IBM Study: Central Banks Favor Digital Currencies for Interbank Settlements

Central banks maintain their distance from Bitcoin but have shown interests in issuing their private digital currencies. And a new IBM-OMFIF survey revealed how this future financial infrastructure would appear.

The Background

The study found that central banks are increasingly adopting Central Bank Digital Currencies (CBDCs). A clear overview revealed that banks were initially reluctant in taking the said technological leap. There were inconsistencies in the categorization of digital currencies that whether they would be wholesale or retail. A retail CBDC, per the IBM-OMFIF report, would have provided everybody the right to hold the digital currency-version of fiat money. Meanwhile, a wholesale CBDC would limit the supply to only selected financial institutions for interbank settlements.

“No major central bank intends to implement a retail CBDC in the near term. However, the debate about wholesale CBDCs has moved on from questions of feasibility to practical considerations,” the report read.

Majority Prefers Wholesale CBDC

IBM and OMFIF rested the survey on how wholesale CBDC could be developed, tested and issued on a centrally-governed payment system.

The study also factored in the regulatory challenges and policy risks a central bank would undertake while experimenting with CBDC. It did so after following up with the responses given by a total of 21 central banks, including Banco Central do Brasil, South African Reserve Bank, Deutsche Bundesbank, European Central Bank, and the Bank of Finland, among others, and surveyed out their opinions on the CBDC systems.

69 percent of banks, according to the report, admitted that they have issues with the existing cross-border financial infrastructure. 54 percent of them believed CBDC could improve the cost, speed, and resiliency of cross-border payments once deployed. Among the respondents, 38 percent of the central banks were already researching a CBDC solution, while the others were not active in the space.

IBM and OMFIF also found the central banks’ growing disinterest in using blockchain to issue their CBDC. 61 percent of the total 21 banks found no substantial qualities in the digital ledger technology. They cited trials in which they found blockchain offering just few efficiency gains, given the technology is still in its infant stage. The majority responded that blockchain would not be necessary to issue a CBDC.

At the same time, the survey revealed the central banks’ half-willingness to work with the private sector to build CBDC solutions. 50 percent voted in favor, arguing it would be essential to involve stakeholders from the start, rather than impose new technology on participants.

Unifying Wholesale CBDC

The report discussed whether a CBDC could be backed by a single sovereign currency or a basket of assets in the wake of arbitrage policy frameworks. The survey responses indicated a central bank-issued fiat-pegged digital token as the likeliest outcome, which would have no significant implication on monetary policies. To them, a digital token launched as a reserve asset would pose limited repercussions on policy-making as a whole.

At the same time, if CBDC is scaled to become a global reserve asset – along with the line of International Monetary Fund’s special drawing right – then it would complexify geopolitical and regulatory implications.

“Clearinghouses and existing payments systems would have to either adapt to new, more efficient systems or find themselves disintermediated from payment and settlement processes in the long term,” the IBM-OMFIF report said.

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