Recently, I ran across this web page describing a report issued jointly by IBM and the OMFIF last fall (September 2018). This blog article will feature this report in some detail because it is a pretty comprehensive summary of where things stand in terms of central banks looking into using central bank digital currencies (CBDC's).
I obtained a copy of the full report by providing a name and email address so I assume anyone can do the same if they want a copy of the report. Since they ask for that information to receive the report, I won't provide a direct link to the pdf version of the report, but will extract a few excerpts below for some analysis and comments.
----------------------------------------------------------------------------------------------------------------------
Below I have pulled out a few excerpts from the report to give you a feel for it. The report is laid out in six main sections. Below I excerpted a comment from the summary of each of the six sections with my analysis (if any) just below the excerpt. Below that I tried to list some bullet point observations from the report. One point of interest to me is that on page 22 of the report, we find these comments under the title "Digital Tokens as Reserves" (I added underlines for emphasis).
Digital tokens as reserves
(from page 22 of the IBM/OMFIF report):
"The impact on monetary policy would further depend on whether the digital tokens in question have the status of reserves. As one respondent put it, "If these tokens are considered as reserves, and the blockchain system is a new medium for recording transactions, then there should be no impact on monetary policy, and the existing tools may continue to be used.’ Around 80% of survey respondents shared this opinion.
In today’s system, the International Monetary Fund’s aspiration for its special drawing right to become a global reserve currency has been held back by conflicting geopolitical interests and priorities of the reserve-issuing central banks of the US, euro area, China, Japan and UK. CBDCs can circumvent such hurdles by enabling the private sector to work directly with the central banks to create a digital SDR to use as a unit of account and store of value.
Such an e-SDR would be the quintessential reserve asset, because it would be fully backed by the reserve currencies in the IMF- determined ratio. The supply of e-SDRs would in turn be dependent on market demand. This would require the creation of a sufficiently large e-SDR-denominated money market."
Readers here may recall that this concept is one we have mentioned here before quite some time ago, so it's interesting to me to see it talked about in this report. The report does not say that the IMF is currently testing an "e-SDR" (see further comments below). Also, it's interesting to note that the report says "the supply of e-SDR's would be dependent on market demand". This fits in with the currency board rules proposal of former IMF Dr. Warren Coats that we recently covered here that issues currency based on market demand.
Now lets look at some excerpts from the six major sections of the report.
-----------------------------------------------------------------------------------------------------------------------
Section 1 - Defining CBDC's
"A WHOLESALE central bank digital currency may lead to significant improvements in efficiency, speed and resilience, as well as lower the cost and complexity associated with existing payments systems."
. . . .
"Central banks concluded that blockchain systems must improve before they can overcome issues of scalability and speed."
My comments: Wholesale means that the currency would be issued to banks but not the general population (which would be a "retail" CBDC). This report concludes that a wholesale CBDC is far more likely than a retail one based on input from the central banks they surveyed. A wholesale CBDC woud not represent significant change from the present system in my view.
Section 2 - Technology Considerations
"A WHOLESALE CBDC would have to preserve the existing capabilities of RTGS (Real Time Gross Settlement) systems without significant degradation. The system must also preserve confidentiality of payment transactions, the ability to pay interest, monitor compliance against regulatory reserve requirements, change the composition of participants and run liquidity savings mechanisms."
. . . .
"The challenge that remains for the main vendors of wholesale CBDC systems is to construct a convincing RTGS replacement that can be properly benchmarked against existing systems and meet the high standards for security, robustness, efficiency and speed."
My comments: This section lays out the technology challenges for any central bank that may want to think about implementing a CBDC system. It mentions several including privacy issues for partcipating banks and security against cyber attacks.
Section 3 - Praticalities
. . . .
"Overall, respondents underscored that wholesale CBDC research and trials are still in their infancy, and that doubts remain over DLT’s ability to deliver on its promise."
My comments: This last sentence is consistent with what we have reported here for some time and also with the recent update from BIS General Manager Agustin Carstens that we featured here.
Section 4 - Policy Implications
(I added underline below for emphasis)
"THE BROAD regulatory and policy implications of a potential wholesale CBDC depend on design and management choices, such as whether it would be backed by a single sovereign currency or a basket of assets.
Based on survey responses, the likeliest outcome is a central bank-issued, fiat currency-backed digital token. This would have no significant monetary policy implications."
. . . .
