Analysis of CBDC international R & D dynamics (1): Seven giants form a group, "synthetic hegemony CBDC" will be born?

Recently, while China is fighting the epidemic of the new crown virus throughout the country, we also take a look at the progress of international research and development of CBDC. At present, there are several new trends.

I. Group research and development of CBDC , with the intention of creating "synthetic hegemonic CBDC "

On January 21, the official website of the Bank for International Settlements (BIS), the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swedish Central Bank, and the Swiss National Bank simultaneously released a message: the establishment of a central bank group to carry out the development of CBDC application cases.

The message says:

"The panel will evaluate CBDC use cases; economic, functional and technological design options, including interoperability of cross-border payments; and sharing of new knowledge and skills. It will work with relevant agencies and forums, especially the Financial Stability Board (FSB) and The Payment and Market Infrastructure Committee (CPMI) works closely. "

The group is led by Benoît Cœuré, the head of the BIS Innovation Centre, and Jon Cunliffe, the Deputy Governor of the Bank of England and the Chairman of CPMI.

Why is this combination likely to create a "synthetic hegemonic digital currency" as the Bank of England Governor Mark Carney calls it?

(1) Leaded by BIS, which directs international clearing business and formulates international monetary and financial business rules

BIS , a temporary institution set up to deal with the issue of war compensation after World War I, has evolved into an international financial institution cooperating with central banks of various countries, known as the "central bank of the central bank". As an affiliate of the International Monetary Fund and the World Bank, its main functions are to handle international clearing business, accept and trade gold or currency deposits of central banks of member states, provide central bank loans, and regularly hold meetings of central bank governors of major western countries to discuss international financial affairs. . There are currently 60 member states (central banks or monetary authorities). It has launched multiple versions of the Basel Accord, and the global banking industry is regarded as a leader of financial regulation and risk management.

As a traditional inter-central bank international organization, BIS once dismissed cryptocurrencies as a speculative tool with great volatility. However, the tests of wholesale CBDC in Canada, Singapore and other countries, BIS believes that the results are not obvious Better than the efficiency of existing payment systems; retail CBDCs “have great financial fragility and the benefits are less obvious” (BIS, 2018). The launch of the Libra coin issuance plan may bring about an impact on the official payment and settlement system and financial stability and order, which has aroused their vigilance and attention, and their attitude has changed since then. Director-General Augustine Carsten has repeatedly mentioned in his speeches that he will support central banks in creating national digital currencies. Its Payment Market Infrastructure Committee (CPMI) reports, surveys, and papers have emerged, becoming an international CBDC. Leader of research and development.

(B) Most members are in the forefront of the development of CBDC

The Bank of Canada and the Bank of Sweden have entered the trial phase of the CBDC : In 2016, the Bank of Canada and the Monetary Authority of Singapore launched the Jasper and Ubin projects, respectively, to explore the application of distributed account technology (DLT) in the interbank large-value payment system. Both parties have adopted the DLT technology of the R3 Alliance, developed a wholesale digital currency prototype system for domestic inter-bank payment and settlement, and verified it through subsequent tests in several stages, but it is limited to domestic attempts. In 2019, the Bank of Canada and the Monetary Authority of Singapore jointly developed the Jasper-Ubin project. In the absence of an intermediary agent, the trial of applying CBDC in cross-border, cross-currency, and cross-platform payment was successfully achieved. It can be said that the central bank of Canada has entered the stage of proof of- concept experimentation in the application of wholesale-type CBDC for large-bank inter-bank payment settlement and cross-border payment, and is at the forefront of international development.

The situation of the Swedish central bank is different from that of Canada. Its cashless trend and speed are of global concern. The purpose of issuing the CBDC " e-Krone" is to ensure the right to issue national currencies, maintain the stable development of the domestic payment and settlement system, and allow financial services to benefit all groups in society. From the launch of the electronic Krone R & D program in 2017 to the current testing phase . Its focus is on retail CBDC.

The Bank of England and the European Central Bank conducted a prototype design and proof-of-concept for the CBDC : The author's article "UK: Issuing Digital Currency or Issuing Plastic Banknotes, This Is a Problem" introduced the development of digital currency in the UK. To put it simply, as the founder of RSCoin , the world 's first central bank digital currency model , although the UK did not have more substantial actions than Canada and Sweden, the pace of research has not stopped. The joint project between Canada and Singapore also has the participation of the United Kingdom: In 2018, the Bank of England and the Bank of Canada, the Monetary Authority of Singapore, and four commercial banks and two third-party institutions participated in the fourth phase of the Jasper project 's research activities. There are challenges and frictions in cross-border payments, suggestions for creating a new transaction model, and a research foundation for the docking of DLT systems in Canada and Singapore in 2019. In addition, Mark Carney, former governor of the Bank of England, put forward a concept of "synthetic hegemonic currency" , which he intended to replace the current dollar-dominated international currency combination.

