Earlier this month, Benoit Coeure, a well-known central bank policy maker, sounded the alarm bells for central banks to act now on the minting of their own central bank digital currencies (CBDCs).

In a speech, the former European Central Bank economist who leads innovation at the Bank for International Settlements (BIS) warned that rapidly growing cryptocurrencies will challenge the business models of international banks – if monetary authorities do not act quickly.

As China advanced Friday to effectively ban cryptocurrency – which has shaken the spot prices of digital currency around the world – central banks around the world are redoubling their efforts to exert their own influence within the sector. It highlights what most observers believe to be a arms race in a new era of global finance.

The Bank for International Settlements / BIS innovation hub recently announced plans to create a crypto platform for the international community of central bankers to transact in CBDCs and other crypto assets.

Calling the feat Project Dunbar, the effort begins with designing a supposedly decentralized platform so that the dozens of countries creating their own style of CBDCs can use the new technology in the same way that retail investors negotiate the cryptocurrency and NFTs.

“The technology behind digital currency is quite elegant in that it removes much of the operational complexity associated with exchanging, clearing and settling payments on the backend,” Andrew McCormack told Yahoo Finance , Head of Singapore’s BIS Innovation Center.

In partnership with central banks in Australia, Malaysia, Singapore and South Africa, the Dunbar project aims to create a platform for CBDCs to improve cross-border transactions for the international banking community.

Twitter’s integration of cryptocurrencies for tips this week is a similar display of this use case for crypto. It is also a solution to the same problem as the government of El Salvador tries to solve by making bitcoin legal tender.

Unlike these other projects, the BIS does not just aim to facilitate cross-border payments for ordinary people. To be successful, it must also solve the problem of massively large currency exchanges between banks, governments and businesses.

“Borrowed from decentralized finance”

Photo taken on July 15, 2021 shows the U.S. Federal Reserve in Washington, DC, United States. US Federal Reserve Chairman Jerome Powell said Thursday he was “legitimately undecided” about the benefits and costs of issuing a CBDC digital currency from the US central bank. “I think our obligation is to explore both the technology and the political issues over the next two years. That’s what we’re going to do to be able to make an informed recommendation,” Powell said during ‘an audition. before the Senate Banking Committee when asked to clarify its position on the CBDC. (Photo by Liu Jie / Xinhua via Getty Images)

Moreover, a crypto platform for central banks must address another concern, that which derives from crypto.

Without an effectively decentralized platform – which means no single entity owns it – major business problems are likely to arise once central banks around the world start launching their own CBDCs in the years to come. These tokens act as digital equivalents for government-backed fiat currencies like the Euro (EURUSD), Chinese yuan (USDCNY), the US dollar (USDX) and the Malaysian ringgit.

There are digital currencies that operate from protocols based on distributed ledger or blockchain technology similar to cryptocurrencies such as Bitcoin (BTC-USD), Ethereum (ETH-USD) and Dogecoin (DOGE-USD). But as a form of money, the end goal of CBDCs is totally different.

Unlike many cryptocurrencies that offer varying levels of decentralization, CBDCs give central banks increased power to coordinate and control a country’s liquidity and set monetary policy. Jean-Pierre Landau, former deputy governor of the Banque de France, said The Economist in May than Facebook (FB) digital currency plans – and the loss of control over the currency it represented – was “a real shock to most of the international monetary community”.

Today, international banking services move most of the money around the world through a complex, multi-level account system. The same transaction requires message exchanges and clearing processes between different banking entities.

Ultimately, transactions are settled by a common entity, usually a central bank. The result is slow compared to the current standard of settlements for tokenized assets: for example, a payment settlement between parties in Asia and North America can take more than a day.

Beyond making cross-border transactions faster, cheaper and more efficient, CBDCs offer monetary authorities a whole new set of tools to shape politics as a society. is moving towards cashless transactions. In a interview with the Wall Street Journal In early September, the BIS ‘Coeure said central banks could use the technology to cut interest rates well below zero.

Interestingly, the BIS project uses platforms developed in the crypto industry such as the DeFi platform, Uniswap – which is reported as under investigation by the Securities and Exchanges Commission – as a model to develop their own platform for CBDCs.

“We borrowed from the world of decentralized finance, if you will. It goes back to Bitcoin. It’s that notion of a decentralized network that has a certain level of programmability, and a certain level of security, and then obviously, deep cryptography to ensure the integrity of the assets that exist on the network, ”said McCormack.

A big step in the central bank

CBDC digital currency banner web icon for financial and digital payment, government, centralization, trust, money and blockchain.  Minimal modern vector infographic.

CBDC digital currency banner web icon for financial and digital payment, government, centralization, trust, money and blockchain. Minimal modern vector infographic.

More than 81 countries are exploring CBDCs according to The Atlantic Council, a Washington-based think tank, tracks advancing various CBDC projects around the world. At least 5 Caribbean countries have already launched a digital currency, and 14 more are in a pilot phase with Bhutan’s central bank announcing more recently that they will partner with Ripple cryptocurrency (XRP).

While in their pilot phase, the Chinese PBC plans to make its CBDC, the digital yuan, available to foreign visitors during the upcoming Winter Olympics in Beijing. It’s unclear how Beijing’s decision to ban crypto will affect their plans in the CBDC.

The level of coordination required to create an “authorized” platform for all of these new CBDCs and other digital assets to interact will be daunting. The progress, policy goals and regulations around a CBDC could vary significantly from central bank to central bank.

This is a “big step,” said Gina Pieters, professor of economics at the University of Chicago, especially given the different access and regulatory barriers for wholesale and retail banking.

Pieters, who has published research on a range of topics related to cryptocurrency and blockchain technology since 2014, told Yahoo Finance that “it will be interesting to see how these different barriers translate” in the development. of the CBDCs.

With so many digital coins created in the coming years, the BIS is also concerned about updating its own technological layer behind the central bank. But at this point, it is not clear whether improving existing infrastructure is as important as maintaining some level of coordination and control between central banks so that countries that mint currencies and coins. digital platforms do not create major currency problems for international banks.

If each country issues its own CBDC on its own platform and none of the systems can interact with each other, a major value of cryptocurrency – more efficient cross-border payments – could be ignored, according to McCormack de Valar. . This is why the BIS is inspired by the design of decentralized funding platforms found in the crypto industry like Uniswap.

“If we have a common platform for CBDCs, we can explore things like automated market making and currency conversion, which are interesting and important concepts for us,” McCormack added.

A Uniswap-like construction designed and owned by central banks is just one concept the BIS will test. But the main goal now is to build an Ethereum-like blockchain project that would provide a space where central bank money could be issued and accessed by a banking player, from commercial banks to payment services, to wallet providers. regulated and potentially larger businesses. It differs from hosting DeFi apps and mountains of other cryptocurrencies and NFTs (non-fungible tokens).

Certainly, the permissible nature of a CBDC platform could also create limitations that would undermine their value as a currency.

Arguably, the openness behind cryptocurrencies like bitcoin and ethereum is one of the fundamental tenets that explain why so many people expect them to hold onto and increase their future value as internet for money.

“The integration of transparent and public governance on the chain,” said Pieters of the University of Chicago. “I’m not sure how far this can be embraced in a digital currency project like this, however.”

David Hollerith covers cryptocurrency for Yahoo Finance. Follow it @dshollers.


For more information on cryptocurrency, see:

What is Dogecoin? How to buy it

Ethereum: What is it and how do you invest in it?

The 21 best crypto leaders to watch in the second half of 2021

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