White Papers
Central Bank Digital Currencies Can Build New "Ecosystem" – White Paper
There are potentially major rewards – and some risks – with central bank digital currencies. A new study charts how they can work and what sectors stand to benefit. The private banking industry needs to pay close attention to this topic, given the implications around privacy, AML and client service.
Central bank digital currencies – forms of fiat currency – could
foster greater financial stability, encourage new commercial
tie-ups and simplify compliance, among other outcomes, according
to a White Paper from Standard
Chartered and PwC China.
In a relatively brief caveat, however, the document noted that
CBDCs could affect individuals’ financial privacy, given the
data-sharing/access implications of these entities.
The study was issued following the Hong Kong Monetary Authority’s
recent start of its e-HKD pilot programme, where Standard
Chartered was one of the participants selected, based on its
proposed use case of e-HKD in offline payment scenarios.
(See
a reaction to the pilot project.)
The feasibility of using wholesale CBDCs for cross-border
payments between central banks has already been tested through
pilots such as mBridge – a joint project between the Bank for
International Settlements Innovation Hub and four central banks.
Studies and pilots on retail CBDCs are also underway in
mainland China, Hong Kong and a number of other jurisdictions.
(The Bank for International Settlements
has weighed in on CBDCs’ potential impact on competition and
financial markets.)
At present, many loyalty schemes are restricted in their
geographical scope. Complexities of technical, regulatory and tax
issues across jurisdictions can hinder cross-border efficient
schemes, the study said.
“Standard Chartered is optimistic about the future of CBDCs and
their tremendous potential for the economy of China and the wider
world,” Anthony Lin, CEO, GBA, Standard Chartered, said. “The
power of CBDCs to create a seamless and innovative digital
economy cross-border will be especially important in the context
of the Greater Bay Area (GBA). Combining trust and
programmability, CBDCs will transform ecosystems and the payments
landscape for individuals and businesses across the region and
beyond.”
It's all in the programme
Programmed CBDCs can enable small firms or networks of niche
brands to form alliances and offer compelling digital loyalty
schemes, thus greatly enriching the retail space, the White paper
said. Programmed CBDCs can also be used to widen access to trade
and supply chain finance. While widely available to buyers and
suppliers with sound credit ratings, many SMEs still face
barriers when seeking to access these financing solutions due to
their lack of scale, collateral or credit history.
(“Programmability” refers to the deployment of smart contracts to
programme self-executing transactions with pre-defined
conditions.)
Cashless growth
The rise of the “cashless” economy has been rapid. According to a
study by PricewaterhouseCoopers
in 2021, there were 1,035 billion global cashless payments in
2020. This figure is expected to increase by 82 per cent in 2025
and to almost triple by 2030. Research by the World Bank finds
that two-thirds of adults worldwide have made or received a
digital payment.
The study argues that “programmable banking innovations” enabled
by CBDC could “drive the need for central bank money, ensuring
its role as the anchor of monetary and financial
stability.” This is controversial:
as argued in this recent book by Edward Chancellor (and
reviewed by this news service), central bank monetary policy of
recent years has arguably driven the boom/bust cycle, widening
inequalities and distorting business as a result of
quantitative easing and the suppression of market interest
rates.
Big Brother?
The idea of such currencies worries privacy campaigners – an
issue certain to exercise the private banking industry, for
obvious reasons. As the report itself notes: “Sharing data
related to consumers’ wallet transactions and their use of
loyalty programme services will be a critical factor for the
adoption of this CBDC use case by the merchants and the
network.”
Concerns about CBDCs include how, for example, they could form
part of a China-style “social credit” system of
incentives/penalties for behaviours – such as spending money on a
gym membership, or buying large amounts of alcohol, purchasing
subversive literature, and the like. A paper, called Central
bank digital currencies risk becoming a digital
Leviathan by Andrea Baronchelli, Hanna Halaburda, and
Alexander Teytelboym, was published in Nature Human
Behaviour in 2022, highlighting such concerns. The
researchers said that if the wrong technology is chosen, states,
even if they are democratic, could know a user’s identity, income
and transactions.
(Editor's note: If readers have views on this topic, please get in touch at tom.burroughes@wealthbriefing.com)