Central Bank Digital Currencies
An Update on CBDC Development – India, Turkey, Kazakhstan, and the UAE
An increasing number of countries are looking into launching their own central bank digital currencies (CBDCs). These new forms of digital money generally have functions and fundamental values similar to traditional notes and coins, such as being a source of value, a unit of account and an instrument for exchanges and exchange operations.
Central banks' adoption of a digital currency is expected to potentially contribute to fostering competitiveness in terms of transactional efficiency, supporting financial inclusion, particularly in emerging markets, as well as increasing transparency of transactions to fight money laundering and fraud.
China is at the front of this CBDC race, having issued digital yuan and is also allowing foreigners to use it for the 2022 Winter Olympics. The ECB and the UK's Ministry of Finance are also heavily pushing a case for CBDCs. While the US has not decided whether it will pursue a CBDC, they are closely examining its implications and options.
Earlier this year, the Bank of Tanzania confirmed it had begun moves towards developing a digital currency platform, which would incorporate CBDCs and cryptocurrency. Building upon the current payments infrastructure, Bhutan's Royal Monetary Authority is also preparing to pilot retail, cross-border, and wholesale use cases of a CBDC in phases. Now others are increasing their CBDC efforts as well.
India Starts the Wholesale CBDC Pilot
India's central bank, the Reserve Bank of India (RBI), announced the launch of its first pilot project to use a wholesale central bank digital currency (CBDC) for secondary trade in government securities on November 1.
The pilot involves nine commercial banks and will focus on understanding the technology, economic impact, and legal implications of issuing a CBDC. These participating banks are SBI, Bank of Baroda, UBI, HDFC Bank, ICICI Bank, Kotak Mahindra, Yes Bank, IDFC First, and HSBC.
“The use case for this pilot is expected to make the interbank market more efficient. Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or collateral to mitigate settlement risk,” the RBI said.
A second pilot project on the digital rupee's retail use will start within a month in closed user groups.
According to Anita Mishra, head of markets and securities services at HSBC India, over time, CBDC will “pave the way for a range of use cases, both in-country as well as for cross-border transactions.”
The RBI has been studying the feasibility of issuing a CBDC for some time and has also set up a working group in January 2019 to examine the merits and challenges of such a move. And in its report published in April 2020, the working group concluded that there was a case for issuing a CBDC in India, but further research was needed.
The pilot launch is a significant step forward in the RBI's plans for the broad issue of CBDC.
Turkey to Launch CBDC in 2023
Turkey's central bank has announced that it will launch a CBDC in 2023. The announcement was made at a conference on digital transformation in the banking sector, a year after the central bank announced late last year that it was looking into CBDC to strengthen its existing payments infrastructure further.
The Presidential Strategy and Budget Directorate presented Turkey's Presidential Annual Program for 2023. Under the sub-heading of Policies and Measures, in the Balance of Payments section, it has been stated that a “blockchain-based central bank digital currency will be put into practice.”
Turkey's central bank will be the responsible institution that will cooperate with the local Ministry of Finance and Scientific and Technological Research Institution. The central bank will also be carrying out the research and development efforts as well as the CBDC's testing in collaboration with other banks, according to the bank.
“The Digital Turkish Lira system will be integrated with digital identity and FAST,” a payment system operated by the Turkish central bank, stated the official report.
The launch of the CBDC is part of the central bank's broader digital transformation strategy. The bank has been working on a CBDC pilot project since 2018.
Kazakhstan to Build atop BNB Chain
Kazakhstan is set to build atop the BNB Chain, a blockchain platform developed by Binance. The move is part of the country's wider effort to embrace blockchain technology and its potential applications.
Kazakhstan's minister of digital development, Bagdat Mussin, said that the country is exploring various ways to use blockchain technology, including in the areas of digital identity, digital economy, and smart cities.
Mussin said that building atop the BNB Chain will enable Kazakhstan to “leverage the best practices of the world's leading blockchain platform.” He added that the country is committed to creating a “friendly environment” for blockchain businesses and projects.
The BNB Chain is a high-performance blockchain platform that features a wide range of use cases, including asset management, decentralized exchanges, and payments. The top-most crypto exchange in terms of trading volume, Binance launched the BNB Chain in April 2019.
Binance CEO Changpeng Zhao also confirmed that the National Bank of Kazakhstan would integrate a digital iteration of its currency, the Kazakhstani tenge, on Binance's blockchain network.
Binance introduced the bank to BNB Chain, tweeted Zhao and then shared that the bank zeroed in on its blockchain network to test the use cases of its CBDC.
Interestingly, these developments are being made while the country has been cracking down on virtual assets mining. The country is also attracting crypto exchanges to its Astana International Financial Centre (AIFC). For instance, last month, Binance announced that it had obtained a license to operate in Kazakhstan through the Astana Financial Services Authority.
BIS mBridge Completed
The Bank for International Settlements (BIS) and four central banks have successfully completed the real-value transactions pilot project on the cross-border CBDC platform as part of Project mBridge.
The six-week pilot is a collaboration between the international financial institution and the central banks to study CBDCs and their role in cross-border payments and multi-CBDC transactions.
In a report, BIS revealed that the project to evaluate whether CBDC would be useful for foreign exchange transfers successfully had 20 different commercial banks in Hong Kong SAR, Thailand, mainland China, and the UAE, which combinedly conducted over 160 payments worth around a total of $22 million through the mBridge platform.
Based on the lessons from the pilot, in the form of liquidity management, FX price discovery, legal frameworks, data privacy, decentralized deployments, and other business use cases, the Project mBridge will “continue its work” to move from the current pilot phase towards MVP and then eventually a production-ready system.
