Central bankers and policy makers debate CBDC use cases

The “immediate need” for central bank digital currencies (CBDCs) is up for debate as use cases evade central bankers and policy makers. Market participants fear the potential market risk a CBDC carries.

Until CBDCs solve a particular problem within financial services there is no need to develop them, said Yuko Kawai, general manager for Europe, Bank of Japan (BoJ), during a panel at the Fintech EU 2020 conference in Brussels on March 3.

“It’s not that we are denying or rejecting the possibility that we will [create a CBDC] in the future, but not for this moment. I would always like to start with a pain point: What can we solve by issuing a CBDC? What is the pain point which is felt, which was raised by Libra? Libra has suggested that there is a pain point in the international remittances, especially by the retail users,” said Kawai.

“If we issue a CBDC of Japanese yen, does it solve that problem? No, it doesn’t. Because digital Japanese yen would be mainly usable within Japan, by a Japanese yen user. It must be converted into something else when it is remitted outside Japan, so a digitised Japanese yen will not resolve the issue of the Libra. Starting from a pain point, I don’t think that we see an immediate need for issuing a CBDC.”

The BoJ is a member of a six-central bank working group created by the Bank of International Settlements (BIS), exploring potential use cases for CBDCs. Other members include the Bank of Canada, Bank of England, Central Bank of Sweden, Swiss National Bank and the European Central Bank (ECB). Despite BoJ’s involvement in investigating CBDCs, Kawai raised concerns over central banks treading into commercial bank territory.

“If we issue a CBDC and we take the job of the commercial banks, who’s going to do the lending? Who’s going to make mortgage loans? We can’t – we are central banks, we will not. So it is a private/public sector issue as well,” she said.

But the debate over private and public functions is not new, according to BoE’s director of fintech, Tom Mutton, during the panel in Brussels.

“There’s always been a debate around money and what the role of the private sector is, what the role of the public sector is. What you should expect from your policy makers if you should have confidence and security in that money whether it’s publicly provided or privately provided. And there’s a debate going on there.

Also on the panel was Andris Strazds, advisor, international relations and communications, Bank of Latvia, who suggested that a potential use case for CBDCs could be to provide an alternative to commercial banks in payments.

“It’s of course the task of the central bank to facilitate small functioning of payments systems and I would not go as far as to say that we should be the ones that actually do point of sales solutions, we definitely don’t have comparative advantage on that and that’s definitely something that we want the private sector to do,” said Strazds.

Regardless of potential use cases, there should be the choice of a European CBDC available, said Pēteris Zilgalvis, head of unit, blockchain and digital innovation, DG CONNECT at the European Commission.

“It would be very nice for us to have a choice at least of a European solution. Of course, central banks work and the ECB’s decision are up to them, but it would be nice from an industrial policy point of view that we would not be reliant let’s say just on a Libra or an Alibaba offering. Those of course can be out there – we are an open market – but in this sense we would be interested in that there’d be something or multiple variants … that would provide the possibility for this type of seamless transfer of data and value at the same time.”

Discussions of Facebook’s global stablecoin Libra, coupled with advances by Chinese bigtechs Alibaba and WeChat have put pressure on central banks to provide a stable alternative to digital currency. And with cash usage on the decline across Europe, the possibility of a cashless society raises questions about the future of money.

“You do see very much in the industrial policy and the digital economy a need for this and how it works out will depend on the interaction between the financial frameworks, the central banks and the market. But whether we have only market-based solutions or if we also have the solutions coming from the central banks and European central banks is something that will be very decisive in the upcoming developments,” said Zilgavis on the panel.

Privacy concerns and market risks

The possibility of CBDCs shines a light on blockchain technology being implemented on a centralised level, as policy makers and consultants weigh existential questions surrounding data flows. Zilgavis emphasised CBDCs ability to transfer both value – through monetary payment – and data.

Arwen Smit, lead blockchain strategist at MintBit, also raised the issue of data flow through CBDCs during a panel at London Blockchain week yesterday.

“We are now creating money where value systems and privacy considerations and attitudes are literally embedded in the very fabric of that money – obviously that’s going to have consequences,” she said.

“The fact that money is going to come with a certain data problem is going to be very significant. It’s not only going to be significant if your citizens are using money on which a foreign government has visibility, it’s also going to be significant if the citizens are using that particular type of money with those particular embedded solutions and conditions; we’re not having invisibility anymore. So in that sense, it should definitely be considered on a national security level.”

Smit made reference to WeChat and AliPay, which operate on a hybrid model in which a third party works with the central bank – in that case the People’s Banks of China (PBOC) – but is able to take payment in Chinese yuan anywhere around the world where the service is offered.

“WeChat and AliPay have to hold reserves at the PBOC. If you were China and you have been researching CBDCs for a while, what would be your next move? Personally, it wouldn’t surprise me at all if China asked its trade partners to hold its CBDCs as an object on those balance sheets.”

The geopolitical market risks of CBDCs must be considered said Carlo Cocuzzo, economist at ING.

“What happens in a world where you can use other currencies? If for example the Chines PBOC would allow foreign customers or foreign clients to access the digital yuan, how would that have an impact on the dollar amount in the foreign exchange market?” asked Cocuzzo during the London Blockchain Week panel.

“Ninety percent of the foreign exchange turnover runs on dollars, so if there’s anybody that stands to lose in this game it’s really the US.”

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