Sibos 2021: Banks must work together to make the most of CBDCs, says panel

With more than half of the world’s central banks exploring the use of Central Bank Digital Currencies (CBDCs), the question of whether they are a challenge or opportunity is on many bankers’ minds.

CBDCs through the bankers’ lens — challenge or opportunity?

This was the focus of conversation at Sibos 2021, as the Bank of England’s Tom Mutton, BNP Paribas’ Florence Lubineau, DBS Bank’s Soon Chong Lim and Citibank’s Tony Mclaughlin considered the risks and rewards of this entirely new form of money.

Tom Mutton says that while interbank digital currency is “extremely exciting and something that we think is very important”, in a way it has been around for a long time, in the form of central bank reserves for those who are eligible to have access.

But he adds if there are new ways to interface with reserves and to interact with technology platforms, “I think that’s a really positive development”.

Much of the exploration around CBDCs has been taking place in Asia, particularly China. It’s broadly accepted that China is the furthest ahead on developing retail CBDCs as it was already ahead of the pack when it comes to digital retail payments.

DBS Bank’s Soon Chong Lim says some of the initiatives that come to fruition could be significant in terms of monetary arrangements and the use of settlement mechanisms for cross-border trade investments in the region.

Lim suggests that CBDCs could potentially challenge the US dollar when it comes to cross-border trade in Asia.

Pivoting to Europe, the EU has really started to take CBDC’s seriously, with the announcement by the European Central Bank (ECB) of its digital Euro project in July.

BNP Paribas CIB’s Florence Lubineau says the EU initiative will start with two years of investigating the key issues, such as design, distribution and impact on the market, business models and legislative framework.

Prior to the ECB announcement, there was already some preliminary work being carried out by different national central banks, and because money creation and distribution in Europe is largely driven by commercial banks, Lubineau says it is important that banks and non-banks are subject to a “symmetry of regulation” when it comes to CBDC experiments.

There are currently two CBDC developments operating in parallel: stablecoins, which might use existing payment platforms, and distributed ledger technology (DLT) and similar technologies to make instant payments around the world decentralised.

And although many banks are starting to explore the former, Lubineau says regulators don’t want stablecoins to unduly disrupt the system.

Meanwhile, banks are co-opting the latter, with a range of DLT experiments.

Citibank’s Tony Mclaughlin says commercial banks must think about how they’re responding to the world of CBDCs, stablecoins and crypto. “You know some banks may come to the conclusion that the appropriate response is to create a bank coin. I think that vision leads to fragmentation in the regulated space.”

On whether the development of CBDCs is an opportunity or a threat, Lim believes it depends on how they’re going to be designed and implemented.

“At DBS, we have taken the view that Pandora’s box has been opened with DLT and with new forms of money,” Lim says.

Stablecoins are somewhat easier to fit within the current regulatory landscape, but there are new forms of money being used as mediums of exchange that are not regulated, Lim adds.

Besides DLT and the emergence of new networks that are created around commercial banks, blockchain also shows promise through smart contracts — programmable money in which you can input conditionality into payments for the first time.

Lim thinks there is real potential “for us to make the next generational change in payments” and to offer payment services in a regulated fashion.

Whether it’s CBDCs or different forms of money, Lim adds: “We think it’s not as important, I think what is more important to realise is what blockchain technology and smart contracts offer.”

Rounding off the panel, Mclaughlin echoes his previous plea to avoid fragmentation in the sector. “Let’s not have bank coins, where we fragment the regulated sector and every bank has its own coin,” Mclaughlin says, calling instead for a shared regulated network where the liabilities of the sector are made fungible on that network.

“We really must avoid fragmentation,” Mutton concurs, claiming it will cause inefficiency and poor outcomes in the system.

He adds interoperability is “absolutely critical” and is what delivers good outcomes.

“Of course, what I would say is that we already have a very steady framework which has worked well for many years around private money, and the role of the central bank, providing wholesale services, providing infrastructure and writing wholesale assessment.

“And if people are to develop new forms of money as well as new business principles, they will of course have to be appropriately regulated.

“That’s absolutely non-negotiable for us.”