The potential progress of CBDC remained in the headlines throughout 2022. At the end of the year, it was announced that the central banks of Sweden, Norway and Israel collaborated with the Bank for International Settlement (BIS) to investigate how CBDCs can be used for payments international retail and shipping. The Bank of Canada also partnered with MIT to conduct its CBDC research, and in the US, while some Federal Reserves remain “agnostic” after the investigation, the White House released a new framework that included CBDCs in September.
The second webinar of the Finextra Digital Asset Series focused on the topic of central bank digital currency (CBDC) and brought together several leading voices from different perspectives. As CBDC becomes more of a reality, practicalities must be considered. Also, what can a country gain from a CBDC, what role can they play in financial crime and what area of financial services can they be used for?
In 2023, CBDCs are likely to remain an important trend to watch as results from these experiments and pilots emerge. It was already announced this year that the Central Bank of Turkey completed its first pilot CBDC transaction.
In light of this, we decided to highlight some of the most crucial points that were raised during our Digital Asset Series webinars, one of which I moderated.
The webinar was comprised of three speakers including:
- Lewis Sun, Global Head of Emerging and Domestic Payments, HSBC
- Brett Walton, Business Development Manager, Fluency
- Faisal Islam, regtech/fintech consultant, Sentinels
policy interoperability
One topic panelists kept coming back to was interoperability. This refers not only to technological problems, but, as argued in the webinar, political and legal blocks can cause more problems.
Sun raised this and said that “Right now, in many sites, potentially managed by different central banks, many proofs of concept and pilots are being carried out. Given that there are different service providers using different infrastructures and technologies, I think it’s a bit fragmented right now.”
A previous Finextra Digital Asset Series webinar on ‘Navigating the CBDC Unknowns’ addressed these controversial issues, particularly the technologies needed to make CBDC a reality and whether distributed ledger technology (DLT) is the way forward.
Walton, who has worked with the Bank of England and the ECB to design their CBDC systems, agreed that “the key thing for us from a technological point of view is the infrastructure. We cannot control regulation; we cannot control monetary policy. We can control the technology and how it integrates into somewhere like HSBC and the infrastructure there.”
He added that in working with the ECB and the Bank of England, they are both asking to meet their own needs. But: “how are the Libra and the Euro going to talk?” He continued, “Having this interoperability thought at the forefront of design [is important], instead of going straight to the point and saying right, we issue an eGBP, so how can we talk to an eEuro. That’s a lot of the discussion we’re having right now with the ECB and the Bank of England.”
At this point, Sun argued, “It’s not just a question of different infrastructures and different technical infrastructures, it’s also a question of standards and principles of governance and oversight. Also, the risk tolerance level of the process flow. These types of soft factors also require a very high degree of harmonization. Otherwise, it will be extremely difficult to achieve this interoperability purely from a technical point of view.”
Islam also believes that future issues with CBDCs are broader than just technology. “Technology is the one that we like to talk about because it’s one that we can really solve, but it’s not really giving us the biggest problem right now at scale.”
Islam explained, “The things you can’t fix, which will perpetually be an issue and have been discussed in all pilot projects, are deep-rooted political and legal issues.”
Elaborating on this, he said: “The problem is that each of these countries is deeply nationalistic and also has its own political whims, which can change from time to time. And so at the heart of any currency, and while we’d like to think that monetary policy is largely independent in most countries, it certainly isn’t.”
Islam later said that one of the goals of a CBDC should always be to benefit the citizens, and an inherent problem with this will be the legal and political issues across borders that can result in an inefficient CBDC system.
CBDCs will not solve all current problems and using technology as a scapegoat for these problems is not the way forward, in the view of Islam. “The main reason why many centralized monetary policies and centralized monetary objectives do not move forward will still not be corrected as a result. In fact, I’m afraid that it actually hides a lot of the political and legal problems in itself, because it will distance the real problem from the scapegoat problem.”
data security
Returning to the topic of interoperability, Islam also highlighted the challenges related to data security. “At some point, a central bank needs to be able to interoperate with a number of other agencies. Sharing information between multiple agencies is where identifying information leaks will come from.”
In response, Walton said: “In our experience with central banks, it looks like there would be a two-tier model. You still have someone like HSBC who fulfills the KYC and AML functions from that perspective.”
He continued that at Fluency, they see the solution as a stored account based solution for the reason, “from an end user perspective, privacy is an important thing and needs to be at the forefront of design in any CBDC. […] Each part of the transaction is seen only by that individual; information is not shared far and wide.”
Sun added, “Currently, data privacy and confidentiality requirements are very strict. I think commercial banks and many of the larger institutions are following industry standards in terms of guidelines and principles to ensure that we meet all data privacy compliance requirements.”
Echoing Walton’s point, Sun said, “different parts of institutions will only control and manage their own information, only individuals will have the complete picture.”
Civil liberties threatened by CBDCs
Another political problem that arises concerns personal data and citizens’ rights. Islam argued that “the main flaw of a CBDC with any kind of identifying information attached to it is that it lends credibility to decentralized bulk cryptocurrencies that essentially give the promise of sovereignty. And while it could be argued that a truly anonymous decentralized cryptocurrency can be used for financial crimes, the other is also true, which is that the perfect privacy of its citizens is essential for a country not to have complete control over its people.”
To illustrate this point, Islam used an example from Canada in 2022, where the Canadian government froze the bank accounts of truck drivers participating in protests against Covid-19 regulatory requirements. On this, Islam said, “essentially, what we found was that, in a Western democracy, the government was able to enact financial authority over the right to protest.”
Islam further warned: “If you think about it being absolutely turned into a centralized currency, you have to imagine that at the end of the day it will exert even more power and control from the central bank to its sovereign citizens.”
This concern for the civil rights of countries’ citizens when it comes to CBDCs is something that remains unanswered and is expected to remain a concern as they are developed throughout 2023.
The full webinar is available to view here:
Digital Assets Series 2022: CBDCs and Digital Currencies – Transforming the Payments Landscapeand we recommend that you stay up to date with all new CBDC updates with Finextra’s PREDICT 2023 Series.
If you are interested in contributing to Finextra’s PREDICT2023 series, please contact us for more information: content@finextra.com
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