The drumbeat of commentary on central bank digital currencies continues. They are seen as ways of significantly boosting convenience, efficiency and compliance. On the downside, some fear that they also threaten financial privacy.

A report setting out how central bank digital currencies could work in day-to-day life has been praised by one of the study's participants for showing how CBDCs are convenient and can foil scammers.

Late last week, the Bank for International Settlements and the Bank of England issued a joint report – Project Rosalind: Building API Prototypes For Retail CBDC Ecosystem Innovation. The 36-page study explores how application programming interfaces (APIs) – software programs that enable different systems to integrate – can turn retail use of these currencies a reality. The project takes its name from Rosalind Franklin, a UK scientist whose work was key to understanding the sequencing of DNA.

“It was a really positive project and the collaboration between the various participants worked well, we’ve now created real-world examples of how CBDCs could be integrated into our day-to-day lives,” Martin Hargreaves, product manager at Quant, said. Quant is a blockchain for finance firm which is involved in the project.

“Each participating company suggested a few different use cases to test, and we worked to add innovations to the core of each suggestion. This collaboration meant we could create a lot of high-impact applications of CBDCs through our approach of implementing novel ideas and programming each use case uniquely," Hargreaves said in a statement late last week.

The project is based on a two-tier model representing a public private partnership. At the centre of this architecture is an API layer, which connects public and private infrastructures. The project explores how central banks could address the need for a universal and extensible API layer for retail CBDC payments. 

The BIS – the central bank for central banks – has been commenting on the issues concerning CBDCs for some time. See a report here.

Digital buzz
There’s been a steady rise in commentary about CBDCs in recent years, driven to some extent by digitalising money and some central banks banning high-value banknotes to foil – so it is claimed – money launderers and tax cheats. 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.

However, the idea of such currencies worries privacy campaigners – a matter certain to exercise the private banking industry, for obvious reasons. Concerns 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. CBDCs could also increase the power of states to impose forms of monetary policy – such as the recent decade-plus of ultra-low/negative interest rates.

Convenience
Quant’s Hargreaves said CBDCs offer considerable benefits.

“For example, one firm demonstrated a checkout experience whereby the customer could select and use a CBDC to pay for an item (similar to selecting and using a debit card, or Apple Pay), while a major bank completed an example transaction between a parent and their child’s account, whereby the child was paid an amount from their parent’s account once certain chores had been completed. The project has shown a wealth of examples where CBDCs can be used in – and add value to – our lives.”

Gilbert Verdian, founder and CEO at Quant said: “One of the biggest benefits of CBDCs will be seen in the fight against fraud; they will equip central banks and commercial banks to tackle the fraud and financial crime challenges we have today with a new approach and technology.”

“Fraud is constantly evolving and the tools and infrastructure we’ve been using to tackle fraud can’t keep up. CBDCs present an opportunity to embed fraud protection at the network level and provide a holistic view of transactions to better spot patterns of fraudulent behaviour. CBDCs have logic and can embed fraud checks into the transaction; this means that if you make a payment, the currency will assess the transaction and the recipient before the money moves, providing the ability to have a higher baseline level of fraud protection at the network level – rather than moving the money immediately and then you realise you’ve been scammed.”

As reported here, a recent White Paper from Standard Chartered and PwC China has broadly praised CBDCs, while adding caveats about privacy. Elsewhere,  the Hong Kong Monetary Authority recently started 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.)