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First, what is a strategic reserve? A strategic reserve is a stock of a systemically important input, which can be released to manage serious disruptions in supply. The most well known example—the strategic petroleum reserve (SPR)—was created as a response to the 1973-74 Arab oil embargo, as well as to meet the reserve obligations of the international energy program. Since the 1970s, the SPR has been tapped more than two dozen times for a range of reasons: from providing critical petroleum supply after natural disasters, to most recently reducing inflationary pressures on energy prices after Russia’s invasion of Ukraine. In addition, if managed well, drawdowns of the reserve can occur when the United States is able to sell the crude oil at high prices and buy it back when prices are low.

What purpose would a strategic bitcoin reserve serve? Proponents of the idea think of bitcoin as a national and economic security asset like oil or gold. However, in economic security terms,  bitcoin clearly does not serve the same function in the US economy as petroleum. Oil is one of the basic inputs that powers our economy and daily living—crypto is not. Holding a bitcoin reserve would be the equivalent of the government holding a lot of iPhones in case it needed to intervene to reduce iPhone prices in the future. It is not a crucial commodity or input in our economy.

Moreover, as this week has made clear, bitcoin price is impacted by macroeconomic factors and recovers slower, even as markets are settling down this week. As the one-two punch of an unexpectedly weak jobs report and a surprising rate hike in Japan came in over the weekend, markets all over the world reacted strongly. A bigger, mirrored dip was seen in crypto prices after Friday. What we saw is a sell-off of crypto—an exchange of a liquid asset to pay off debts and higher borrowing costs—incurred by rising uncertainty in the markets as they begin to price in a possible conflict in the Middle East, in addition to the macroeconomic data. Compare this with gold—another reserve asset—which stayed relatively stable over this period. This volatility of crypto is persistent and makes it an ineffective hedge against inflation. 

Additionally, bitcoin is only one type of crypto asset. In the case of a strategic petroleum reserve, we don’t just use one provider of crude oil, regardless of its market share. Moreover, a large majority of the US government’s seized crypto assets are in the form of tether and other assets. It’s still an open question if they would become a part of the strategic reserve.  

Since it’s not about the resilience of bitcoin during a period of macroeconomic uncertainty, or its strategic importance in our economy—what is the idea of strategic bitcoin reserve actually about? Both critics and proponents have talked about how this proposal could make bitcoin and crypto more institutionalized and  enmeshed with traditional finance, raising its popularity and use for commercial purposes. For the last five years, the crypto industry has wanted to shed its outsider status and enter the mainstream of global finance. It has been somewhat successful with the introduction of BlackRock’s bitcoin ETF this year, in addition to increased interest in tokenization experiments. This sort of institutionalization has helped, largely because it has been realistic about crypto’s capabilities and importance in global markets. 

The biggest drawback of the strategic bitcoin reserve proposal is that it prescribes crypto values it does not have, at least for now. This proposal is at best, premature, and at worst, out of touch with the reality of markets and US national security objectives. Bringing bitcoin into mainstream use is not reason enough to create a strategic bitcoin reserve. 

Ananya Kumar is the deputy director, future of money at the Atlantic Council’s GeoEconomics Center.

Data visualization created by Alisha Chhangani.

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Central bank digital currencies, or CBDCs, are a digital form of a country’s fiat currency—like an electronic version of cash. The difference between a CBDC and the money one uses on, for example, the payment service Venmo or the Bank of America app is that a CBDC is a liability of a country’s central bank, not a commercial bank.

Over the past five years, most central banks in the world have started exploring the possibility of issuing a CBDC. The reasons vary from country to country. For example, in some small island nations, such as the Bahamas, improving financial inclusion because of limited access to banks and vulnerability to natural disasters is a major motivation. In other countries, such as the United Kingdom, there is a push to “future-proof” money as citizens use less paper cash. While the reasons might vary based on the unique requirements of each country, the trend line is clear. According to Atlantic Council research, as of March 2024, there is a new record high of 134 countries exploring a CBDC, with thirty-eight ongoing CBDC pilot projects, including ones in Europe and Japan.

The United States trails all of its Group of Seven (G7) peers when it comes to researching and developing a CBDC. Outside the G7, the gap is even wider. Eleven Group of Twenty (G20) countries are in the pilot stage, including Brazil, India, Australia, South Korea, and Turkey. China, too, is on the list and already has 250 million users.

In the absence of US-led models and regulatory roadmaps, there is a growing risk of a fragmented payment system emerging in which different models proliferate and make the international financial architecture more expensive and less efficient. This is the exact opposite of what banks are trying to achieve with these new technologies.

Critics of CBDCs rightly raise concerns about citizens’ privacy. If the Federal Reserve issues a digital form of cash, couldn’t the government then “surveil” the population and see how citizens spend their money? The solution, however, is not to remove the United States from the playing field, which would allow countries such as China, which will not prioritize privacy, to set standards for the rest of the world. Instead, the United States should work with partners and allies to develop digital assets with democratic values—ones that protect privacy, ensure cybersecurity, and foster a healthier global financial system.

In fact, if this bill ever became law, the United States would be the only country in the world to have banned CBDCs. It would be a self-defeating move in the race for the future of money. It would undercut the national security role of the dollar as the decision would only accelerate other countries’ development of alternative payment systems that look to bypass the dollar in cross-border transactions. This would make US sanctions less effective.

It is one thing to decide not to issue a CBDC—and several countries are debating that precise issue right now. But it is an unnecessary and harmful step to preemptively ban the Federal Reserve from even exploring the idea.

In many ways, the bill before the House is a solution in search of a problem. Over the past year, the Federal Reserve has been crystal clear that it would not proceed with a CBDC without congressional approval. Federal Reserve Chair Jerome Powell repeated this stance in March in testimony to Congress. This gives both the House and the Senate ample opportunity to voice their legitimate concerns if and when the time comes to debate a US CBDC. But even that point is a long way off. The Federal Reserve is only researching a retail CBDC—meaning one used by the general public for commercial and peer-to-peer transactions—at this point, and as the experience of other countries shows, these projects can take years to turn into actual prototypes.

The bill does create real risks for the future of the dollar, however. Because the bill is so broadly worded, it could potentially ban a range of the Federal Reserve’s existing functions and its work with commercial banks on faster settlement of deposits, as research by the Congressional Budget Office shows. Such sweeping language could impact a range of ongoing projects between the Federal Reserve, major US banks, and even US allies overseas. In fact, the New York Federal Reserve is currently working with the private sector and a number of countries, including Singapore, Germany, and France, on developing faster ways to exchange money between commercial banks across borders.

It is very likely that several countries will look at the House bill and conclude that it’s not worth their time, energy, and money to engage with a partner that may, in the near future, not be able to see a project to its conclusion. Even if the Senate never takes up the legislation, a signal will have been sent. With this single vote, the House could create a chilling effect that will undercut US influence in being able to set critical standards around this emerging technology.

Financial innovation in the United States is and always should be a collaboration between the public and private sector. The Federal Reserve should be allowed to continue its exploration and work with US commercial banks and countries around the world to build safe global standards and faster payments. To stop this research in its tracks and make the United States the one country in the world to ban a CBDC would be a disservice to innovation and jeopardize US leadership in the global economy.

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center. He previously worked at the International Monetary Fund and US State Department.

Ananya Kumar is the associate director for digital currencies at the Atlantic Council’s GeoEconomics Center.

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What is a CBDC?

CBDC is a digital form of a country’s fiat currency that is a liability of the central bank. A country’s central bank issues a CBDC. 

Is CBDC the same as cryptocurrency?

CBDC is different from cryptocurrency. Unlike CBDC, cryptocurrency is not issued and backed by a central bank, they are usually issued by private companies. Cryptocurrencies, such as Bitcoin or Ethereum, are decentralized. This means that control and decision-making in a transaction are transferred to many different entities, instead of relying on intermediaries.

Both cryptocurrencies and CBDCs can run on distributed ledger technology, meaning that hundreds of devices all over the world are responsible for carrying out and verifying transactions. One form of cryptocurrency, a stablecoin, can be pegged to a fiat currency.

How is this different from other forms of digital money?

CBDC is also different from digital money held in bank accounts or payment apps. Digital forms of money held in these apps or accounts are a liability of the commercial bank; CBDC is a liability of the central bank. CBDC is usually intermediated, meaning that it is distributed through banks, payment service providers, and digital wallets. Even in this case, CBDC is still a liability of the central bank. 

Are there different types of CBDC?

There are two types of CBDC: retail CBDC (rCBDC) and wholesale CBDC (wCBDC). rCBDC is used by the general public for commercial and peer-to-peer transactions. rCBDC would be used to buy a cup of coffee, for example. wCBDC is used by financial institutions to settle interbank and securities transactions. Its use is comparable to that of interbank transactions with central bank reserves. 

Why are countries exploring CBDC? 

There are many motivations for researching and developing CBDC, and each country’s motivation will determine whether they explore rCBDC or wCBDC. The motivations for rCBDC include promoting financial inclusion, increasing payment efficiency, lowering transaction costs, and improving safety. The primary motivation for wCBDC is reducing cross-border friction in interbank and securities transactions. 

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

Will CBDC replace cash?

CBDC will complement existing payment methods, not replace them. In its 2023 report, A stocktake on the digital euro, the European Central Bank clarified that a digital euro would “provide an additional payment option to complement cash and current
private digital payment solutions (rather than replace them).” The Federal Reserve and the Bank of England have also stated that CBDC will not replace cash.  

Are there any risks in pursuing CBDCs?

As countries explore the benefits and development of CBDC, there are several challenges that arise. If citizens pull too much money too quickly out of commercial banks to purchase CBDC, it could result in a bank run–creating instability in the financial market. This is a challenge in volatile economic conditions. 

Another challenge is creating a secure and resilient infrastructure for holding and using a CBDC. Cyber attacks, internet connectivity issues, and interoperability with existing payment systems are challenges for the efficiency of CBDC. 

Finally, central banks must also ensure the privacy and safety of a CBDC, which are necessary for gaining public trust and protecting citizen’s rights.

What are the national security implications of CBDC?

The introduction of new payment systems could impact the daily lives of citizens but also potentially compromise a country’s national security objectives. For instance, CBDC can allow countries to build linkages and networks outside of the dollar, which can create opportunities to evade sanctions. Therefore, cross-border collaboration is necessary on issues of CBDC governance, privacy, and security. Private and public entities have already begun to work together to set standards and ensure interoperability. Yet more can be done to ensure that the issuance of CBDC does not jeopardize the national security objectives of a country.

Alisha Chhangani is a program assistant at the Atlantic Council’s GeoEconomics Center. Follow her at @alisha_chh

Leila Hamilton is a young global professional at the Atlantic Council’s GeoEconomics Center. Follow her at @leilathamilton

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• Introduction
• The call for standards
• Defining standards
• A comprehensive overview of current standards on digital assets
• Lessons learned from standard-setting efforts
• Establishing standards
• Key themes for a CBDC framework
• Conclusion

Abstract

Over the past few years, the global financial landscape has undergone a significant transformation marked by the emergence and integration of digital assets. Looking ahead, the global financial terrain is set to include a spectrum of both sovereign and nonsovereign digital currencies and both centralized and decentralized networks. This future brings the promise of enhanced efficiency, inclusion, transparency, and choice to global payments. To fulfill this promise, the international community must develop interoperability standards that prioritize a fast, highly scalable, and resilient architecture. The flexibility of this architecture to adapt configurability based on policy and economic considerations is critical to its success.

This working paper is a foundational step toward a broader, global dialogue about digital asset standards. The Digital Dollar Project and the Atlantic Council’s GeoEconomics Center hosted a global convening titled “Exploring Central Bank Digital Currency: Evaluating Challenges and Developing International Standards” in November 2023. A version of this paper was released as a working paper to level set the attendees of the conference and provide a call to engage the public and the private sector in standard-setting efforts. This paper was further developed based on feedback from the conference and outreach afterward. The  paper now reflects what we learned from our convening and incorporates the most recent developments in standard-setting efforts globally. The rapid growth of central bank digital currencies (CBDCs) worldwide underscores the importance of aligning approaches to their development, adoption, and implementation across technical, regulatory, and governance levels. Today, there is a patchwork of first steps undertaken by both public-and private-sector entities, aimed at achieving different objectives. These efforts have focused on frameworks, guiding principles, and, in some cases, the development of standards for digital assets broadly, as described below. Some are CBDC-specific and others have general applicability in the payments sector. As governments and stakeholders collaborate to establish consistent benchmarks for CBDC development, it’s crucial to identify, organize, and align standard-setting endeavors. This process involves assessing existing efforts to pinpoint gaps and create a foundation for international standards that remain open and flexible for future development and innovation. Through this paper, we show the crucial element of interoperability, which is needed for the furtherance of standards on CBDCs and digital assets. We attempt to build the pressing themes around which standards will have to be addressed through existing and new efforts.

