Connecting digital islands: joining up digital currencies and payment systems.

CBDC – an electronic form of central bank money that citizens can use to make digital payments and store value – is one of the themes at the centre of discussion during Sibos 2022. In particular, during the panel session ‘Connecting digital islands: joining up digital currencies and payment systems’, insights were shared by panellists David Kretz (Bank of America), Lewis Sun (HSBC), David Treat (Accenture), Evelien Witlox (European Central Bank), and moderator Joy Macknight (The Banker). The packed room showed, once again, the strong continued interest in the topic of CBDCs.

Fundamental changes

Why are CBDCs so relevant right now and what is the debate really about? According to Joan Gross, chairman of the Digital Euro Association, “the digitalization of the monetary system is progressing and will undergo fundamental changes over the next decade”. The same idea was defended by David Treat, during the Sibos 2022 panel. “The COVID-19 pandemic has contributed to this change and the way we view this transition. These days, we are already questioning how CBDCs could work and how it should be designed.”

The theme was already discussed during Sibos 2019 in London, when there was a handful of central banks doing CBDC projects. By May 2020, this had already increased to 35 and now we are at 105 concrete projects. Accenture panellist David Treat considers it an explosion of focus on CBDC. Back then, the target of projects was on the ‘what’ (what is a CBDC, what can you do with it) and this has now turned into the ‘how’ (how could it work, what are the critical dimensions for the how, like privacy and interoperability).

Questioned by the moderator on what the latest updates are regarding CBDCs, Evelien Witlox from the European Central Bank (ECB), stated that the investigation – which started in October of 2021 and is planned to end in October of 2023 – is roughly half-way into the design decision making. “The ‘how’ has lots of different aspects to consider – online, offline, cross-border, privacy, distribution. We plan to analyse and discuss this with the market, which will lead into the final decision making. Then, at the end of the investigation phase, we’ll report our findings and see if it makes sense to implement a CBDC. That’s where we are”, said Evelien.

Interlinking and interoperability

The Bank for International Settlements (BIS) has presented three models for access to and interoperability of CBDCs in July this year, and, during the Sibos session, the audience was asked to indicate which one will win out in the end. Majority of the votes, 64% to be precise, went to the interlinking model. 31% went to the compatible model and 6% to the single global platform. All panellists largely agreed with Evelien Witlox (ECB) stating that a single global platform is considered somewhat utopic.

“This is simply not possible as there are too many differences in the systems, rules, regulations, etc. I think the interlinking will be the final solution”, said Lewis Sun (HSBC) in his turn. During the panel, the speakers revealed that during their premeeting they had already discovered that interoperability is a complex topic which can easily result in heated discussion. David Kretz (Bank of America) defines interoperability, basically, as “how value is exchanged from one store of value (cash, balance or token) to another”. HSBC panellist, Lewis Sun, describes it as the transfer between different systems without any loss of critical info (and functionality) with a realistic speed.

“When you talk about it, it is good to ask a few fundamental questions to ensure you agree on what you are discussing specifically (there are political, technical, and functional layers to a discussion about interoperability)”, said David Treat. Lots of CBDC initiatives are running, but there are in different (maturity) phases. Even so, the idea that it makes sense to discuss interoperability already at this stage was backed by all speakers.

An ever-evolving payment landscape

A lot of further exploratory work will be needed into CBDCs. In the meantime, other banking solutions like Instant Payments and SWIFT GPI are already tackling issues like costs and time with cross-border payments. It will be interesting to see what place CBDCs will take in the financial landscape – their full potential is yet to be discovered and realised.

Worldline has been at the heart of digital euro development, by creating a dedicated taskforce that directly engages with the ECB, aiming at delivering a prototype for one of the target use cases of a digital euro. In September of this year, the ECB chose five companies (amongst 54 candidates) to collaborate with and develop potential user interfaces for the digital euro. Worldline is one of these selected companies and will be specifically focusing on prototypes regarding peer-to-peer offline payments. According to the ECB, the prototyping exercise – which is part of the digital euro project is expected to be completed by the first quarter of 2023. The findings will be published by the ECB.

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