Harvey Cheung, SVP Markets, eCurrency
The discussions around a digital fiat currency (DFC), also known as central bank issued digital currency (CBDC), have been gaining even more momentum in the last year. The concept of a CBDC was first introduced by Canada in 2012 through the MintChip project, which aims to create the first regulator-friendly digital cash platform. Since then the discussion of digital fiat currency has accelerated as central banks realize the need for a digitally issued fiat currency and its importance to a digital economy. There are over 90 central banks studying the implications of digital currency and digital fiat currency[1]. Various new DFC projects have been initiated by central banks, including e-krona by Sveriges Riksbank, Digital Currency Research Institute by People’s Bank of China, electronic hryvnia by National Bank of Ukraine[2] and e-peso by Banco Central del Uruguay, just to name a few since 2016.
Central banks’ requirements on digital fiat currency – similar to cash! Defining characteristics of digital fiat currency have begun to emerge from these projects after the experts have examined the legal, economic, monetary, operational and technical requirements and implications of issuing digital fiat currency. For example, Riksbank in September 2017 issued its first report[3] on the e-krona project, which declared the basic characteristics of an e- krona:
“A digital central bank currency, here called an e-krona, has the following basic characteristics:
It is specified in the national value unit, the Swedish krona.
It constitutes a claim on the central bank (the Riksbank).
It is electronically available 24 hours a day, 7 days a week, 365 days a year and available in real time or close to real time.
It is available to the general public, i.e. is more broadly available than traditional central bank deposits in RIX, to which only the banks have access.”
Further, Bank of Canada (BoC) issued a staff paper[4] in November 2017 to discuss the motivation and implications on a central bank issuing its own digital fiat currency. The paper has defined 25 attributes of the “benchmark” digital fiat currency, for example (please refer to page 8 to 11 of the paper for details):
“Denomination
The benchmark CBDC is denominated in the sovereign currency; for Canada, the Canadian dollar .
Legal tender
Like cash, the benchmark CBDC is legal tender
Access to CBDC
Access is non-exclusive—anyone could use the CBDC—but access to related technology is required.
Availability of CBDC
The benchmark CBDC would be available 24/7, like cash and other electronic payment methods.
Distribution channel used by central bank
Similar to current bank note distribution in Canada, households and firms would purchase the benchmark CBDC at a regulated financial institution (e.g., a bank) with their deposits at those institutions or with bank notes. Bank customers could also withdraw CBDC from their bank accounts, which is conceptually similar to the withdrawal of cash
Finality and irrevocability
To be used for payments, benchmark CBDC transactions need to be confirmed nearly instantaneously, and the underlying transactions need to be settled irrevocably as quickly as possible.”
The required characteristics of a digital fiat currency from central banks in fact are very similar to cash as shown in the table below.
A recent speech[5] made by the Governor of Reserve Bank of Australia on the topic of “An eAUD?” further ascertained that central banks prefer to have digital fiat currency be issued and distributed similar to cash:
“If an electronic form of Australian dollar banknotes was to become a commonly used payment method, it would probably best be issued by the RBA and distributed by financial institutions, just as physical banknotes are today.”
Working on the technologies
The People’s Bank of China (PBOC) has established the Digital Currency Research Institute, a dedicated organization to focus on the development of its own digital fiat currency in May 2017. It is reported that PBOC has completed trial runs on the algorithms needed for digital currency supply, taking it a step closer to addressing the technological challenges associated with digital currencies. Mr. Yao, the Director-General of the Digital Currency Research Institute, said China's central bank has successfully designed a prototype that can regulate the supply of its future digital fiat currency6.
While in Sweden, the Riksbank has published its e-krona project plan phase 27 with the objective to draw a proposal for a concrete e-krona concept in 2018. In this phase, Riksbank will work on the infrastructure and technology as well as investigate the legal and policy issues of e-krona. In Uruguay, The Banco Central del Uruguay announced that they are piloting a digital peso program in September 2017 involving 10,000 users. With these technological explorations and other recently completed trials, one should expect more test and true deployments of digital fiat currency in the coming months.
Footnotes:
Think Act – The rise of cryptofinance in central banking, Roland Berger, 2016
“Ukraine wants a national digital currency, not its own cryptocurrency”, Cointelegraph, January 2018
The Riksbank’s e-krona project Report 1, Sveriges Riksbank, September 2017
Central Bank Digital Currencies: Motivations and Implications (Staff Discussion Paper 2017-16), Bank of Canada, November 2017
An eAUD?, Address to the 2017 Australian Payment Summit, Reserve Bank of Australia, December 2017