Introduction

In recent years, the global financial landscape has witnessed a profound transformation characterized by the accelerated rise and integration of digital assets. As a subset of these assets, central bank digital currencies (CBDCs) have captivated the interest of countries worldwide.¹ The CBDC landscape has rapidly evolved with 130 countries, representing 98 percent of the global economy, actively researching and, in some cases, deploying CBDCs. A recent survey by the Bank for International Settlements (BIS) revealed that the number of central banks likely to issue a CBDC within the next three years has grown in the past year from 15 percent to 18 percent for retail CBDCs (rCBDC) and from 8 percent to 15 percent for wholesale CBDCs (wCBDC).²

CBDCs, in their promise and potential, are emblematic of a broader shift—a movement toward a more efficient, frictionless digital infrastructure, shaping the future of international trade, cross-border payments, and global financial integration. However, with transformative potential comes inherent complexity. As fiat currencies become more intertwined with technology there are significant implications for privacy, human rights, cybersecurity, digital financial inclusion, and the movement of money across borders for international trade, aid, investment, and other payments. If designed without a common framework of standards and collaboration, a shortsighted and fragmented approach to CBDC development could lead to the emergence of walled gardens.

At the core of establishing standards lies the concept of interoperability—the ability for diverse systems to interact seamlessly and reduce friction. In this context, interoperability extends beyond technical objectives alone; it requires a broader framework including regulatory and governance standards, paving the way for streamlined cross-border transactions, reduced operational friction, and bolstered trust among participating entities. While not a panacea, technical, regulatory, and governance benchmarks are instrumental in navigating the complexities of the international payments systems. In order to achieve interoperability, CBDC exploration should prioritize a thorough discussion on establishing technical, regulatory, and governance standards. (See Annex 1 for definitions relevant to this discussion.)

This paper is intended as a catalyst to stimulate a broader, global dialogue about CBDC standards. It takes stock of existing activities, begins to define how these efforts may be coordinated and aggregated into a set of globally accepted best practices, and offers a baseline for addressing gaps or deficiencies in defining best practices.

The call for standards

CBDCs are a digital form of a country’s national currency, issued and backed by the country’s central bank. They come in two forms: retail CBDCs (rCBDC), accessible to individual consumers and usable for everyday purchases and peer-to-peer payments, and wholesale CBDCs (wCBDC), utilized by financial institutions or other major entities for interbank settlements and large financial transactions. The motivations behind rCBDCs and wCBDCs are distinct. The deployment of rCBDCs is usually motivated by financial inclusion, payment efficiency, privacy, and safety. Interest in wCBDCs is aimed at addressing cross-border friction to improve international payments—including limited operating hours, long transaction chains, restrictions on legacy technology platforms, data fragmentation, high costs, complex funding, and compliance issues.³

Ultimately, rCBDCs and wCBDCs would operate in conjunction with each other to achieve both the domestic and cross-border needs of a country.⁴ Therefore, the deployment of domestic CBDCs must not be considered in isolation or the result will be walled gardens that stand apart from global commerce and economic trends. Creating a CBDC in a silo is unlikely to achieve the desired outcomes in the short or long term, as it will replicate the friction of the existing payments systems. CBDCs’ potential to provide a simpler and more efficient way to move money can only be realized as long as the CBDCs can interoperate with one another.

If deployed, a CBDC must be able to operate across various transactions, institutions, and users. Many CBDC initiatives and explorations recognize the complex and interconnected ecosystem in which financial activity takes place and the interdependencies of the different participants in transaction settlements. By agreeing on standards upfront—which is by no means a simple task—CBDCs can hopefully escape some of the growing pains that we have seen with the development of new financial technology (such as automated teller machines that could only be used by customers of a specific bank) or new digital technology (such as the challenges posed by the early years of closed-loop email).

Concentrating on developing and implementing clear and accessible global standards can enable greater industry collaboration and competitiveness through interoperability, transferability, consistency, and safety across various industries and economies. With this clarity, countries can direct their efforts toward aligning and promoting key principles such as privacy, free enterprise, the rule of law, and economic liberty within the global financial landscape.⁵

Defining standards

At the heart of this paper is the effort to promote interoperability in payments systems and prevent the creation of walled gardens. We therefore define standards as the technical, regulatory, and governance benchmarks needed to achieve interoperable systems in the long run. It is crucial to recognize that standards do not emerge arbitrarily; instead, they evolve from fundamental principles, embodying intentional consideration and consensus.

Standards specific to CBDCs are not unchanging; they must reflect and be responsive to technological development, market shifts, and experience. Standards are established by technical and governance bodies, often made up of diverse stakeholders, and reflect a consistent floor for pragmatic implementation across jurisdictions. Therefore, they must have built-in flexibility to adjust to changing circumstances across a variety of market structures.

Our use of a narrow definition of standards as a means to achieve interoperable payments systems helps navigate the complex technical, governance, and regulatory environment. In the following section, we catalog existing standards for digital assets and the institutions responsible for setting them.

A comprehensive overview of current standards on digital assets 

International Monetary Fund

As a key institution in international monetary cooperation and exchange rate stability, the IMF is instrumental in assisting its 190 member countries in managing economic change. Its expertise in macrofinancial surveillance can help identify vulnerabilities associated with digital assets and it can offer policy advice to enhance the resilience of economies.

In November 2023, the IMF released a virtual handbook on CBDCs, designed as a comprehensive guide for policymakers and experts in central banks and finance ministries. The plan for this evolving handbook is to offer about twenty chapters by 2026, with periodic updates to reflect the latest findings and viewpoints.⁶ The initial chapters address key topics like the framework for exploring CBDCs, product development, impacts on monetary policy, capital flow management, and financial inclusion.

A publication called IMF Approach to Central Bank Digital Currency Capacity Development, released in April 2023, outlines the IMF’s efforts to facilitate peer learning and develop analytical underpinnings for advising member countries on CBDCs. In addition to research, the IMF provides technical assistance, including the XC platform initiative.⁷ The XC platform, proposes a global centralized ledger to simplify and streamline cross-border payments. This initiative builds on the concept of wholesale CBDCs, but the platform includes commercial banks, payment providers, and central banks within a single, streamlined system. The XC model aims to reduce transaction costs and settlement times, making it an attractive option for countries looking to enhance their cross-border payment systems.

Described as a “digital town square,” the XC platform would build a three-layer architecture: a settlement layer that acts as the primary ledger, a programming layer for executing smart contracts, and an information layer designed to protect personal data while ensuring compliance and facilitating currency controls as needed.⁸ The platform’s architecture is designed to be open and upgradeable, ensuring its longevity and adaptability to future innovations. Instead of adopting CBDCs, central banks can issue certificates of escrow (CE) for use exclusively on the XC platform. CEs enhance financial accessibility by granting more entities, including nonbank financial institutions (NBFIs), payment-system providers (PSPs), and nonresidents, direct access to central bank reserves. These certificates share characteristics with CBDCs and can later be converted into central bank reserves by financial institutions. According to the IMF, a key advantage of using CEs is that it allows countries to prioritize domestic use cases for their CBDC projects, while CEs can be used solely for cross-border transactions.⁹

The XC model is designed for wide-ranging compatibility with existing systems, requiring central banks to make only minor technical updates. The model is a policy and regulatory framework; it encourages countries to adopt consistent and supportive regulations for cross-border payments, potentially incorporating tokens and distributed ledger technologies (DLTs). In order for the model to work, however, it will need compatible legal and regulatory frameworks to effectively manage risks and ensure compliance across various jurisdictions. Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department at the IMF, further explained this point at our conference in November 2023.

Bank for International Settlements

The BIS acts as the central bank for central banks, fostering monetary and financial stability globally. It actively explores the impact of digital currencies on the financial system and central bank operations. The BIS Innovation Hub facilitates research and development on digital innovation, helping member countries adapt to the rapidly evolving digital asset landscape. Its membership consists of sixty-three central banks and monetary authorities.¹⁰

Recent significant projects include Project Mariana, which tested cross-border trading using CBDCs and decentralized finance technology, and Project Icebreaker, which focused on using retail CBDCs for international payments through a novel hub-and-spoke model, both completing their testing phase in 2023.¹¹ Most recently, Project Sela, a collaboration between the BIS Innovation Hub Hong Kong Centre, the Bank of Israel, and the Hong Kong Monetary Authority, focused on exploring rCBDC features including accessibility, cyber security, and effective public-private collaboration, with an emphasis on central banks overseeing retail ledgers and private intermediaries managing customer-facing services.¹²

In July 2023, the BIS presented the results of a survey showing that 93 percent of central banks are engaged in CBDC work, with retail CBDC development more advanced than wholesale CBDC.¹³ The survey reveals most central banks recognize the value of having both a retail CBDC and a fast payment system.¹⁴ By 2030, there could be fifteen retail and nine wholesale CBDCs publicly circulating, while stablecoins and crypto assets are rarely used for payments outside the crypto ecosystem.¹⁵ This BIS finding followed its June 2021 report discussing its survey on CBDCs, which found that many central banks had not decided on issuing a CBDC, but had a tentative inclination toward allowing cross-border use by tourists and nonresidents. In March 2021, the BIS explored the potential for multi-CBDC (mCBDC) arrangements to improve cross-border payments by leveraging interoperable central bank digital currencies. Technology could play a role in addressing inefficiencies, and the paper discusses the dimensions of payment system interoperability and the benefits of mCBDC arrangements.¹⁶

The BIS Universal Ledger interoperability model advocates for a shared global ledger that integrates various forms of money—including CBDCs, tokenized deposits, and other digital financial assets—into a single, programmable environment. The BIS aims to address the inefficiencies and silos present in the financial system by enabling safer transactions and atomic settlements within a transparent framework.

The architecture of the unified ledger model is designed to be secure, scalable, and interoperable, with a strong emphasis on privacy and regulatory compliance. At its core, the architecture includes a data environment for securely storing digital asset representations, like CBDCs and tokenized deposits, in organized partitions managed by authoritative entities such as central banks and commercial banks. The execution environment facilitates the automation of complex financial operations and secure, efficient transaction processing. This environment supports atomic settlement, ensuring comprehensive transaction success or complete rollback. In addition, to safeguard sensitive data and transaction privacy, the model implements cryptographic methods like homomorphic encryption and secure multiparty computation. These technologies enable encrypted data computation without exposing the actual data, reinforcing the system’s privacy and security. An important component of the BIS project is the governance framework that establishes operational and regulatory compliance protocols, while also detailing the responsibilities of all involved parties, including central and commercial banks.

Unlike the XC model, which builds on blockchain solutions, the BIS’s unified ledger approach uses application programming interfaces (APIs), creating a more centralized system where transactions have to be processed and validated by authorized entities, such as central banks or designated financial institutions. ¹⁷ Within this system, central bank money can circulate on a platform that is not owned and operated by the central bank, which can present risks. It also raises questions about the security, control, and integrity of central bank money when it is managed outside the traditional central banking systems.

The BIS favors a system grounded in central bank money, offering a sounder basis for innovation, stable and interoperable services across borders, and a virtuous circle of trust through network effects.¹⁸

Basel Committee on Banking Supervision

The BCBS is the global body for setting prudential standards for banking supervision and regulation. With the emergence of digital assets and their potential impact on banking operations and risk management, the BCBS is studying the implications for financial institutions. The committee’s membership includes central banks and banking supervisory authorities from twenty-eight countries.¹⁹

The BCBS standard for prudential treatment of crypto asset exposures integrates crypto assets into the Basel Framework for banks.²⁰ Joint reports by CPMI, BIS, the IMF, and the World Bank on central bank digital currencies for cross-border payments emphasize CBDCs’ potential to enhance cross-border payments through international cooperation and coordination.

Financial Action Task Force

FATF primarily focuses on combating money laundering and terrorist financing and has had less emphasis on specific guidelines for CBDCs. Its recommendations function as guidance on regulating virtual assets and virtual asset service providers (VASPs) to ensure the prevention of illicit financial activities. More than 200 jurisdictions have committed to implementing FATF standards, making the organization a key player in shaping regulatory frameworks to maintain transparency and security in the digital asset sphere.²¹ FATF has thirty-eight member countries, including major economies and financial centers worldwide.²²

FATF has published several papers related to virtual assets and VASPs. The first version of its Guidance for a Risk-Based Approach to Virtual Assets and VASPs, released in June 2019, focused on risk assessment and monitoring, particularly for issues of anti-money laundering and combating the financing of terrorism (AML/CFT).²³ A twelve-month review of the revised FATF standards on virtual assets and VASPs was conducted in July 2020, showing progress in implementing these standards among some jurisdictions, but not yet sufficient progress to create a global AML/CFT regime for virtual assets.²⁴ A second twelve-month review in June 2022 revealed continued progress, but indicated that implementation was still insufficient and certain challenges remained, such as the implementation of the “travel rule.”²⁵ This rule is a legal obligation that requires financial institutions—such as banks and cryptocurrency service providers—to collect and share detailed information about the parties involved in a financial transaction.