ECB : A lot of preparations have been made for the development of the CBDC. Since Lagarde became president, the ECB's research and development in the CBDC has accelerated significantly. Recently, under its leadership, more than a dozen EU central banks have joined the Accenture and R3 alliances. Cooperate to develop and design a "European chain" system based on DLT to solve the balance between privacy and anti-money laundering in CBDC micropayments. And proof-of-concept .

The Bank of Japan and the Swiss National Bank are currently in the theoretical research stage of the CBDC : Japan is a country with obvious cash preferences, and 80% of daily shopping still uses cash (Japan Times, 2019). Even in the case of non-cash payment point rewards introduced by the government to offset rising consumption taxes in 2019, 31% to 54% of people over the age of 50-70 still have no intention of using non-cash payment methods (Daily News, 2019 ). There is clearly a lack of motivation for retail-based CBDC research and development. After the launch of the Libra coin issuance plan, the official attitude of Japan remained low-key until December of the central bank governor Toshihiko Kuroda said that there is currently no need to launch a CBDC. But recently, its deputy governor, Masayoshi Amamiya, said:

"In Japan, public demand for CBDC may surge, depending on the development of the settlement system. If this happens, we must be prepared to respond."

At the end of last year, the central bank issued a report on the legal issues of the CBDC. It discussed the impact of the issuance of the CBD on the current private and criminal laws, the Bank of Japan Law, data collection law, administrative law, and competition law. See the most comprehensive and in-depth report on legal issues discussed in the CBDC study, indicating that there was no pause in preparation.

The situation in Switzerland is similar to Japan, and the public has a strong cash preference, even among young people. Other countries have cancelled large denomination cash for anti-money laundering and anti-terrorist financing purposes, reducing the cash consumption limit, while the Swiss franc still retains a maximum denomination of 1,000 Swiss francs and a cash transaction cap of 100,000 Swiss francs. The attitude towards private cryptocurrencies is also as friendly as that of Japan, with many cryptocurrency institutions established in Switzerland. Executives at the central bank have stated that digital currencies are still more suitable for privatization. At the end of last year, the Swiss Federal Council still stated that the CBDC would not bring benefits to Switzerland at the moment, and instead would trigger risks such as financial stability.

But things will always change. As the number one country in the global innovation index, the world's largest offshore financial center and the leader of international asset management business, how can Switzerland fall behind in the new round of monetary and financial revolution?

(3) Many members rank among the top of global reserve currency and settlement currency, and have the ability to compete with the US dollar

To measure the importance of a country's currency in international economic exchanges and the status of that country's currency in the world currency structure, two indicators are generally used, one is the share of global reserve currencies ( IMF data), and the other is the international settlement business. Mid-price settlement uses an occupation ratio ( (SWIFT data ) .

Major currencies in international foreign exchange reserves in Q3 2019 (%)

USD 61.78438569
EUR 20.06671504
JPY 5.603073115
GBP 4.434193454
RMB 2.0099432
Australian dollar 1.67459292
Canadian dollar 1.885093402
Swiss Franc 0.148220224

Source: IMFCOFER

WeChat picture_20200203103829

Source: SWIFT

As can be seen from the above table and chart, except for the central bank of Sweden , the members of the CBDC group are at the forefront of international currency status.

Although the euro is far away from the US dollar in terms of global payment currency and reserve currency, its position as the second-best player for many years has been inaccessible.

The Japanese yen ranks as the fourth largest payment currency and the third largest reserve currency in the world . This time it suddenly appeared in the central bank's portfolio with "interoperability of cross-border payments" as its main research and development direction. It may be more enthusiastic about going abroad to the CBDC. The cross-border, cross-currency and cross-system wholesale CBDC .

All members account for more than 32% of the international reserve currency and more than 48% of the international payment and settlement currency . The latter indicator has exceeded the first dollar.

From the above analysis, the six central bank groups developing the CBDC are most likely inspired by Libra's support for currency baskets, because " multiple reserve currencies will increase the supply of security assets and alleviate the decline of the asymmetric system on the global equilibrium interest rate Stress ”(Mark Carney, 2019). The proposal of the concept of synthetic hegemonic currency SHC is intended to change the long-term rules of the game in which international trade is denominated in US dollars. In the form of cross-border payment CBDC , relying on their respective strengths in the international currency market, it intends to reconstruct the international monetary and financial structure and establish A new international currency combination competes with the US dollar. Compared with Libra, official currencies naturally have legal status and regulatory and risk management mechanisms such as AML / CFT . The barriers to cooperation between countries are smaller than cross-currency and cross-border cooperation launched by private institutions. (to be continued)