Digital transactions are changing the way we view payment systems and systems for financial intermediation. Payment systems are evolving. But more fundamentally, money is evolving, writes BILEL JAMOUUSSI.

Central Banks are investigating means to adapt to this evolution. Central Bank Digital Currency (CBDC) could provide a digital equivalent to trusted banknotes and coins. Central Banks aim to accommodate and capitalize on digital transformation, while preserving the controls that protect the stability and integrity of national currency.

The new Digital Currency Global Initiative will host the diverse set of expertise required to support these investigations.

The initiative is a partnership of ITU and Stanford University to provide an open, neutral platform to discuss the new opportunities and risks introduced by digital currency – CBDC as well as stablecoins, e-money and private digital currencies – and their implications for technology, business and policy.  

Accelerating investigations

The Digital Currency Global Initiative will continue the research and dialogue initiated by the ITU Focus Group on Digital Currency including Digital Fiat Currency active from 2017 to 2019.

Research from the Bank for International Settlements (BIS) showed that, over the two years the Focus Group was active, all BIS-member Central Banks had launched investigations into digital currency. As interest in the topic grew, the Focus Group offered Central Banks a venue to find expertise to assist their digital currency investigations.

The group detailed the requirements of CBDC as they relate to regulation, technical and business dynamics, and security. It delivered a set of recommended design principles for CBDC as well as a reference architecture for the different implementations of CBDC for retail, wholesale and cross-border payments.

The Focus Group’s work showed a broad range of Central Banks and commercial banks to be actively exploring wholesale CBDC and privately-issued CBDC.

Wholesale CBDC could enable wholesale payment transactions between a country’s Central Bank and participant financial institutions.

Privately-issued CBDC could introduce new functionality to payment systems, such as the interoperability of ledgers and capabilities to execute trusted ‘atomic’ transactions. This could introduce a range of smart contracting choices for market players, opening further possibilities for programming the currency.

Central Bank pilot projects are using blockchain and distributed ledger technology (DLT) to tokenize both cash and securities on a single shared ledger.

These projects are reporting improvement in the speed and efficiency of ‘delivery-versus-payment’ settlement, the confirmation of payment received required to enable the delivery of an asset.

Transactions recorded using DLT-based CBDC payment systems could be more cost effective in aggregate than transactions recorded across multiple ‘silo’ accounts, thereby increasing the utility of the wholesale payments system.

Pilots demo different options

Central Banks are exploring various technological solutions and operating models for their retail CBDCs.

The Central Banks of Ecuador and Uruguay have conducted limited-scale pilot projects for the issuance of retail CBDC. We see the research of other Central Banks moving closer towards the initiation of CBDC pilots, for example in The Bahamas, Eastern Caribbean Currency Union, and Sweden. We also see some Central Banks, such as those of Barbados and The Philippines, supporting private-sector CBDC in regulatory sandboxes.

Some Central Banks have opted for central management of the entire infrastructure, including wallets. We see others maintaining control over the issuance CBDC while providing commercial banks with the Application Programming Interfaces required to carry out the distribution of CBDC.

Blockchain and DLT are a key part of the conversation, but Central Banks are also able to choose between different technological architectures, with some of these architectures based on DLT and others not.

Discussions on the ITU platform have shown that DLT-based implementations of CBDC will likely be based on private permissioned networks, networks meeting the need to oversee transactions among network participants and regulate access to the network.

We also see some Central Banks considering retail CBDC in the form of a card or a mobile wallet app on which prepaid values would be stored locally, rather than on a ledger. This could provide offline capabilities to match the 24/7 availability of cash.

Key design principles for CBDC

The set of recommended design principles for CBDC developed by the ITU Focus Group are specific to CBDC, but they include a range of key design principles applicable to all types of digital currency.

The design principles highlight that the rationale for CBDC issuance should drive the choice of the operating model, architecture and enabling technologies.

They emphasize that CBDC architecture should be robust and highly secure, aspiring to mitigate threats to cybersecurity.

They recommend that any specific design choice should consider the capabilities of existing ICT infrastructure, the legal and regulatory framework, the mandate of the country’s Central Bank and the market environment, with a specific focus on the end-users and key private-sector actors such as digital financial service providers.

And they emphasize that the design of the CBDC should be technology agnostic and that the choice of technology should come at the very last stages of the design process.

This multifaceted discussion calls for the participation of a diverse range of interests representing both the public and private sector – this discussion continues in the Digital Currency Global Initiative.

We welcome your participation

The Digital Currency Global Initiative will build clarity around the technology, business and policy environment surrounding digital currency and the potential for digital currency to expand financial inclusion.

It will provide an open, neutral platform to share case studies of digital currency applications, benchmark best practices and develop specifications to inform technical standards.

• Jamoussi is Chief of the ITU-T Study Groups Department.