To address these challenges and based on the two reviews, FATF published Updated Guidance for a Risk-Based Approach to Virtual Assets and VASPs in October 2021. This guidance includes updates in six key areas, including clarifying the definitions of virtual assets and VASPs, guidance on stablecoins, and additional guidance on peer-to-peer transactions and information-sharing among VASP supervisors.²⁶ However, the latest update on the implementation, published in June 2023, indicated that jurisdictions still struggle with fundamental requirements.²⁷ The report also emphasizes the need for appropriate risk identification and mitigation measures, especially for decentralized finance (or DeFi) and unhosted wallets (e.g., controlled by the owner rather than a platform or exchange manager), which have the potential for misuse. In 2020, FATF has also reported to the Group of Twenty (G20) on stablecoins, outlining its specific views on the application of anti-money laundering and counterterrorist financing requirements.²⁸ There is ongoing work needed to ensure consistent and effective implementation of FATF standards in the digital asset sphere, and some jurisdictions are still struggling with fulfilling the fundamental requirements outlined by FATF.

International Organization of Securities Commissions  

As the leading international standard-setting body for securities regulation, IOSCO plays a critical role in ensuring the stability and efficiency of capital markets. With a growing interest in digital securities, IOSCO’s principles on issuer and investor protection, market integrity, and risk mitigation have significant implications for the global adoption of tokenized assets. IOSCO has more than 120 members, including national securities regulators and exchanges from various jurisdictions.²⁹

While debates on which digital assets count as securities are ongoing in the United States, IOSCO has been actively engaged in providing insights into the realm of digital asset markets through a series of consultation reports and public reports. Policy Recommendations for Crypto and Digital Asset Markets, published in November 2023, stands out as a comprehensive consultation report proposing eighteen recommendations that address six key areas of concern. These areas include conflicts of interest resulting from vertical integration, market manipulation, cross-border risks, custody and client asset protection, operational and technological risks, and retail access, suitability, and distribution.³⁰

In March 2020, IOSCO released Global Stablecoin Initiatives, a public report emphasizing the applicability of principles for financial market infrastructures to stablecoin arrangements with systemically important functions. IOSCO’s work on exchange traded funds and crypto-asset trading platforms may also apply to global stablecoins.³¹ In March 2022, IOSCO presented its public report on decentralized finance, highlighting regulatory concerns like fraud risks, flash loans, cybersecurity, and spillover effects on traditional markets. Additionally, in December 2020, the organization published Investor Education on Crypto-Assets, a report to educate the public and investors on crypto assets and risk mitigation.³²

Committee on Payments and Market Infrastructures  

Under the BIS, the CPMI provides a platform for central banks to promote the safety and efficiency of payment systems worldwide. With digital assets gaining recognition, the CPMI is actively engaging in discussions concerning the potential role of CBDCs and their interplay with private cryptocurrencies. The CPMI has twenty-eight members, representing major central banks and monetary authorities.

A 2018 Markets Committee report titled Central Bank Digital Currencies introduces and defines CBDCs, assessing their potential implications for monetary policy and central bank operations.³³ It recommends further research on various aspects including interest rates, financial stability, and exchange rates. The report also warns against the risks of private digital tokens due to their volatility and lack of protection for investors and consumers, making them unsuitable for widespread use in payments.

Financial Stability Board  

The FSB’s mandate is to oversee and coordinate global financial regulation, identifying and addressing systemic risks to foster stability in the financial system. Recognizing the growing importance of digital assets, the FSB monitors developments and potential risks arising from their use and ensures that the digital asset market operates within established stability parameters.³⁴The FSB is broadly focused on the global regulatory framework for crypto-asset activities, and has not released any specific research or guidelines on CBDC development. The board’s membership includes a combination of G20 economies, other major economies, and international organizations.³⁵

International Organization for Standardization

The ISO fosters agreement on best practices and processes, and publishes standards and technical specifications (TS), including on the security aspects for digital currencies. ISO/TS 23526:2023 focuses on providing a security framework for the issuance and management of digital currencies in general, using cryptographic mechanisms standardized by ISO and other references. The document aims to integrate security aspects into the design of digital currency systems, as opposed to adding them later as an extra layer, to accommodate legacy infrastructures​.​³⁶ ISO does not have any explicit references or guidelines on CBDCs’ technical security, but instead has a broader focus on digital currencies overall.The following organizations below were added after the conference and depict wide-ranging efforts for interoperability occurring both in the private and public sector.

Society for Worldwide Interbank Financial Telecommunication

Building on its legacy in global financial messaging, the Society for Worldwide Interbank Financial Telecommunication (Swift) has introduced a model to enhance its existing infrastructure for cross-border payments, making them faster, more transparent, and cost-effective. Currently in beta testing, this model facilitates the connection of disparate national CBDC networks, enabling them to communicate and transact with one another while leveraging Swift’s existing infrastructure and security protocols—best thought of as a hub-and-spoke arrangement between various central banks with Swift at the center. This initiative is part of a broader Swift effort to prevent the fragmentation of the global payments landscape into “digital islands.”³⁷

The project began in March 2023, with over eighteen participants, including the Monetary Authority of Singapore and the Banque de France. Within a twelve-week period, they were able to process over 5,000 transactions. In September 2023, Swift further broadened the initiative by announcing the participation of three new central banks: the Hong Kong Monetary Authority, the Central Bank of Kazakhstan, and an additional, anonymous central bank.

Following the insights and successes from Phase 1, Swift released the takeaways from the Phase II CBDC sandbox project in March 2024, engaging thirty-eight central banks, commercial banks, and market infrastructures from around the globe. This project was designed to tackle complex use cases and assess solutions within a controlled sandbox environment. The second phase involved over 125 participants, who collectively executed more than 750 transactions. The sandbox was hosted on Kaleido, a Web3 platform for blockchain applications, where central banks were able to simulate CBDC transactions. Swift’s technology stack included a combination of the Corda, Hyperledger Fabric, and Hyperledger Besu platforms.³⁸

Phase II explored four new use cases. First, it demonstrated the automation of trade payments through CBDC networks and smart contracts, aiming to improve trade efficiency and minimize costs. Second, it evaluated two models for foreign exchange trade and settlement: an International Foreign Exchange Marketplace and a Continuous Linked Settlement (CLS) inspired system, both of which underscored the integration of CBDC trade and settlement. Third, the project focused on delivery versus payment (DvP), facilitating atomic DvP for tokenized bonds by ensuring interoperability between tokenization platforms and CBDC networks. Finally, it investigated mechanisms to mitigate liquidity fragmentation across various currencies and platforms, utilizing smart contracts and netting algorithms. The report established three foundational principles for interoperability: linking networks via ISO 20022 messaging, providing a unified point of access through Swift, and ensuring coexistence with traditional market infrastructures.³⁹

This model leverages Swift’s global reach and the existing network effects among financial institutions. It also offers flexibility for countries to maintain their own domestic CBDC infrastructure while ensuring global connectivity.

The Internet Engineering Task Force

The Internet Engineering Task Force (IETF) is deeply involved in the development of standards to enhance blockchain interoperability, focusing on the Secure Asset Transfer Protocol (SATP).⁴⁰ This protocol is designed to enable seamless transfers of digital assets across diverse distributed ledger technologies (DLTs) by leveraging a network of trusted gateways, akin to the role border gateway routers played in the early internet. Such an approach offers a scalable and ledger-agnostic solution for the rapidly evolving digital asset ecosystem.

SATP facilitates asset transfers through a structured process that includes three main stages: Transfer Initiation, Lock-Evidence Verification, and Commitment Establishment. The protocol ensures that digital assets are exclusively valid within one network at any given time, adopting a transfer mechanism that maintains the asset’s integrity and uniqueness.⁴¹ This is achieved through the strategic use of gateway endpoints which manage the transfer process, ensuring secure, transparent, and auditable transactions that adhere to Atomicity, Consistency, Isolation, and Durability (ACID) principles.⁴² The SATP framework comprises a comprehensive set of API endpoints and resources for the initiation and execution of asset transfers. It also aims to facilitate the integration and management of digital asset transactions, contributing to a more efficient and secure digital economy.

Hyperledger, an open-source community focused on blockchain technologies, plays a role in implementing and advancing SATP through projects like Hyperledger Cacti.⁴³ Cacti serves as a blockchain integration framework that enhances interoperability by allowing operations across multiple enterprise-grade blockchain networks. It achieves this through a pluggable architecture that supports Business Logic Plugins (BLP) and Ledger Connectors, enabling seamless interaction with various DLTs.

Global Blockchain Business Council

The GBBC has launched the fourth iteration of the Global Standards Mapping Initiative (GSMI 4.0), a comprehensive project designed to map and analyze the blockchain and digital assets landscape.⁴⁴ This initiative provides an extensive overview of regulatory developments across 230 jurisdictions and six global bodies, compiles a taxonomy of 350 terms and definitions, maps sixty-three technical standards bodies, and identifies more than 2,000 stakeholders in the blockchain ecosystem. Additionally, it offers access to 1,500+ courses from accredited educational institutions and includes four in-depth reports focusing on AI convergence, digital identity, supply chain, and sustainability, with a special spotlight on Brazil. GSMI 4.0, building on the work since 2020, aims to present a holistic view of global industry activity. The initiative’s resources, including an interactive map of blockchain and digital asset regulations and a series of reports, are available on the GSMI site (https://gbbcouncil.org/gsmi/). All materials produced by the GSMI are crowd-sourced and open access, ensuring they serve as a reliable information source for those interested in blockchain and digital assets.

The Internet Governance Forum

The Internet Governance Forum (IGF), primarily serves as a multistakeholder platform for policy dialogue on internet governance issues.⁴⁵ While not directly implementing or proposing specific financial systems, the IGF’s contribution lies in facilitating discussions, building consensus, and sharing best practices among stakeholders to influence the governance frameworks that underpin these technologies. First convened in 2006 by the United Nations secretary-general as a result of the World Summit on the Information Society (WSIS) held in 2003 and 2005, IGF gathers governments, the private sector, civil society, and technical communities to debate and share insights on enhancing internet security, ensuring digital privacy, fostering the digital economy, and expanding internet access.

Security, trust, and privacy are central to the IGF’s discussions on digital financial services. The forum encourages dialogue on how to protect against fraud, ensure the integrity of digital transactions, and safeguard users’ privacy and data in an increasingly digital global economy. Key areas of focus for the IGF also include the development of governance frameworks that protect user data and ensure a secure online environment. The forum also emphasizes the importance of digital inclusion, advocating for equitable access to the internet and digital services across different regions and communities. Through its annual meetings and intersessional work, the IGF indirectly supports the infrastructure and policies that impact the digital economy and financial inclusivity.

As the above section shows, there have been some efforts in creating standards for interoperability of digital assets. From feedback after the conference, we added the work of organizations such as Swift, IETF, GBBC, and IGF in standard creation. All the organizations listed above have led to important standard making efforts as described. However, these efforts are concentrated in specific areas and, as explored below, some crucial gaps exist that must be addressed in any evolving framework for standards.

Lessons learned from standard-setting efforts

As we evaluate the above models of governance, it is important to assess growth opportunities for the next stage of standard developments. In this section, we identify the critical learnings and gaps in standards development for interoperability of digital assets.

First, the rCBDC experimentation space has provided countries with some experience in building CBDCs, largely driven by domestic objectives. These experiments are at very different stages and use a range of private-sector vendors that are not subject to the same regulations due to a slower pace of crypto-asset regulation globally.

Second, within wCBDC experimentation, operating frameworks in technology and regulation have emerged, led by entities like the BIS Innovation Hub, the global financial-messaging cooperative Swift, and other private-sector players. However, they are constrained by the limited number of participating countries, furthering the issue of fragmentation in cross-border CBDCs. Current experimentation should incorporate standards-setting bodies (SSBs) such as FSB, BCBS, CPMI, ISO, and FATF as participants or observers to ensure better collaboration in the development of standards.

The membership structure of SSBs significantly influences the establishment of the goals and priorities of these institutions. Additionally, while emerging market economies often surpass developed economies in the development of digital infrastructure, including CBDCs, they sometimes find themselves underrepresented in setting norms and establishing benchmarks. This underrepresentation can result in an inadequate consideration of their technological advancements within the organization’s priorities.

Moreover, apart from the FATF, there seems to be a shortage of robust frameworks for assessing the global standards’ impact and implementation lags. To address the evolving landscape of financial technologies, it is imperative that new and non-financial SSBs be actively involved in these discussions, leveraging their expertise in technological matters and regulatory concerns.

Finally, some of the above frameworks have actively involved private sector participants in influencing standard development and creation. As intermediaries, the private sector has a crucial role in the entire lifecycle of standards, from actively influencing the creation of standards to ultimately adopting and implementing them.

Towards establishing standards

A transparent and collaborative multi-stakeholder approach is crucial for establishing frameworks for standards related to digital currencies. Standardization is driven by consultation processes with governments, industry specialists, consumers, regulators, and civil society organizations (CSOs). Historically, governments have provided the necessary legal and governance paradigms, in turn creating environments conducive to standard development and assimilation across multi-stakeholder groups. Central banking authorities, driven by the imperative of maintaining financial stability and directing monetary policy, contribute a nuanced perspective essential for shaping these standards. The private sector’s technological advancements and practical exposure play a critical role, not just in ideation, but in the tangible implementation of these standards, ensuring their practical efficacy. Lastly, the participation of CSOs provides reflection and inclusion of key social elements, serving as a check by society on the suitability of resulting standards.

