to realize their many potential benefits including economic growth, technology innovation, increased transaction efficiencies and improved financial inclusion.
China is undoubtedly the most proactive country when it comes to CBDC, conducting real-world trials of a digital yuan partnering with the SWIFT global transaction system. Recently, the People’s Bank of China joined central banks from Thailand, the United Arab Emirates (UAE) and Hong Kong to explore a digital currency cross-border payment project together.
In Switzerland, the Swiss National Bank has been working with financial infrastructure operator SIX on Project Helvetia, the landmark study on the feasibility of CBDC in Switzerland.
The project has completed two proofs of concepts so far, successfully using a CBDC for wholesale transactions between financial institutions and linking a distributed ledger technology (DLT) platform to existing payment systems in a near-live setup.
The next stage in the trial is currently underway and is due to be completed by Q3 2021, with cross-border payments also being examined.
SNB’s proposed retail CBDC scheme
Most CBDC projects around the world have been focused on retail CBDCs intended to be used by consumers to purchase goods and make peer-to-peer (P2P) transfers, an area not covered by Project Helvetia in Switzerland.
Instead, the SNB released earlier this month a working paper that lays out how a retail CBDC could look like. In the paper, titled How to issue a central bank digital currency, the central bank outlines the key features and characteristics a retail CBDC should have, proposing a scheme for a token-based system that doesn’t run on a DLT platform, and which combines transaction privacy with know-your-customer (KYC) and anti-money laundering and combating the financing of terrorism (AML/CFT) compliance.
According to the SNB, a retail CBDC should be more efficient and cost-effective than fund transfer systems currently operated by central banks. It should also not compete with commercial bank deposits but rather replicate physical cash.
Like cash, a retail CBDC should preserve transaction privacy and protect the user from government scrutiny, surveillance abuses, as well as the other party in the transaction.
Anonymity in CBDC systems is a key area of concern not only for Switzerland but also the European Union (EU). The European Central Bank (ECB), which has been working on a digital euro to complement cash, has explored the possibility of so-called “anonymity vouchers.” These vouchers would allow users to privately transfer a limited amount of digital currency over a defined period of time.
Featured image credit: Edited from Unsplash
