The Banking Executive Magazine - July Issue 2021

Central Bank Digital Currency • Central Bank Digital Currency CBDC or digital cash: CBDC is is- sued by a central bank, and the holder of CBDC has a direct claim on the state. This preserves the concept of money as a public good and makes CBDC a safe store of value, but it also has the potential to disintermediate banks and un- dermine financial sector stability if individuals and companies are able to hold accounts directly at the central bank. The European Central Bank and var- ious central banks and monetary au- thorities around the world are working on CBDC regulations. These regulations address various issues in- cluding: • Users rights • Credit operations • Capital adequacy • Monetary policy • Money Laundering • Privacy • Availability in markets United States (US) officials are eval- uating the ability of CBDC to im- prove domestic and global payment systems. The European Central Bank ECB is investigating the potential for a digital euro to enable the digital economy and support European sov- ereignty and stability. CDBC TECHNOLOGY DESIGN AND INFRASTRUCTURE Key CBDC technology design and features include: • Electronic record: CBDC uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular country. • Centralisation: CBDC is central- ized. It is issued and regulated by a central bank or a monetary au- thority in a country. • Reserve back up: CBDC is the lia- bility of the central bank, which means that the government must maintain reserves and deposits to back it up. • Electronic cash: CBDC is essen- tially electronic cash. Like tradi- tional cash, CBDC gives holders a direct claim on the central bank and allow businesses and individ- uals to make electronic payments and transfers. • Risk: CBDC differs from a debit and a credit card. Debit or credit cards are considered as one form of digital money but they are is- sued by commercial banks, based on central bank money credited electronically to customers’ ac- counts. Debit and credit cards en- tail default risk as commercial banks may fail and governments usually only insure a certain amount. However, CDBC is fully backed by central banks and is de- fault-risk free. • Uses: CBDCs are built for either re- tail or wholesale payments. Retail CBDCs are used in the same man- ner as banknotes, to make pay- ments between individuals, or between individuals and busi- nesses. Wholesale CBDCs are used to enable transactions between fi- nancial institutions and entities that have accounts in central banks. The Bank for International Settle- ments (BIS) identifies a list of foun- dational design choices for CBDC: • Architecture: refers to the opera- tional role and division of respon- sibilities between the central bank and private intermediaries. • Infrastructure: refers to the techni- cal design and choice between a centralized database or decentral- ized Distributed Ledger Technolo- gies DLT for recording transactions in CBDC. • Access: defines whether CBDC use is based on individual identity or anonymous through digital tokens. • Financial intermediation: defines the role of banks and credit alloca- tion decisions with the state. • Payment and settlement platforms: are platforms on which a CBDC can operate. Platforms should be interoperable with one another and with legacy systems. • Global trade platforms: are plat- forms for domestic and global pay- ments across borders. the BANKING EXECUTIVE 40 ISSUE 151 JULY 2021