The goal of this collaborative process is the establishment of a guiding framework for standards. To begin this process, we outlined the following themes for CBDC framework creation, which align with the G7 principles proposed in 2021, to identify the key themes necessary to begin building a framework. These key themes are governance; privacy and data protection; competition and consumer protection; global impact and sustainability; and transferability and accessibility. Through conversations at the conference and outreach afterward, we aimed to test the robustness of these themes through a survey (see Annex 2 for survey questions). Within each theme, we describe the areas of framework development needed for the establishment of standards. Conference attendees and survey respondents identified thematic overlaps and largely agreed with these themes, which have allowed us to set policy priorities for CBDC frameworks.

A thematic approach to CBDC and digital asset standard creation

• Governance
  Effective governance of CBDCs requires a nuanced approach, placing a focus on maintaining public policy objectives and central bank mandates including monetary and financial stability. To achieve this, the framework should involve the creation of dynamic mechanisms that not only monitor, but also proactively mitigate potential destabilizing effects. Stress-testing frameworks are essential tools for central banks to assess the comprehensive impact of CBDCs on economic stability. The principle of “do no harm” dictates that economic stability must be safeguarded at every stage of CBDC implementation, through concrete guidelines and risk assessments. In parallel, there is an imperative to establish legal and governance frameworks, offering clear definitions of regulatory benchmarks. Governance is the biggest challenge that emerges as we analyze existing efforts for standard setting, as each of the technical models discussed at the conference envisions an operator of an inherently global system. This is a complex and difficult endeavor, likely to have many challenges and phases.

• Privacy and Data Protection
  The protection of privacy and data involves specifying requirements for user data protection, consent, and disclosures.⁴⁶ Mechanisms for cross-border data transfer should be designed to navigate the complexities of various data protection laws across jurisdictions, ensuring compliance, individual privacy protections, and seamless transactions. Operational resilience and cybersecurity require technology standards for resilience against cyber, fraud, and operational risks, including security measures, encryption standards, and incident response protocols.⁴⁷ There was widespread agreement at the conference that piecemeal privacy protections will not be sufficient for the evolving financial system, and that comprehensive privacy protections will have to be regulated for. Additionally, all models of digital asset interoperability have highlighted the importance of built-in privacy frameworks.

• Competition and Consumer Protection
  CBDCs should coexist with existing means of payment and should operate in an open, secure, resilient, transparent, and competitive environment that promotes choice and diversity in payment options. Promoting fair competition and consumer protection requires the development of international standards for open-access APIs, ensuring competition and interoperability, thereby enhancing the overall efficiency of the CBDC ecosystem. It also is crucial to strike a balance between the demand for faster, more accessible payments and the necessity to combat illicit finance and protect the right to personal privacy. Establishing protocols for collaboration between CBDC operators and regulatory authorities, including law-abiding information sharing, joint investigations, and the development of responsive regulatory frameworks, is vital to address and mitigate potential risks associated with illicit finance.⁴⁸

• Global Impact and Sustainability
  Considering the global impact and sustainability of CBDCs, spillovers can begin to be addressed by establishing technical principles for cross-border transaction reporting and information sharing. Energy and environmental considerations are crucial; hence, international standards for the energy efficiency of CBDC infrastructure should be created, specifying benchmarks for sustainable operations. This has to be built into the next phase of testing and experimentation at the domestic and international levels.

• Transferability and Accessibility
  Ensuring interoperability with existing and future payment solutions is necessary to achieve the goal of transferability and accessibility. Technical standards should be formulated for integrating CBDCs with emerging digital payment solutions, and interoperability protocols should be specified to facilitate seamless transactions between CBDCs and other payment instruments. Additionally, for payments to and from the public sector, protocols for cross-border collaboration among central banks and organizations must be defined, addressing the international dimensions of CBDC design. Technical requirements for cross-jurisdictional compatibility and seamless integration into global financial systems should be established. Additionally, technical reporting requirements should be instituted to ensure transparency in the utilization of CBDCs for international development initiatives. A lot of recent experiments have shown “token agnosticism” or the ability to support a wide variety of tokens, demonstrating that builders do not want to be overly prescriptive and provide consumers with a range of options.

These key themes illuminate the areas of framework development needed to achieve comprehensive standards for CBDCs. These are not an exhaustive list, but provide primary recommendations as the public sector, policymakers, and the private sector engage in CBDC development.

Through conversations at the conference, it was evident that the G20 payments roadmap is used as an industry benchmark by the public and the private sector as they address modernization efforts. The identified themes speak to some of the priorities outlined by the G20, but seek to go beyond the existing priorities. As G20 targets evolve to include leveraging the digital asset ecosystem, the above described themes can provide crucial benchmarks for standards creation. As governments draft regulations and the private sector engages in experimentation, often along with the public sector, they must address these themes. It also is imperative that global standard-setting bodies address the current gaps in their guidance and participate in these discussions—especially in the development of cross-border flows. Through the conference, it also became clear that many of the standard setters in this space are working across overlapping areas of work—which makes the need for communication channels essential going forward. Crucially, as was repeatedly emphasized at the conference, interoperability is imperative as any standards for CBDCs or digital assets broadly are developed, so that future systems of money do not increase friction in the global payments landscape.

Conclusion

As countries worldwide explore CBDCs’ potential for an advanced and seamless digital infrastructure, a unified standard framework will become necessary to foster harmony, quality, and trustworthiness worldwide. Our working paper served as a call to action for both public and private stakeholders to actively engage in standard-setting efforts with the goal of ensuring interoperability and efficiency, as well as embedding democratic norms, values, and rules of law in CBDCs.  It also set some common definitions and understanding of the current state of international standards for those seeking to understand the current state of international standards and existing gaps and areas for improvement. As previously noted, standards ensuring consistency and seamless functionality are not static; they must be flexible enough to accommodate advancements in digital currency technology, shifts in economic priorities, and changing societal perspectives on digital assets.

To further global dialogue on these topics, The Digital Dollar Project and the Atlantic Council GeoEconomics Center hosted a first-of-its-kind convening, “Exploring Central Bank Digital Currency: Evaluating Challenges & Developing International Standards,” on November 27-29, 2023. This event brought together international policymakers, technologists, financial services providers, innovators, and consumer and privacy advocates to discuss the ongoing impact of emerging technologies on the future of money, its infrastructure, and global payment systems. The convening explored the complexities around digital currency, focusing on key technology and policy considerations, outlining areas for future public-private cooperation, and identifying potential pathways to standards that embed privacy protections, democratic values, and interoperability. Following the conference, this paper was revised to reflect what we learned from the conference, incorporate recent developments in international standard setting, and build on the framework offered in the working paper in consideration of future global interoperability standards efforts.

Ananya Kumar is the associate director for digital currencies at the GeoEconomics Center. She leads the center’s work on the future of money and does research on payments systems, central bank digital currencies, stablecoins, cryptocurrencies, and other digital assets.

Alisha Chhangani is a program assistant at the Atlantic Council’s GeoEconomics Center.

Jennifer Lassiter is the executive director of The Digital Dollar Project, working to shape the future of money through collaboration with stakeholders. Her experience includes roles at the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau.

Katherine Haar is the strategy director of The Digital Dollar Project and a digital currency specialist within Accenture’s Innovation Group.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

Digital Dollar Project

The Digital Dollar Project (DDP) encourages research and public discussion on the potential advantages and challenges of a digital dollar. DDP identifies options for a CBDC solution to help enhance monetary policy effectiveness and financial stability; provide needed scalability, security, and privacy in retail, wholesale, and international payments; and integrate with existing financial infrastructures, including US Federal Reserve-related projects.

Learn more

Issue Brief Nov 2, 2023

Asking the right questions: Can digital currency enable financial inclusion?

By Ananya Kumar

Cryptocurrencies and CBDCs have the potential to enhance financial inclusion. However, the lack of quantitative data makes it challenging to evaluate their impact. To assess their financial inclusion capacity, this paper builds a rubric for policymakers which includes layers of consideration.

Digital Currencies Economy & Business

New Atlanticist May 16, 2023

Not so fast: The case for a new SWIFT

By Josh Lipsky, Ananya Kumar

Imagine a network that combines both messaging and settlement to become a one-stop shop for international payments. It’s time for the US and its allies and partners to make that idea a reality.

Digital Currencies Economy & Business

Econographics Mar 14, 2024

CBDCs will need to work across borders. Here are the models exploring how to do it

By Ananya Kumar, Alisha Chhangani

These innovative models reflect a clear realization in the both the public and private sector— as CBDCs become a part of the financial landscape, there needs to be a mechanism to interchange them across borders.

Digital Currencies Economy & Business

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On March 26, Forward Defense Nonresident Senior Fellow Michael Groen coauthored an article for The Cipher Brief titled “Preparing for a Digital Battlefield: National Security and Cryptocurrency” about combatting illicit actors and nation states with blockchain intelligence. He emphasized that sanctions enforcement and counterterrorism success must include digital tools and techniques to investigate, seize, and disrupt transactions in evolving domains to protect national security.

Fellow

Michael Groen

Nonresident Senior Fellow

Forward Defense Scowcroft Center for Strategy and Security

Defense Policy Defense Technologies

Forward Defense, housed within the Scowcroft Center for Strategy and Security, generates ideas and connects stakeholders in the defense ecosystem to promote an enduring military advantage for the United States, its allies, and partners. Our work identifies the defense strategies, capabilities, and resources the United States needs to deter and, if necessary, prevail in future conflict.

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Central banks and international financial institutions are realizing that uneven and dispersed technological advancements in digital currencies could actually create further fragmentation of the financial system, deepen digital divides, and create systemic risks. This would undercut the premise of digital currencies, which are supposed to create more efficiency in the existing system. Fortunately, there are some new models of interoperability across borders. A range of policymakers are trying to solve this looming problem, here are the current options:

IMF’s XC Model 

The International Monetary Fund (IMF) interoperability model, known as the XC platform, proposes a global centralized ledger to simplify and streamline cross-border payments. It was released in November 2022 as a theoretical project which extends the concept of wholesale CBDCs by integrating commercial banks, payment providers, and central banks into a unified, streamlined platform. The model’s goal is to reduce transaction costs and settlement times.

The platform proposes a three-layer architecture: a settlement layer that acts as the primary ledger, a programming layer for executing smart contracts, and an information layer designed to protect personal data while ensuring compliance and facilitating currency controls as needed. Instead of adopting CBDCs, central banks can issue Certificates of Escrow (CE) for use exclusively on the XC platform. These certificates share characteristics with CBDCs and can later be converted into central bank reserves by financial institutions. According to the IMF, a key advantage of using CEs is that it allows countries to prioritize domestic use cases for their CBDC projects.
Importantly, the XC model is built to be broadly compatible with legacy systems, demanding relatively minimal technological adjustments from central banks. The XC model is a policy and regulatory framework, not a technical solution. It encourages countries to adopt consistent and supportive regulations for cross-border payments, potentially incorporating tokens and distributed ledger technologies (DLTs). However, in order for the model to work, it will need compatible legal and regulatory frameworks to effectively manage risks and ensure compliance across various jurisdictions. Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department at the IMF, further explained this point at our conference in November 2023.

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

BIS Unified Ledger

The BIS Universal Ledger interoperability model advocates for a shared global ledger that supports the issuance and transaction of both CBDCs and tokenized assets. Released just a day after the IMF updated its single ledger XC model, the BIS also aims to address the inefficiencies and silos present in the financial system by enabling safer transactions and atomic settlements within a transparent framework. In the report, the BIS emphasizes the role of trust in central bank digital currency projects in overcoming the limitations and fragmentation observed in current tokenization efforts.

Unlike the XC model which builds on blockchain solutions, the BIS’s unified ledger approach uses APIs (application programming interfaces) creating a more centralized system where transactions have to be processed and validated by authorized entities, such as central banks or designated financial institutions. Within this system, central bank money can circulate on a platform that is not owned and operated by the central bank, which can present risks. It also raises questions about the security, control, and integrity of central bank money when it is managed outside the traditional central banking systems.

The unified ledger model is already being piloted. In October 2023, South Korea launched a wholesale CBDC pilot project exploring BIS’ unified ledger concept. With technical support from the BIS, commercial banks in South Korea utilize a wholesale CBDC for interbank funds transfers and final settlements. These banks will then issue tokenized deposits as payment instruments accessible to the general public within the CBDC network, which is jointly managed by the Bank of Korea (BOK) and other financial institutions in the country. BOK has also joined forces with the BIS Innovation Hub’s Singapore center on “Project Mandala”, which aims to integrate jurisdiction-specific policies and regulatory requirements into a universal protocol for international transactions like foreign investments and payments. This initiative seeks to develop a compliance-by-design architecture for more efficient cross-border transfers for CBDCs and tokenized deposits.

SWIFT’s New Cross-Border Project

Building on its central role in global financial messaging, SWIFT’s innovation hub has introduced a model to enhance its existing infrastructure for cross-border payments, making them faster, more transparent, and cost-effective. Currently in beta testing, this model facilitates the connection of disparate domestic CBDC networks, enabling them to communicate and transact with one another while leveraging SWIFT’s existing infrastructure and security protocols. The current project is running out of the innovation hub and would require a big operational shift to be expanded to the whole SWIFT ecosystem. 

