On 15 November, a group of major US banks and the Federal Reserve Bank of New York announced they have started to test the use of digital tokens representing digital dollars to improve how central bank money is settled between institutions, in essence testing a wholesale Central bank Digital Currency (CBDC).
The US has also been developing a programme called Project Hamilton, in which MIT experts will test technical research for a hypothetical retail CBDC in collaboration with the Federal Reserve Bank of Boston and the Bank of England.
On both sides of the Atlantic, research and testing of CBDCs is accelerating. At Accomplish (formerly known as Accomplish Financial), we are excited by the potential of new technologies to change the world for the better. We also understand that national payment systems are crucial to the integrity of the global financial system, making up its constituent parts and providing a strong degree of government-backed stability, which – despite the rise of decentralised finance – most people continue to regard as indispensable to ensuring economic value.
This is why CBDC research is important. Public money plays an anchoring role in the international payments system, however, new forms of contenders for money including cryptocurrencies and stablecoins and becoming an important part of the ecosystem. “We need to build infrastructure that caters for the coexistence of the various forms that money can take and meets the increasing expectations of security, speed and efficiency with compliance at its heart” states Guy Raymond El Khoury, CEO of Accomplish.
CBDCs have the potential to maintain and even augment the anchoring role played by national currencies in this evolving ecosystem, by making traditional forms of money both more efficient and cheaper to use on an international scale.
Globalisation has facilitated the rapid growth of systems for processing non-cash electronic transfers between people located anywhere in the world, and it is safe to say that financial technology has already revolutionised the global economy.
International payments can however still take up to five days to settle in certain cases and come with a associated high costs. For a globalised and connected world, a more advanced international payments system is more important than ever.
CBDCs will be designed to reduce transaction costs and provide near-instant settlement time through the use of distributed ledger technologies. Moreover, the possibility of CBDCs streamlining, what is a currently a significant cost in every payment made, due diligence and KYC is a massive step forward for supporting both consumers and businesses.
Currently, 105 countries (representing over 95 percent of global GDP) are exploring paths towards a Central Bank Digital Currency, while 10 countries have now fully launched a digital currency, a clear signal of their potential promise.
Here in the UK, Project New Era – our private-sector consortium – will soon be piloting a CBDC-like asset which will generate real-time data regarding specific use cases that will be used to make recommendations to the Bank of England and regulators. The goal of the project is to shape a future in which new and existing forms of money can seamlessly co-exist and be moved around conveniently.
Guy Raymond El Khoury, who was instrumental to our role in setting up the consortium, also noted that “the UK is perfectly positioned to run a CBDC pilot and has the correct mix of a dynamic fintech community, technical capabilities and, most importantly, a globally respected regulatory environment that allows innovation to develop”.
CBDCs also have the potential to expand access to financial services to under-banked populations and make it easier to fight financial crime. Other possible benefits include eliminating third party risk from events such as bank failures and even the potential to facilitate fiscal transfers in times of economic crisis – such as pandemics and wars.
It will, however, also be crucial to mitigate against the potential risks. Project New Era will evaluate every potential drawback of a CBDC and seek to ensure that best-in-class infrastructure prioritises key concerns such as privacy and security. There is also an argument to be made that the biggest risk would be to do nothing at all.
Historically, the changing face of currency has always been an evolutionary process. The emergence of digital currencies represents the biggest technological revolution since the advent of the internet, and the crucial next step in the full digital transformation of the global financial system. Exploring best practice through research and pilot projects is about ensuring we maximise the potential of this revolution, in a way that benefits businesses and consumers alike. Changing the world can’t wait.
As posted on https://www.digitalfmi.com/