Time to ‘future-proof’ central banks – Sibos panel

Central banks need to “future-proof” themselves in case central bank digital currencies (CBDCs) are widely adopted in the future, an official from the Hong Kong Monetary Authority said on October 12.

Howard Lee, deputy chief executive of Hong Kong’s central bank, discussed the evolving digital money landscape alongside peers and members of industry during the annual Sibos conference.

“You don’t know if [CBDC issuance will be] three years down the road, five years down the road, or further down the road. But this is something that no-one can really ignore,” said Lee. 

The HKMA has been investigating possible CBDC use cases since 2017 and has become a core member of the Bank for International Settlement’s Innovation Hub network.

The central bank is currently involved in both retail and wholesale CBDC projects but has given no indication of whether it plans to issue a CBDC in the future.

Lee said he sees CBDCs having the greatest potential in the wholesale space, where payment-versus-payment transactions could be used to settle digital assets. This would drive financial innovation, he added.

The European Central Bank is another institution that has moved “forcefully” in the CBDC arena, according to Ulrich Bindseil, the ECB’s director-general for market infrastructure and payments, who has played a key role in the central bank’s exploration of a potential digital euro.

During the panel discussion, Bindseil said the central bank had recently launched a two-year project that would identify CBDC use cases with a view to potentially launching a retail CBDC in the next five or six years.

However, he was keen to stress the ECB would not be able to solve all current payment frictions with a CBDC: “We cannot load everything [into a CBDC] and say in five years’ time we will have solved cross-border payment issues. It’s a bit more of a medium-term objective.”

In addition to cross-border payment considerations, Bindseil said the ECB was also mindful of the role CBDCs could play in programmable payments, offline payments and broader international payment interoperability.

“Those are all things we should keep in mind now [and] prepare to have them eventually in scope,” he said.

Private sector competition

Lee and Bindseil were joined by Georges Elhedery, co-chief executive of HSBC’s global banking and markets business, who warned that despite central banks’ efforts on digital money, private sector initiatives would continue to pose issues if left unchecked.

“Decentralised finance is out there. We as a regulated entity have no intention to be operating in a totally unregulated space,” he said.

“Therefore we do call on our central bank and our regulators to consider ensuring that these stablecoins and other kind of crypto are regulated commensurate to the risks they pose.”

Bindseil noted that one of the main reasons bitcoin appeared so competitive in payments was due to regulatory arbitrage.

“The public sector should look at this and close this regulatory arbitrage gap as quickly as possible. And then also this illusion of bitcoin as an efficient way for cross-border payment will quickly go away,” he said.

However, the European central banker was quick to note there was a difference between crypto asset usage and the emergence of stablecoins, which were – in his words – a “kicker” for the ECB’s own CBDC progress.

“Central banks have reacted to stablecoins more,” he said. “Big techs entered the market with big promises.”

The only reason these initiatives have slowed down in recent months, he said, was due to tech firms running into “regulatory realities”, which they are not used to adhering to.

The Facebook-backed initiative Diem, formerly known as libra, was one such initiative.

The social media giant caught many regulators off-guard in June 2019 when it unveiled libra, which it described as a “global currency” that it hoped would “reinvent money”. However, the firm appeared to be taken aback when regulators quickly warned of the possible risks and the need for tight regulation if libra were to become systemically important.

Following a rebrand and a failed attempt at seeking a licence in Switzerland, Diem altered its strategy and headed back to the US where it has partnered with Silvergate, a California-based bank, which will be the sole issuer of its stablecoin.

Diem’s chief economist, Christian Catalini, has said the company was committed to “fading out” its stablecoin if the Federal Reserve issued a digital dollar in the future.