In September 2023, SWIFT announced the participation of three central banks—including the Hong Kong Monetary Authority, the Central Bank of Kazakhstan, and one anonymous central bank—in the next beta phase of its CBDC interoperability project. The project, which initially began in March 2023 with over eighteen participants including MAS and the Banque de France, has now expanded to include more than thirty entities and has already processed over 5,000 transactions in a twelve-week period. This solution leverages SWIFT’s global reach and the existing network effects among financial institutions. It also offers flexibility for countries to maintain their own domestic CBDC infrastructure, while ensuring global connectivity. The model is best thought of as a hub-and-spoke arrangement between various central banks with SWIFT at the center. 

Comparing the models 

The IMF’s XC Model, BIS Unified Ledger, and SWIFT’s New Cross-Border Project each propose innovative approaches to enhancing cross-border payments, especially focused on addressing fragmentation in the payments system. The models themselves are in various stages of development and reflect a spectrum of solutions which envision varied new architectures, novel tokens, and different roles for the private sector and the public sector. These models do not exist in a vacuum, and are accompanied by parallel efforts by central banks (such as Project CedarX Ubin + and Project Mariana) and private companies (such as the Regulated Liabilities Network) to address similar issues of cross-border fragmentation.

The XC Model and BIS Unified Ledger emphasize centralized architectures that focus on integrating existing financial structures with new technology. In contrast, SWIFT’s initiative seeks to adapt its role in traditional messaging infrastructure to connect CBDC networks, prioritizing interoperability and the reliability of established systems. All three frameworks are being designed to support both CBDCs and tokenized assets—creating one platform to exchange them all rather than separate networks. This “token agnosticism” reveals that these projects do not want to be overly prescriptive of the future financial system, and are in the early stages of development and testing. 

Each of these initiatives reflects a different aspect of the evolving landscape of global finance, geared towards a push towards greater efficiency, reduced costs, and enhanced security in cross-border transactions. A central question across these models is that of governance, as each of the proposed models envisions an operator of an inherently global system, a concept that is as blue-sky as it gets. This is going to prove difficult due to geopolitical disagreements, since the countries exploring CBDCs are neither aligned on the role of the existing global institutions at the center of the project, nor do they agree on a specific technological model. While these three models seem unified in their ultimate objective, these projects will have to get more specific about who governs, enforces, and creates the rules of the future of cross-border payments. The alternative is a replication of the existing frictions in our system—leading to less efficiency, higher cost, and a loss in trust in money. 

Despite differences, these models reflect a clear realization in the public and private sector that as CBDCs become a part of the financial landscape, there needs to be a mechanism to interchange them across borders. As our research shows, the solution set is varied, and leaves observers with looming questions related to the required standards of governance, regulatory frameworks, and consumer protection. There are no compelling answers yet, but as the cross-border models evolve to include proofs of concept and testing, they will have to find the balance between what is technologically feasible while being practically applicable across the globe.

Ananya Kumar is the associate director for digital currencies at the GeoEconomics Center. She leads the Center’s work on the future of money and does research on payments systems, central bank digital currencies, stablecoins, cryptocurrencies, and other digital assets.

Alisha Chhangani is a program assistant for the Atlantic Council GeoEconomics Center where she supports the center’s future of money work.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The Palestine Monetary Authority (PMA), created by the Oslo Accords and established in 1994, serves as the central bank for the Palestinian territories and supervises the thirteen Palestinian and foreign banks operating in the West Bank and Gaza. However, unlike most central banks around the world, the PMA does not issue currency or conduct monetary policy. The de facto currency in the Palestinian territories is the Israeli shekel. Despite the obvious economic linkages between Palestinian territories and Israel, free movement of money between them is restricted. Following Hamas’s takeover of Gaza in 2007, many Israeli banks cut off or reduced correspondent relationships with Palestinian banks due to concerns about money laundering and terrorist financing, pushing the Palestinian economy to an even more cash-based system. This, in addition to limited shekel clearing by Israel, leads to excess shekel holdings in Palestinian banks.

Ironically, cutting off the connections between Israeli and Palestinian banks due to concerns about money laundering and terrorist financing has created significant vulnerabilities that enable terrorist financing. Limited infrastructure (twenty-three ATMs per one hundred thousand people in 2021), limited access to banking, a lack of financial literacy, and inconsistent sources of income make the reliance on cash even more acute within the Palestinian territories, especially the West Bank. Cash can be anonymous and opaque, making it a preferred vehicle for illicit actors, including terrorists, to raise, use, and move money. 

Overreliance on cash also creates challenges for the general population as it is difficult to track, is not secure, and is difficult to hold in large quantities. With excess shekel holdings, Palestinian banks are unable to create capital, and bank profits are lowered by 20 percent. Due to blockades and checkpoints, cash needs to be physically moved into and out of Palestinian territories, which adds time, costs, and opportunities for corruption. Adding to this, concerns about money laundering and terrorist financing, especially in the West Bank, have prevented many Palestinians from opening and maintaining bank accounts, limiting their access to the international financial system and markets.

Even before the war, 80 percent of Palestinian residents were largely reliant on international aid and remittances, and this reliance will likely only increase due to the war. The financial plumbing that is required for the flow of money into the region is broken. 

Over time, Israel has tried to solve these issues. Before October 7, Israel’s goal was to keep the situation in the West Bank and Gaza at what it called “a low simmer.” The view was that Hamas was focused on governing the Gaza Strip, not undertaking terrorist attacks. And so, with the knowledge of the United States, Israel engaged in a policy intended to allowed Hamas to receive just enough financial support to keep things from boiling over. In 2016, the Israeli government entered a deal with Qatar to prevent a cash crunch in Palestinian territories. Every month, Qatar would send cash valued up to fifteen million dollars to Gaza, meant for public servant salaries and humanitarian aid, a portion of which was diverted to Hamas, which controlled the government and taxed residents. The Israeli and US governments have known about this, along with other sources of Hamas’s funding, for years before Hamas’s October 2023 attack. Over time, the territories’ increased reliance on cash exacerbated Hamas’s other extraction capabilities—cash is relatively untraceable and easy to siphon into seemingly legitimate businesses. In the past, aid money from Turkey, Iran, and Egypt flowed through Hamas, which continues to have direct and indirect sources of income in the region.

A better financial architecture is needed in the Palestinian territories to facilitate the movement of money for the needs of Palestinians, while preventing siphoning to terrorist groups such as Hamas and other illicit actors. While a range of financial improvements are needed, including expanding financial access and literacy, it also makes sense to look at digital finance as a tool of reconstruction, including the possibility of a shekel-backed stablecoin, based on blockchain technology.

What stablecoins can do

Unlike cash, a stablecoin can be traceable and provide transparency into money flows into the territories. As the name suggests, a shekel-backed stablecoin will need shekel reserves, which Palestinian banks have in abundance, but it will not rely on the movement of physical cash. Coupled with a strong process to stop money laundering and terrorist financing, the stablecoin could be held in digital wallets or physical cards. Such a stablecoin could overcome two big problems faced by Palestinians today. First, it would make direct access to money easier and less reliant on physical cash. Second, it would enable tracking and tracing of money to ensure that siphoning to Hamas and its affiliates can be prevented. It could still do this while ensuring the privacy of transactions and enabling trust in the system. A stablecoin would be faster, cheaper, and safer than the alternatives currently in use in Gaza.

A stablecoin alone will not solve the financial infrastructure and access issues of the Palestinian territories. Even before the war in Gaza, only 80 percent of the population had access to the internet, and updated broadband will be required to enable a mobile-based banking system. (Currently, only 3G access is allowed in Gaza and 2G in West Bank.) More than 80 percent of the population has access to a mobile phone, but just 2 percent has actually made a purchase with one. Electricity shortages were common before the war, and have gotten worse since. Access is not the only issue. Individuals with low and inconsistent streams of income will have to be encouraged to use a new system, and trust will have to be built into that system. Any new technology will have to come with financial literacy and training efforts. 

Fortunately, there are several existing examples of post-conflict reconstruction of payments systems. When Russia launched its full-scale invasion in 2022, Ukraine was already in discussions to build a central bank digital currency and further digitize its economy. Since February 2022, both private and public institutions have partnered to provide solutions to enable the movement of aid into Ukraine and build a domestic payments infrastructure to enable e-hryvnia, a hryvnia-backed stablecoin. A similar solution has been put to use in Afghanistan, which, with sanctions on the Taliban, has similar attributes to the situation in Gaza. In 2022, an afghani-backed stablecoin was distributed through HesabPay, using the Algorand blockchain. Research has found that direct aid distributed through HesabPay met humanitarian needs while preventing leakages to the Taliban and ensuring low costs.

A shekel-backed stablecoin could be part of the solution to an emerging humanitarian crisis, as well as a building block to the future of payments in Gaza and other war-torn territories.

This reorientation of the financial infrastructure in the Palestinian territories will require US and EU engagement with the PMA and Israel. It will also require working with regional partners, such as Qatar, the United Arab Emirates, Turkey, Saudi Arabia, and the broader Gulf Cooperation Council. It will involve collaboration with the intergovernmental Financial Action Task Force, which can continue its ongoing reviews and accreditation to keep the PMA compliant with regulations to combat money laundering and terrorist financing. As multilateral institutions provide aid and technical support to the Palestinian territories, they must prioritize projects like this one, which aims to be economically sustainable and ultimately productive. This could provide an opportunity for positive international collaboration that provides long-term benefits for the Palestinian territories and the broader region.

Ultimately, the success of a shekel-backed stablecoin or any other project will depend on a host of regulatory and policy improvements that the PMA and other institutions will be responsible for. A functional and sustainable Palestinian economy requires a functional payments system, and that will be to the benefit of the wider region.

Ananya Kumar is the associate director for digital currencies at the GeoEconomics Center. She leads the Center’s work on the future of money and does research on payments systems, central bank digital currencies, stablecoins, cryptocurrencies, and other digital assets.

The author thanks Kim Donovan and Jonathan Panikoff for their contributions to this piece. Ryan Murphy also contributed research.

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Thank you Chairman Hill, Ranking Member Lynch, and distinguished members of the subcommittee, for your leadership in holding this hearing and the honor of the invitation to testify. My name is Carole House. I am a Nonresident Senior Fellow at the Atlantic Council, an Executive in Residence at Terranet Ventures, and Chair the CFTC’s Technology Advisory Committee (TAC).

Most of my career has been at the intersection of national security, emerging technologies, and finance. I have served in the US Army, the Senate Homeland Security and Governmental Affairs Committee (HSGAC), and FinCEN. I also served two tours in the White House, including most recently at National Security Council (NSC) where I supported initiatives like the US Counter-Ransomware Strategy and President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets.

Innovation is core to the US economy, but we have learned that responsible innovation does not mean unchecked technological advancement without regard to implications for society, security, and democratic values. Cryptocurrency remains a serious risk for illicit finance. It is not inevitable for the sector to always be that way, but the unique aggregate features of crypto compounded by the existing state of compliance domestically and abroad have cultivated an environment ripe for exploitation by rogue nations and fraudsters. There are mitigating measures like transparency that are helping to combat illicit finance, but critical and timely steps are needed to make best use of them. The status quo has not yielded benefits for consumers, the evolving DeFi ecosystem, or US leadership.

Core to cryptocurrency’s appeal to both licit and illicit users is its ability to transfer significant value peer-to-peer, pseudonymously, immutably (or irreversibly), with global reach, with increased speed and cost efficiencies.¹

The absence or reduction of financial intermediaries and central points of control in more highly decentralized cryptocurrency systems also challenges clear lines of responsibility and accountability that are crucial in managing risks in high value, high risk sectors like finance.

A risk-mitigating feature of cryptocurrencies is their often public and transparent nature.² However, aside from concerns about consumer privacy, there are limitations to this transparency–ranging from off-chain data to the use of obfuscation methods like mixing, chain-hopping, and encryption.^{3 4} The same extent of transparency we see today is also not inevitably a part of these systems, given growing experimentation to integrate privacy enhancing technologies (PETs).

With these features and the lagging state of non-compliance in mind, cryptocurrency remains attractive to a full spectrum of illicit actors.

• It is a favored tool of cybercriminals and the predominant means of payment in sophisticated ransomware-as-a-service (RaaS) economies targeting critical infrastructure like energy and hospitals, extorting at least one billion dollars last year alone.

• The Biden Administration also reported that North Korea funds about half of its proliferation regime via cybercrime and cryptocurrency theft.⁵

• Despicable pig butchering and investment fraud schemes continue to harm consumers, with over nine billion dollars reported in fraud in 2022.⁶

• Cryptocurrency is one in a suite of tools used in many forms of transnational organized crime, including drug and human trafficking, as well as terrorism financing and sanctions evasion and offset.^{7 8 9 10}

There are also national security concerns implicated by diminished leadership in driving responsible financial and technology experimentation when adversarial nations have for years been pursuing alternative financial systems and developing building blocks for the next phase of the internet.

