Worldwide testing of Digital currencies by Central Banks
Date Time:2019-12-10

Today, Central banks are researching for the possibility to issue a central bank digital currency (CBCC), while some of it are testing their currency for multiple uses. Many countries like Canada, China, Uruguay, Thailand, Sweden, Singapore and the Bahamas have advanced projects of digital currency. Moreover, India has also contributed through digital rupee in the draft cryptocurrency bill of the country. 

CBDC of China is ready:

China has recently claimed that its CBDC is almost ready. As per various media coverage, The People's Bank of China (PBOC) is near completion to issue their own sovereign digital currency of the country. This information was given at a forum which was held on Aug 10, in the northern Chinese province of Heilongjiang. Deputy director of the payment department of this bank, Mu Changchun revealed this information. 

He said that the bank will use a two-tier system and the blockchain will not be solely responsible for the digital currency as it can not handle transaction volumes in China. It was also added that the bank started looking for launching the possibility of its own CBDC in 2014. At that time, CBDC was researching intending to reduce the cost of traditional paper money and to boost the money supply control of policymakers. 


A trial between Singapore and Canada


The Bank of Canada and the Monetary Authority of Singapore (MAS) experimented on cross-currency and cross-border using CBDC. They linked up the different domestic payment networks like Project Ubin and Project Jasper. According to the MAS description, these payment networks were built on two different platforms of distributed ledger technology (DLT). The Accenture and J.P. Morgan were partners in this trial. The Canadian network development on Corda was supported by the former whereas the Singapore network on Quorum was supported by the latter. 


The MAS explained that the cross-border payments are still costly and slow, so they prefer correspondent banking network concerning cumbersome reconciliation, counterparty risk and inefficient liquidity management as well. So, both banks collaborated in order to make the cross-border payment process safer, faster and cheaper. According to the MAS:

"This is the first such trial between two central banks, and has great potential to increase efficiencies and reduce risks for cross-border payments."


Payment testing of CBDC by the Bahamas:


Bahamas is another country which is testing a CBDC. Details of discussion between the International Monetary Fund (IMF) and the Central Bank of the Bahamas has been released in July in which work done of the CBDC of the country was also included. The IMF explained that with peer-to-peer transactions via e-wallets etc., an access to the digital payment system can be increased by a CBDC. According to the IMF:

"The CBOB [the Central Bank of the Bahamas] is planning to pilot a digital version of the Bahamas dollar as a means of payment to boost financial inclusion, especially in smaller islands of the archipelago."


It is also noted that with the e-currency, there could be a risk to cybersecurity, AML/CFT sphere and financial stability. So it is recommended to invest in technological capabilities and human capital to ensure that the pilot of a general-purpose CBDC is much more compatible with the current financial infrastructure. 


Multi-phase CBDC testing in Thailand


The second phase of CBDC's testing called Project Inthanon has been completed by the Bank of Thailand (BOT). The first phase was started in August last year, which was focused on producing a proof-of-concept which decentralized real-time gross settlement system (RTGS). This RTGS utilizes a CBDC on a distributed ledger. The second phase was started in February this year which explored the ways to use DLT in two different areas. 

The one area was "to tokenize the BOT-issued debt devices to get its life-cycle activities and delivery, payment settlement. Whereas, the second area was the incorporation of data reconciliation functions and regulatory compliance in the payment process on a distributed ledger in order to enhance procedure efficiency, reduce risks and mitigate operationally. The second testing phase's result was declared in July. 


Soon, the bank will enter into the third phase which focuses on the trail a DLT based RTGS prototype. The BOT explained that it would be expanded to get connected with other systems so make cross-border transactions easier. Moreover, it will also include compliance and regulatory issues from foreign as well as THB currencies. 


Sweden, Uruguay and ECCU


In April last year, the central bank of Uruguay completed a pilot program on a retail CBDC which was a part of a program named as governmental financial inclusion. The Bank for International Settlements (BIS) described that the pilot was started to issue, circulate and test an e-peso in November 2017. Then the transfers became easy and instantly through simple text messages or the e-peso app. Blockchain was not used. Almost 20 million e-pesos were launched and all these were canceled with the ending of the pilot. Now, the program is again in an evaluation phase before making any potential issuance.


The Riksbank was started in Sweden on the e-krona project to decline cash use. This project was started in spring, 2017. Website of the central bank states that it would provide the general public access to a digital complement to cash, whereas the value of the money would be guaranteed by the state. The Riksbank also confirmed that the possibilities would be investigating to issue an e-frona so that competence can be increased. Moreover, using this way there will be better prepared to meet the new market of digital payment.


There is a contract between the Eastern Caribbean Central Bank (ECCB) and Bitt Inc., a Barbados-based fintech company to conduct a CBDC pilot within the ECCU. A securely minted and digital version of the EC dollar (DXCD) is involved in this pilot which will be further used by non-bank financial institutions and licensed financial institutions in the Eastern Caribbean Currency Union. For financial transactions between merchants and consumers through smart devices, the DXCD will be used. For example, if a person is miles away then he will be able to send DXCD securely using his/her smartphone in a few moments, that's too without any charges. 


Digital Rupee in India


After the ban on cryptocurrency, now there is deliberation on a draft cryptocurrency bill in India. With this bill, the government is proposed to allow the creation of digital rupees as legal currency. It also defines that digital rupee is a kind of currency which is issued by the Reserve Bank and approved by the central government. 

According to this bill, the central government and the Reserve Bank allow digital rupee as a legal tender. 


Reasons to explore CBDC by Central Banks:


In the June report, the IMF stated that many central banks are checking issuing a CBDC. It is mostly noted that cash which is falling used in advanced economies are looking for options for an alternative payment method. One important reason to use CBDC is to reduce cost and improve the efficiency of implementing monetary policy. As a result, cryptocurrencies competition are countering and the contestability of the payment market is also ensured. The report states that it offers a risk-free payment method to the public. According to the report:

"Most central banks are considering non-anonymous CBDC. Almost all seem to be favoring a hybrid approach that allows the relevant authorities to trace transactions. Several are focusing research on a two-pronged approach with anonymous tokens for small holdings/transactions, and traceable currency for large ones."


Meanwhile, the IMF also noted that countries where financial systems are not fully developed and unbanked citizens consider CBDC as a way to improve financial inclusion as well as to support digitization. Additionally, many technical problems and policies should be addressed. A clear solution to issue CBDC has not yet found. 


Agustin Carstens

According to the report of the Financial Times, at the end of June, Agustin Carstens, BIS General Manager said that Global central banks may need to issue digital currencies sooner than expected. With the announcement of Facebook for Libra, many central banks have reportedly shown interest in CBDCs. Carstens said that proofs showing the demand for central bank digital currencies should be shown and it also needs to be clear that the demand is still there. He said: 

"Many central banks are working on it; we are working on it, supporting them … And it might be that it is sooner than we think that there is a market and we need to be able to provide central bank digital currencies."