"A wholesale CBDC could be expanded to serve as a digital global reserve asset along the lines of the International Monetary Fund’s special drawing right. This would have profound geopolitical and regulatory implications."
My comments: Lots of interesting information in this section. First, note how most central banks preferred a "fiat currency-backed digital token". This is in contrast to the proposal of Dr. Warren Coats who prefers to anchor a currency to a basket of goods. Next, this section is where the reference to the concept of an "e-SDR" comes from (detailed on page 22 of the report and quoted above). Also note that the report states this (an "e-SDR" as a reserve currency) "would have profound geopolitical and regulatory implications". I believe this is because of the intense political debate that would go along with a proposal to adopt some kind of "e-SDR" as a digital global reserve asset and the fact that the US and other reserve currency issuers prefer the status quo at this time. Especially the US with the US dollar as the primary global reserve currency.
Section 5 - Case Studies
(I added underline below for emphasis)
"OMFIF'S CASE studies span a range of projects. They include exploratory endeavours, such as the European Central Bank and Bank of Japan’s Project Stella, as well as more developed undertakings, such as the Bank of Canada’s Project Jasper."
. . . .
"The studies cover a range of technological choices, from platforms built on Linux’s Hyperledger Fabric to Ethereum. Various capabilities such as smart contracts and liquidity saving mechanisms were examined."
. . . .
"None of the central bank case studies examined included the possibility of radically overhauling their payments systems in the near future. Most are satisfied with existing RTGS platforms."
My comments: This section looked at several case studies of actual central bank trials around the world. Please note that the last paragraph underlined above again confirms what we have reported here on this blog for some time.
Section 6 - Conclusion
(I added underline below for emphasis)
"Achieving real-time gross settlement (RTGS) for domestic and cross-border payments has traditionally been fraught with complexities, high costs and lengthy settlement times, leading to several risks in settlement finality. Central banks agree that, despite significant improvements in existing structures, these issues continue to undermine payments systems. Maintaining overall system resilience is a priority for central banks, especially as the current system remains vulnerable to single points of failure. The main motivations expressed by central banks in pursuing a wholesale central bank digital currency include potential improvements in speed, efficiency and resilience, as well as boosting system utility as non-cash assets become tokenised. However, realising these benefits depends on the success of the underlying technology.
Trials of wholesale CBDC systems illustrate how variations of distributed ledger technologies have the capacity to meet and, in some cases, exceed the performance of existing interbank systems. However, there is still a long way to go before the technology is mature enough to meet central banks’ expectations for the next generation of real-time gross settlement systems.
. . . .
Collaboration between private sector participants and the central bank will determine whether these initiatives find success domestically. For cross-border success, this collaboration must expand to include various national central banks from around the world."
------------------------------------------------------------------------------------------------------------------------
My final added comments: This report is consistent with what has been reported here for some time on this topic. While there are constantly news articles suggesting that major changes by central banks or the IMF are imminent in regards to converting to either central bank digital currencies or even an "e-SDR" at the IMF, this report clearly lays out where all this really stands as of last fall when it was issued. IBM is at the very forefront of this and I view them as a high credibility information source.
My take is that while all of this is being studied and discussed, as noted above, most central banks do not see this kind of change happening any time soon and only after a lot more research takes place. Even then, the report states there is no guarantee that central banks will move in this direction (unless convinced there is a clear operational advantage for them to do so).
It also does not say the IMF itself is close to moving in this direction with an "e-SDR". It does mention the idea of an "e-SDR" as a concept for a global reserve currency though. Input I get from experts on this suggests to me that this article is not talking about the official SDR used at the IMF, but rather a private version of the SDR based on the component makeup of the currency basket of the actual SDR. We will cover this more in depth in a follow up article next week.
The IBM/OMFIF report does not really clarify exactly what they mean as I read it, but they mention private sector entities working with central banks to "create" this "e-SDR" as they call it. This suggests something other than the official SDR used at IMF.
In addition, one expert on the SDR that I hear from reminded me that changes in the existing rules for SDR's at the IMF must be approved by the membership and that the US has veto power in the voting at the IMF. Also, while the IMF could promote the issuance of private SDR's (not official SDR's), there is no indication that the IMF is looking into doing that at this time based on input I received that I view as highly credible.
This is a topic to keep an eye on over time, but right now there is no indication that something major is about to change in the current monetary system unless some kind of new major crisis forced an emergency decision to make changes as we have been reporting here for some time.
Short OMFIF video summarizing the report
No comments:
Post a Comment