In light of the threat, policymakers must consider what to do about it. The CFTC TAC recent report on DeFi outlined opportunities for approaching accountability, such as building in compliance features at different layers across the DeFi tech stack, as well as considering ongoing infrastructure provider-focused regulations developing at DHS and Commerce. Despite some calls for equivalent privacy and neutrality treatment of DeFi as we give the internet, I encourage consideration that financial versus information activity carries different levels of risk. “Neutrality” is not an acceptable position to take toward illicit finance.

I’ll offer some opportunities to consider for combating crypto crime:

• Enhance regulatory and enforcement agencies’ capability to take action against egregious violators of our illicit finance framework, such as through prioritized funding for agencies and honing disruption authorities like FinCEN’s 9714 and 311 designations.

• Next, promote international action on combating illicit cryptocurrency activity in priority jurisdictions through diplomacy and capacity building.

• Third, enhance outcome-oriented public-private partnerships for information sharing and R&D.

• Finally, promote development of secure, trustworthy, and interoperable digital identity infrastructure.

Thank you again for the opportunity to speak on this issue, I look forward to your questions.

Fellow

Carole House

Nonresident Senior Fellow

GeoEconomics Center

Cybersecurity Digital Currencies

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Over the past twelve months, some of the largest central banks in the world have all made significant strides forward in their development of central bank digital currencies (CBDC) and fast payment systems. This includes the European Central Bank (ECB), the Bank of England, the Bank of Japan, the Reserve Bank of India, and the People’s Bank of China.

The Atlantic Council’s GeoEconomics Center’s research shows that in India, for example, testing on the digital rupee project is scaling up, reaching the milestone of more than one million transactions per day processed by commercial banks throughout the country. In the eurozone, the ECB is now in the preparation phase for its CBDC. On January 1, the bank laid out a detailed roadmap and benchmarks for the year ahead, including testing of a digital euro and working with a variety of private sector companies on key design features including offline payments and fraud prevention. Already, conversations among the central bankers in Germany, France, and Italy are centered around how high to set the limit on individual wallets and which commercial banks will work with the ECB. The reality is that central banks and legislatures across the Group of Twenty (G20) have moved past debating the theoretical merits and concerns with CBDCs, and instead are actually testing and piloting the technology to see what works and what doesn’t.

Interestingly, these new pilot programs are not limited to wholesale (bank-to-bank) or retail (everyday usage) CBDCs. In addition, central banks are investing in new forms of technology in an attempt to “future-proof” their currencies for the rise of blockchain, artificial intelligence, and quantum computing—all innovations that could impact how people use money for both legal and illicit purposes.

Unfortunately, the US Federal Reserve doesn’t seem to be on the same page. Right now, technological payments innovation inside the Eccles building is lagging behind its peers and competitors. One way to assess this is by the resources available within the organization for research and development. The People’s Bank of China, for example, has more than three hundred people dedicated to working on digital currency. Across the entire US Federal Reserve system, there are fewer than twenty. The Bank of England has an official joint task force between His Majesty’s Treasury and Parliament and a dedicated website to answer common questions. The innovation gap is not just on CBDCs. FedNow, the long-awaited interbank settlement system, has taken years longer than comparable systems in Europe, and take-up is limited in the early days.

Vice Chair of the Federal Reserve Michael Barr, speaking recently on Bloomberg’s Odd Lots podcast, said that it could take years to know if the FedNow system is working. But the future of money is not going to wait. Think of cross-border payments—an area clearly in need of an upgrade. The average cost of sending remittances internationally in 2022 was more than 6 percent, with major differences depending on the region. (It’s especially costly to send remittances to countries in sub-Saharan Africa, for example.) Meanwhile commercial banks often have to wait hours, and sometimes days, to settle large-scale transactions. In the end, many of these costs get passed on to consumers. So the idea that the system now is fine doesn’t align with reality—the financial payments architecture is old, creaky, and in need of a major upgrade.

Fed officials often have ready answers for why these innovations are slow going. Typically their answers include not seeing a strong use case at present and wariness about unknown consequences of changing the current system. It makes sense to not want to disrupt the currency that underpins the global economy. But the apparent belief of some inside the Fed and on Capitol Hill is that the dollar does not need to innovate. That is a miscalculation.

Instead of thinking about innovation defensively, the US government should drive payment innovation from a position of strength. As the issuer of the world’s reserve currency, the Fed has a unique opportunity to set standards and influence constructive developments on the future of payments. By using its influence at the International Monetary Fund, the G20, and the Committee on Payments and Markets Infrastructures, the United States can help set these standards. But the Fed, working with the US Treasury and other parts of the government, has to bring options and technological solutions to the table in order to influence the trajectory. Without its leadership, others will fill the vacuum.

As the GeoEconomics Center’s new dollar dominance monitor shows, there are new alternative financial plumbing systems—including China’s own version—expanding all over the world. Think of these systems like pipes being built. The pipes take a long time to construct, but once the water is turned on, change happens very quickly. If these cross-border systems are built without the United States—and the dollar—the way the dollar is used in trade, reserves, and especially sanctions enforcement could shift significantly.

While many are stepping in to fill the innovation gap, including the Bank for International Settlements, the ECB, and the Reserve Bank of India, none can substitute for the issuer of the world’s reserve currency.

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

What’s concerning about this approach from the Fed is that central bankers around the world are asking for the Fed’s help. Central bankers often privately ask some version of: “Where is the Fed on this?” On a range of issues from privacy to cybersecurity, the Fed’s leadership would be welcome and its guidance and technological expertise listened to, even if the United States doesn’t determine there’s a need for a specific kind of payments innovation in its own domestic system.

The United States could make progress quickly, if it wanted to. Researchers and universities across the country, including at the digital currency labs at the Massachusetts Institute of Technology and Stanford University, are doing fascinating work on how to build CBDCs safely and effectively. Major companies in the United States are similarly developing their own CBDC models. The United States is helping other countries build CBDCs with the talent of academia and the private sector—but the US central bank is not an active part of the collaboration. Meanwhile, the regional Feds, including the Federal Reserve Bank of New York, are doing important exploration on wholesale CBDCs, including Project Cedar, an experiment between the New York Fed and the Monetary Authority of Singapore. But it’s been close to a year since there has been a substantial update on the initiative. 

An explanation might be that the Fed is working on this, but it is doing so quietly. That would be welcome, but it’s not enough. In a politically polarized environment, the Fed’s lack of public communication has led to misinformation on what a possible digital dollar would do—just turn on the news to see it.

What will the future look like if nothing changes? In the absence of more US technological models and standards, a fractured system will be constructed with different designs, cybersecurity standards, and varied messaging systems. Instead of faster, cheaper, and safer, money will be more siloed but less secure. In 2024, the digital euro will have an enormous standard-setting effect as other countries adopt European solutions on the challenges of anonymity and offline payments. But even the euro will not be able to create a new international standard—the Fed is the one actor that could unify a fractured payments landscape.

Critics of CBDCs have been quick to say these tools don’t work or will not be effective. But how can anyone know this without pilot projects designed precisely to test and answer these kinds of questions? Obviously, some of the Fed’s peers are coming to a different conclusion after investing resources, time, and talent into exploring the future of money. Imagine passing judgment that artificial intelligence won’t impact the future of work before ever using ChatGPT. Once people get their hands on the innovation, their perception of what is and isn’t possible changes rapidly.

The thinking in Washington right now on payments innovation is to wait until after the November election. But the United States doesn’t have a year to waste. A year is an eternity in technology. The gap between the Fed and other major central banks is likely to widen through 2024, and the Fed will have to play catch-up. Between now and next January, Fed officials should do more to accelerate exploration efforts on all of their payment projects, including faster cross-border transfers and CBDCs.

If they don’t, the future of money may quickly pass them by.

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center and a former IMF advisor.

Ananya Kumar is the associate director of digital currencies at the Atlantic Council’s GeoEconomics Center.

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CBDCs may have various benefits, such as replacing cash in island economies, enhancing resilience in more advanced economies, and improving financial inclusion. The tokenization of financial assets, such as bonds issued on blockchains, opens doors for CBDCs to be used in wholesale forms of payment.

Efforts to enhance cross-border payments have also gained momentum. Sending funds across jurisdictions is still too expensive, slow, and limited in availability. Cross-border payments must be improved for the sake of users, inclusion, and business efficiency. The cost of inaction on this front may include fragmentation in capital flows and compliance with international standards, as well as diminished effectiveness of policies for monetary and financial stability.

While resources are allocated to near-term improvements, it is important to explore medium-term solutions that leverage new technologies. This could include infrastructure based on blockchain technology to facilitate settlement (not just clearing) of cross-border payments and to manage risks and information flows through programming of basic financial contracts and encryption. This infrastructure (“cross-border platforms”) could facilitate the exchange of CBDCs in wholesale or retail form, interface with traditional forms of money, provide FX conversion, and manage payment risks. The use cases could be both small- and large-value payments.

The role of the public sector in developing new platforms would be key. While the private sector is actively piloting and testing the transfer of on-chain financial assets, the public sector should actively investigate and establish desirable features to support policy objectives. These objectives encompass operational efficiency and stability; market contestability and integration; innovation; and applicability to both large- and small-value payments in the context of financial inclusion. Other areas of focus include effective monitoring; data integrity and privacy; implementation of domestic macro-financial policies; monetary sovereignty and financial stability; limited spillover effects; evenhandedness; and fair representation, among others.

Solid governance and oversight will also be needed for these infrastructures to ensure they are aligned with policy objectives and that the infrastructure and participants are compliant with rules and standards. Indeed, this will be key as trust in ensuring that compliance checks are appropriate is fundamental to safeguarding financial integrity. An important question is who will be responsible for the application of Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) measures and for monitoring compliance. Other challenges will include determining the jurisdictional domicile of the platform, ensuring coherence of legal requirements of participating jurisdictions, as well as addressing legal uncertainties including smart contracts, data protection, and roles and responsibilities of operating and oversight bodies.

There should be no presumption that platforms are necessarily desirable, nor of who should build and operate them—whether the public or private sector. To the extent the private sector is involved and pursues its own interests, platforms should still be designed to facilitate the payment and financial needs of the underserved, to the extent they are compliant with rules and standards.

New technologies like programmability and encryption offer new functionalities that could increase efficiencies and help develop new solutions and business models. Competition from purely private solutions (including stablecoins and crypto assets) pushes the public sector to improve infrastructures and services and to counter the forces of fragmentation that could undermine the International Monetary System. Collaboration among international institutions, central banks, and ministries of finance is crucial in providing guidance and setting design contours for cross-border platforms. The IMF is committed to playing its part in this collaborative effort.

Tobias Adrian is a guest contributor to the GeoEconomics Center and IMF Financial Counsellor and Director of the Monetary and Capital Markets Department.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Central bank digital currency (CBDC) is a digital version of cash issued by a central bank to be used either by individual consumers (retail CBDC, or rCBDC) or financial institutions (wholesale CBDC, or wCBDC). At the time of writing, more than one hundred central banks are pursuing CBDCs for a variety of motives: improving payments efficiency and upgrading existing financial infrastructure, increasing financial inclusion, and enhancing monetary policy transmission. CBDCs allow their developers unparalleled discretion in terms of their constituting features—inter alia, choice of design, accessibility, and programmability. CBDCs present unique opportunities and challenges for policymakers, regulators, market participants, and individuals, making this a transformational moment in the history of money.

International financial institutions (IFIs) have taken note of their member countries’ burgeoning interest in CBDCs. IFI mandates and responsibilities intersect with CBDCs in several important ways. First, CBDCs may present new financial-stability challenges. This brings CBDC-related developments under the purview of the International Monetary Fund (IMF). Second, CBDCs’ development potential (including financial inclusion)—a major force driving adoption in emerging markets and developing economies (EMDEs)—makes them relevant for the World Bank. Finally, the Bank for International Settlements(BIS), with its standard-setting committees, is a natural forum for discussion on issues related to technology and regulation around CBDC. Recognizing the intersection of CBDCs and their mandates, and spurred by the demands of member countries, these IFIs have been rapidly developing workstreams on CBDC.

Collectively, IFIs’ efforts constitute an emerging global governance architecture for CBDCs. But is that emerging architecture appropriate, effective, and sufficient to manage the global transition to digital money? This report is an attempt to answer this question, with a focus on three domains: financial stability, development and financial inclusion, and global payment systems. One chapter is dedicated to each of these issues. Each chapter considers the risks, challenges, and opportunities associated with CBDC development, and discusses the mandates, activities, and plans of the international financial institutions. Finally, recommendations are made in each area to improve the global governance architecture for CBDCs.

Greg Brownstein is a Bretton Woods 2.0 Fellow with the GeoEconomics Center.

Utsav Saksena is a Bretton Woods 2.0 Fellow with the GeoEconomics Center. He is also a Research Fellow (Macro-Finance) at the National Institute of Public Finance (NIPFP), an autonomous institute under the Ministry of Finance, Government of India.

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Flagship Event Tue, November 28, 2023 • 9:00 am ET

Exploring central bank digital currency: Evaluating challenges & developing international standards

This first-of-its-kind convening of leaders from international financial institutions, central banks, businesses, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

Digital Currencies Economy & Business International Financial Institutions

Over the past few years, the number of central bank digital currencies and other digital assets has grown exponentially. This growth speaks to the confidence that many people have in the interplay of technology finance and money that can offer cutting-edge transparency, speed and efficiency. But it has also resulted in new concerns, including how standards can be developed to create an even playing field for new entrants into the financial system, maintain privacy and security, and ensure that new systems are compatible with existing ones. This problem of “interoperability” needs to be solved, or else what may emerge is a world of digital asset “silos.”

The emerging and disparate marketplace of digital ledger technologies (DLTs) “is going to challenge our ability for a harmonized global solution,” explained Jennifer O’Rourke, executive director of innovation strategy at the Depository Trust and Clearing Corporation. “But the answer to that is going to be interoperability,” she added at a panel session of the Atlantic Council’s conference on central bank digital currency on November 28.

When it comes to the future of digital currencies, interoperability, which O’Rourke defined as “the sharing and the coordination of disparate data across multiple participants,” is top of mind for governments, financial institutions, and international organizations.

To examine the many technical, legal, and regulatory issues surrounding digital currency interoperability, O’Rourke was joined by Federico Grinberg, senior economist for the International Monetary Fund; Tony McLaughlin, head of emerging payments and business development at Citi; Tom Zschach, chief innovation officer at SWIFT; and Jordan Bleicher, senior advisor to the under secretary for domestic finance at the US Treasury Department.

Below are highlights from this discussion about the crucial role that interoperability will need to play in the future of digital currency, which was moderated by Ananya Kumar, an associate director of the Atlantic Council’s GeoEconomics Center.

Why is interoperability so important?

• Bleicher illustrated the importance of interoperability by outlining some of the alternatives. “One alternative would be a world of proliferating silos that can’t speak to each other. This would be a world of high transaction costs and limited gains from trade,” he said. On the other end of the spectrum, he said, is a “world of monopoly rents, limited competition, and general stagnation.” Interoperability, he said, “is a kind of middle path between these extremes.”
• Zschach spoke about how crucial interoperability is for new networks. “If you’re creating a new network and new digital asset” but have “no way to connect to what’s there already, then you’re going to build a digital island,” he said. “And you won’t drive adoption and you create even more fragmentation.”
• Grinberg warned that “if we let bridges and interlinking systems proliferate, that’s going to create a lot of inefficiencies,” as well as “create operational risks, and increase the attack surface of bridges and systems.”

Why is achieving interoperability so challenging?

• “We have to remember that DLT was created as the antithesis of regulated financial services and not in order to augment it,” said McLaughlin. “The first thing that you have to do if you want to apply DLT to the regulated spaces,” he said, is “to put a number of fundamental blockchain constructs into the garbage.”
• “The marketplace has already created distinct networks that right now are predominantly single asset networks,” said O’Rourke, “and we’ve got to figure out how we can connect those together.” She added that banks’ and market participants’ incentives cause them to find “localized solutions that are creating this fragmented marketplace.”
• “Where there are regulatory gaps or new standards that have to be developed,” said Bleicher, “we have existing institutions that we can leverage to make progress,” including the Group of Seven (G7), the Group of Twenty (G20), and the Financial Stability Board. “There’s much that needs to be done,” he said, “but we do have venues in place that we can use to advance some of this work.”

What should the approach toward interoperability look like?

• McLaughlin cautioned against allowing technology to lead the conversation on regulatory frameworks. “What really should be leading,” he said, “is a consensus about what kind of settlement venues we want to build.” Then, he said, “we can go and build something new.”
• O’Rourke emphasized the need for industry to address the outstanding problems surrounding interoperability and access standards “sooner rather than later,” because “there already are organizations and governments that are moving forward quickly,” and are “creating their own solutions without having these conversations.”
• “I think it’s very important to avoid the digital divide across countries,” said Grinberg. New technologies may be “difficult to set up from a legal regulatory standpoint” and will “require a lot of political capital to be adopted and to be aligned,” he said. “But we need to strive to make this work for the countries that are excluded or have more costly access to cross-border systems.”

Daniel Hojnacki is an assistant editor of editorial at the Atlantic Council.

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The post The future of digital currencies depends on interoperability. How can it be achieved? appeared first on Atlantic Council.

The post IMF Financial Counsellor and Director Tobias Adrian quoted by Ledger Insights on the IMF’s proposed XC platform appeared first on Atlantic Council.

Flagship Event Tue, November 28, 2023 • 9:00 am ET

Exploring central bank digital currency: Evaluating challenges & developing international standards

This first-of-its-kind convening of leaders from international financial institutions, central banks, businesses, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

Digital Currencies Economy & Business International Financial Institutions

With debt crises unfolding all over the world, a new effort is underway to deploy technology to improve lending to developing countries.

The project, announced Tuesday by Bank for International Settlements (BIS) Innovation Hub head Cecilia Skingsley at an Atlantic Council conference, will bring together the International Monetary Fund, World Bank, and BIS in an effort to “tokenize”—or apply blockchain technology to—World Bank development aid. The aim is for the technology to help speed up cross-border settlements and make development aid safer, protecting secure information.

The project may also make it easier to guarantee that the aid is fully compliant with regulations against money laundering and the financing of terrorism.

“Will [it] save a lot of money? Will it revolutionize the world? No, probably not,” Skingsley said at the conference on central bank digital currencies (CBDCs) hosted by the Atlantic Council’s GeoEconomics Center. “But I think it’s a very tangible way to actually put the technology to work.”

Below are more highlights from the conversation, moderated by Alice Fulwood of the Economist, which touched upon shaping the financial system for the public interest and rebutting arguments against CBDCs.

Meeting new demand

• Skingsley explained that global technological progress has increased the appetite for cross-border financial transactions that settle instantly, a solution offered by CBDCs. “It’s critical to get the right infrastructures in place” to facilitate that, she explained.
• With technological change happening “so fast,” driven largely by the private sector, central banks “need to pay attention,” Skingsley argued.
• “There are many technological ideas out there that have… potential,” she added. “If this is left unchecked, these technologies may develop into services used in our societies in a way that may not have the public interest as the first priority.”
• Designing a financial system for a digitized future will require grappling with questions around the protection of privacy, financial stability, geopolitics, and financial inclusion, Skingsley added. She also said that a new financial system should protect people’s right to choose how they spend money. “Cash should continue to play a role. People should have the option to use it if they want,” she argued.

Defying the doubters

• Skingsley pointed to the criticism that retail CBDCs—intended for use by households or companies—designed for domestic use don’t address any immediate needs, as they don’t tackle cross-border payments. But “if we dismiss CBDCs,” she argued, “we might be foregoing opportunities to improve the previous public good, which is money; and we could miss opportunities to provide better and cheaper services to people.”
• In response to those who argue that CBDCs present a threat to privacy and a risk that a country could institute social controls, Skingsley explained that privacy is “not something that we have that comes by chance” and that most countries already have legal protections in place that would cover financial privacy. “These mechanisms,” she said, “should be preserved.”
• She also noted that because privacy relates to the development and strength of democratic institutions, government officials—beyond central banks—should help ensure strong privacy regulations around CBDCs.
• When CBDC skeptics argue that the currency presents a risk to financial stability, Skingsley said she replies that the “train has already left the station” as digital bank runs already happen. She also argued that CBDCs wouldn’t make the problem worse, as—according to central banks—countries have the tools to counter bank runs.

Setting the standards

• Skingsley said that other, private-sector-led crypto projects are a “sort of wake-up call” that central banks cannot “just sit on their hands” anymore. “But that is not necessarily the same thing [as] to say that we need to rush things,” she said, adding that she thinks many countries are exploring CBDCs “at a good pace” and the paces of their transitions should vary.
• Looking back on many other historical innovations, she noted that the private sector led first, and then the public sector stepped in with needed laws, regulations, and foundations. “We need to think about the regulations and the international standards,” she argued.
• The Swedish banker put these efforts into three categories: The first is principles for financial market infrastructures; she explained there are already such legal and regulatory standards in place through the Basel Committee on Banking Supervision and the Financial Action Task Force.
• But moving forward, Skingsley added, countries should work together on two other categories: Setting standards related to payment-specific technologies—and how to operate them—as well as establishing cross-cutting technology standards.
• “It’s a really collective responsibility to make sure technology ultimately [serves] economically meaningful activities,” Skingsley concluded.

Katherine Walla is an associate director of editorial at the Atlantic Council.

Watch the full event

The post A newly announced blockchain-backed system could transform development lending appeared first on Atlantic Council.

Flagship Event Tue, November 28, 2023 • 9:00 am ET

Exploring central bank digital currency: Evaluating challenges & developing international standards

This first-of-its-kind convening of leaders from international financial institutions, central banks, businesses, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

Digital Currencies Economy & Business International Financial Institutions

With the current cross-border payments system, “we could end up in a fragmented world,” warned Tobias Adrian.

To avoid that future, which would pose a variety of financial risks, the world needs a “basic set of rules and governance that is truly multilateral and inclusive,” explained Adrian, director of the Monetary and Capital Markets Department at the International Monetary Fund (IMF).

Speaking Tuesday at an Atlantic Council conference on central bank digital currencies hosted by the Council’s GeoEconomics Center, Adrian explained that the current cross-border payments system—which manages financial transactions taking place across countries’ borders—is one of the “key pillars” of the international monetary system. But, he added, the system has an array of flaws. There are shortcomings in facilitating messaging and trust between countries, swiftly moving funds, and conducting quick regulatory checks such as those regarding anti-money laundering and countering the financing of terrorism (AML/CFT), or know your customer (KYC) policies.

And with “very rapid changes” taking place in cross-border payments, Adrian warned, countries are facing “macro-critical threats,” for example possibly losing their monetary sovereignty—or their ability to control their currencies—as more cross-border payments take place outside of regular banking systems.

But there are ways to connect payment activity, Adrian explained. One such way is the IMF’s proposed XC platform, which would create a global, unified ledger for cross-border payments. The platform would not only ensure that “payments get end to end, from entity to entity,” Adrian said in conversation with Bloomberg’s Allyson Versprill. It would also essentially make the movement of money “programmable” and help ensure that countries participating in the ledger have “high bars” for AML/CFT and KYC requirements.

A world of fragmentation

• Adrian noted that while the IMF can develop a concept like the XC platform, it is really up to its 190 member countries and the private sector to “actually build such things.”
• “Our ambition would be to have platforms that are truly multilateral” to ensure that messaging is done in a “fully inclusive way” around the world, Adrian said. Thus, the IMF is looking to ensure that countries can “come together on the standards” so that every country can be “at ease to settle on the platform together.”
• “There’s really an opportunity to have a more ambitious approach to cross-border payments,” Adrian said.
• Currently, there are projects among smaller groups of countries to establish faster cross-border payments including Project mBridge (between Thailand, Hong Kong, China, and the United Arab Emirates). In response to concerns that such projects contribute to fragmentation, Adrian said that they are actually “very important” for understanding what works to make cross-border payments easier. “The global community has really benefited from seeing those projects being rolled out,” he said.
• “Still, I do hope that we can get to a more ambitious, more multilateral approach,” he said. “Given the level of geopolitical fragmentation that we have seen around the world, that is certainly difficult, but I do think there’s an opportunity to… come together.”

The IMF’s role

• The IMF and other international financial institutions are looking to harness various technologies—including encryption, programmability, and tokenization—in improving cross-border payments.
• “Technology can help,” Adrian added, “but it goes beyond technology,” to helping build trust and set up legal systems or regulations to govern the international payments system.
• Adrian explained that the IMF is also assessing countries’ AML/CFT capacities and providing technical assistance to improve that capacity and their financial integrity—and thus help support the creation of a multilateral cross-border payments system.
• The IMF is also providing technical assistance to central banks, regulators, and finance ministries globally to help countries “think through policy questions” about central bank digital currencies, Adrian explained. Currently, the IMF is working on a handbook on CBDCs that gathers shared knowledge, lessons, and findings on CBDC projects.
• These measures are part of the IMF’s “role as a guardian of the international monetary system,” Adrian added, helping countries think through trade-offs and make well-measured policy choices.

Katherine Walla is an associate director of editorial at the Atlantic Council.

Watch the full event

The post The IMF’s multilateral, multipronged proposal to stop cross-border payments from fragmenting appeared first on Atlantic Council.

Flagship Event Tue, November 28, 2023 • 9:00 am ET

Exploring central bank digital currency: Evaluating challenges & developing international standards

This first-of-its-kind convening of leaders from international financial institutions, central banks, businesses, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

Digital Currencies Economy & Business International Financial Institutions

Event transcript

Uncorrected transcript: Check against delivery

Speaker

Tobias Adrian
Financial Counsellor and Director, Monetary and Capital Markets Department, International Monetary Fund

Moderator

Allyson Versprill
Crypto and Regulation Reporter, Bloomberg

TOBIAS ADRIAN: So let me talk about both CBDCs and multilateral payment platforms and it’s going to tie very closely to many of the themes of the earlier panels and, again, Cecilia’s remarks earlier this morning.

So what is the IMF doing in this space, and I would characterize it as doing really two things at the moment. So one is very much focused on CBDC and it is about support to our membership.

So we have 190 countries, and the agencies in those countries that are our members are essentially the central banks, the regulators, and the finance ministries in each of those countries. And an important part of what the IMF is doing is to provide technical assistance to those institutions to help build capacity and so we are working very closely with standard setters in order to help the membership.

We have recently been focused on CBDC so many countries have come to us to ask for help to think through policy questions about CBDC and, you know, this is very complementary to, I think, what the BIS is doing, which is more focused on the technological development and actually running projects, which is something we cannot do—we’re not set up to do. We are providing more, like, policy advice and helping countries to, like, take the right decisions, going forward.

The second thing we are doing is to think about policy frameworks going forward, so develop policies going forward. This, again, is done within the international context on the cross-border payment side in particular within the Financial Stability Board’s cross-border payments initiative, where different institutions have collaborated to think about sort of like the future of payment systems. And here the IMF comes in as we have this whole, like, role as a guardian of the international monetary system, right, and so that is covering payments as well.

So let me start with CBDC and then move to cross border. So in terms of CBDCs, there are many countries around the world that are exploring CBDC and even if they haven’t decided to go ahead with CBDC they’re sort of, like, either doing experiments or doing policy development. Again, this is done in close collaboration with the BIS, the IMF, and the World Bank as well.

So last month we put out a handbook or, rather, the first five chapters of a handbook on CBDCs and we’re planning to put out a total of twenty chapters and here we are listing so, like, the twenty chapters that we are planning to put out over the next two years that are really about the policy—the policy framework of central banks around CBDCs and the kind of decision process around CBDCs. So helping countries—our member countries to take the right decision, going forward.

So, you know, that in turn ties in to our work on cross-border payments and so here we have been working, you know, to really upgrade—to think about how to think about the evolution of the global payment system as one of the key pillars of the international monetary system.

So, you know, the international monetary system has the global payment system but also capital controls, exchange rate arrangements, and then the global financial safety net which—you know, central bank swap lines and IMF lending.

So those are the four pillars. So cross-border payments are an important pillar of the international monetary system. And that is sort of like the motivation, the secondary motivation, of the IMF, besides the technical assistance, to think about global payments.

So, you know, tying back to the discussions from earlier, when you think about cross-border payments, there are, you know, two big pillars. So one is about clearing. The second one is about settlement. And there are evolutions in both of these pillars that are very important.

The foundation for clearing is messaging. And so in messaging, we do have sort of like a very global, very multilateral messaging system that is pretty much used by every country and every financial institution around the world. The hurdles in clearing are oftentimes related to business process, legal challenges in AML/CFT challenges.

So we do see around the world that there’s still a lack of trust in oversight. So basically, in order to do cross-border payments, right, you have to trust that the institutions on the other side of those cross-border payments have all the processes in place to make sure that the payments that you are conducting are, you know, sound and legal. And so that is sort of like one big block of cost drivers. And, you know, technology can help, but it goes beyond technology, right? So it is—you know, technology can help. But, you know, processes, legal systems, and regulatory approaches are very important here.

On the settlement side, right—so this is actually making sure that payments actually get settled—they are the actual movements of funds. They’re the foreign-exchange components and, you know, the contracts that have to be honored. And this is where common infrastructures can help. So in settlement, we still see a lot of fragmentation of liquidity. There’s quite a bit of difference across different countries and, you know, assets. So there are payments and then there are assets that have settlement systems, and there’s certainly a need to improve on both of these fronts.

So I think in clearing there are many, many attempts for sort of like incremental fixes; so, for example, to get to better overlaps in terms of operating hours, when you think about the global economy, to improve standardization. And, of course, interlinking fast-payment systems, you know, is to a first order improving clearing.

Once you go from clearing to settlement, this is where platforms really become very key. And again, that’s a point that was raised already earlier today. You know, you do—at this point in time, you do need some, like, financial market infrastructures in order to get from clearing to settlement.

So when you look around the world and you look at sort of like what works well and what works less well, so among advanced economies, high-value payments. So wholesale payments work extremely well for both clearing and settlement, right? So, you know, settlement is in the trillions of dollars every day in the wholesale market. Among advanced economies, it’s very seamless. There are infrastructures that are super-efficient that have been operating for decades.

But once you go to low-value payment systems or you go outside of the advanced economies to low-income countries and emerging markets, you’re getting more and more [friction], right? And so I think a lot of the motivation of the international community—we had already mentioned the Group of Twenty, the BIS, the IMF, the World Bank, etc.—is really to, you know, go to those low-value payments and those low-income countries and emerging markets where there’s, you know, room for first-order improvement.

So, you know, why are we here together? You know, clearly there are very rapid changes in cross-border payments. And, you know, many countries are facing macro-critical threats from payments. And this, again, is where we have done a lot of work at the IMF, you know, to understand sort of, like, the vulnerabilities of countries relative to losing—or, the potential of losing monetary sovereignty due to cross-border payments that are outside of sort of like the regular banking systems.

So, you know, the way we think about that is that there’s the very, very big picture, international monetary system. I already talked about that. So this has a payment system component, but also the exchange, capital controls, and then the global financial safety net component. Then, from a country perspective, there’s the monetary and financial stability. So each country has to make sure that they have monetary sovereignty and both monetary and financial stability. And so the payment system is the foundation for both monetary and financial stability.

And then many countries are very much motivated by financial inclusion aspects as well. You know, in advanced economies, of course, financial inclusion is very broad. But in many emerging markets and developing economies, financial inclusion is relatively low. And there are big opportunities through enhancements of payments to increase financial inclusion and foster, you know, lending and capital market and economic activity more broadly.

So I think technology is providing opportunities to move ahead with these objectives. So a more inclusive international monetary system, a more stable monetary system. But there are also many risks, right? And so the goal of the fund and other international financial institutions is to really use those technologies for policy purposes, i.e., you know, employ all the greatness of encryption and programmability and tokenization in order to achieve policy objectives. And I think that is where the interesting work is going on at the moment.

So, the risks that we are seeing more concretely is that we could end up in a fragmented world, not just politically but also in a fragmented world in terms of the underlying types of payments, which ultimately, you know, underline capital market activity and broader economic activity. We could end up in a world where we have connected entities to some degree, but some entities and some countries that are excluded. And as a global and multilateral institution, we’re sort of aiming to, you know, provide a basic connectivity, a basic set of rules and governance that is truly multilateral and inclusive. So, I think that is—the ambition is to aim for innovation that is compatible with policy goals and that is inclusive relative to the broad membership of, say, the IMF.

So, let me—you know, oversimplifying a little bit—compare and contrast two models of payment connectivity that are being debated at the moment. So, the one is the interlinking of fast payment systems. And, you know, Cecilia explained quite a bit of that already. And that, you know, is extremely powerful, as she explains, right? So, you can have, like a central hub where these payment systems are being interlinked. And it can, in principle, provide a broad interconnectivity around the world. But, of course, to, you know, get to the settlement stage, you know, common platforms likely need it.

And so the way we look at the world is that there’s, you know, not one solution that solves all problems, so we really think that a multipronged approach is the right approach where you have a variety of possibilities of doing cross-border payments. So the platform model is connected to each of the networks, money is moved through the platform, it’s end to end, and it’s backed by escrowed money. In particular, what we have in mind are sort of like tokenized versions of central bank money. Firms would offer settlement services on a trusted, integrated, scalable, and widely accessible environment.

So, you know, we are working alongside BIS, BIS Innovation Hub. So in particular, the BIS proposed this concept of unified ledgers, which is very much aligned with the—with the second model. The BIS Innovation Hub is working on interlinking the fast-payments system, but it’s also working on many bridges which are platforms for cross-border clearing and settlement. The World Bank has various projects, particularly on interlinking. I mentioned already the FSB [Financial Stability Board], together with the CMPI [Committee on Payments and Market Infrastructures], led work on these cross-border payments platforms. And then, of course, there are all the private-sector initiatives that we already heard about.

So I want to talk about one particular version of these proposals, which is what we were thinking about, which we call the XC platform. And so, you know, it is really aiming at using new technologies in order to enhance cross-border payments in a fully policy-oriented way.

So there are three layers. There’s a settlement layer, so actually making sure that payments get end to end from entity to entity across borders. There’s a programming layer; i.e., while money in and of itself is not programmable, you can have programmable features that are built into a platform so that it can link into platforms. And then, importantly, there’s the information management, right? So what we are having in mind is that on the platform you have anonymity, but to get on the platform you have, you know, very high bars in terms of AML/CFT requirements, identity, etc.

So the information management, in turn, is closely tied to the AML/CFT and governance concerns. And you know, in many ways the settlement and programming is more advanced than this governance work, and this is where the technical assistance becomes so important; i.e., building capacity in all countries to upgrade identity, AML/CFT, and financial integrity more generally. So, you know, again, it’s the legal challenges to governance that are—that are, you know, really, really important, and where capacity building is so important.

To finish off, let me just point out that, you know, money has always been a partnership between the private sector and the public sector. When money was purely private it didn’t work all that well, so central banks were created as a backstop for commercial bank liabilities. But when you think about financial systems today, you know, 90 or 95 percent of monetary liabilities are private-sector liabilities, right? They are the deposits of banks. So how to calibrate the interaction between the public and the private sector is extremely important here. There are examples where central banks built systems that were not adopted or used by the private sector.

So, you know, having a very strong focus on what is the role in the private sector, what’s the role in the public sector is, you know, first order for cross-border payments, though it might vary across countries, right? So there are very different cultural differences across countries, different histories, different institutional setups. So it’s something we put a lot of care in and we do a lot of outreach to understand what the right balance is. So with that, let me turn to the next part.

ALLYSON VERSPRILL: Hi. My name is Allyson Versprill. I cover crypto regulation for Bloomberg News. Thanks for joining us for this later-in-the-afternoon panel.

So, during your discussion, you talked a lot about, you know, multilateral platforms potentially being a way to improve cross-border payments. You know, when you’re thinking about that, I mean, what has been sort of the biggest challenge? I think we see projects here and there kind of addressing these in smaller pockets with countries, but in terms of getting all of your members, 190 members on board, you know, what are the challenges that you’re running into?

TOBIAS ADRIAN: So that’s an excellent question. So, you know, let me first point out that, you know, the fund is not so like a very operational institution. It’s really more about governance. So when I talked about the platforms, this is really policy development. But it’s up to our membership and the private sector to actually build such things. And, again, the BIS Innovation Hub plays an important role in actually working on the technology side to build some versions of those platforms.

Our ambition would be to have platforms that are truly multilateral. So, for example, messaging is done in a fully inclusive way around the world. And I think as a multilateral institution, our ambition would be to have settlement also be, you know, truly multilateral. So the challenges are about the governance, right? It is about making sure that countries come together and agree on the standards related to integrity, identity, information sharing across borders that makes everybody at ease, to, you know, settle on the platform together.

And, you know, I think, you know, there is, of course, a regulatory body which is the CPMI, which plays a very important role in terms of developing regulations around these platforms. And we are playing an important role in terms of helping countries implement those regulations. But we think that there’s really an opportunity to have a more ambitious approach to cross-border payments that is linked to such platforms.

ALLYSON VERSPRILL: And how difficult does that sort of standard-setting policymaking become when you have, you know, already different countries maybe moving at different paces, some kind of lagging behind? You know, how do you get to some sort of global rules?

TOBIAS ADRIAN: Yeah. So it’s a slow process. So I think this morning on the panel somebody said that, you know, to get CLS started, which is a payments platform for wholesale payments for a subset of countries, you know, took many, many years. So, ideally, we would move more quickly. But, you know, these international financial institutions, such as the IMF, I think can be helpful in terms of getting to consensus about how we should be going as a global community to, you know, upgrade global payments.

ALLYSON VERSPRILL: And in terms of leveraging new technologies, I mean, what are you seeing really being used at this point? Or where do you see kind of the long-term timeline on how some of these technologies can be used?

TOBIAS ADRIAN: Right. Yeah, so I think in the—in the shorter term, the interlinking of fast payment systems is a very achievable and very important step. And I think that’s a significant improvement, but it’s not in and of itself sort of, like, using new technologies, right? So the power of encryption, and programmability, and tokenization. So those are the three technological improvements that we’re seeing.

So in our view, you know, getting two cross-border payment systems that are incorporating all three, so tokenization, encryption, and programmability; that would be the more longer-run goal.

ALLYSON VERSPRILL: And, you know, I wanted to go over some of the projects we’ve seen already to try to improve cross-border payments. We have the mBridge Project, which is China, Thailand, Hong Kong, and the UAE. Then there’s Project Dunbar, which is Australia, Malaysia, Singapore, South Africa.

You know, you talked a little bit about some of the risks in fragmentation. Do you think when you have these projects that just involve kind of, you know, some subsets of countries does that increase the danger of maybe having more—a fragmented global payment system or what can we learn from those projects and take forward?

TOBIAS ADRIAN: The projects are very important in terms of understanding so, like, what works and, you know, they started off as technological projects but I think over time we have understood that the governance is so important—the legal frameworks, the institutional capacity across countries, extremely first order. Business processes are extremely important.

So I think, you know, the global community has really benefited from seeing those projects being rolled out and there are more and more of these projects that are starting. Still, I do hope that we can get to a more ambitious, more multilateral approach at some point that, you know, can benefit countries more broadly, which is really the mission of the IMF is really to have this broad, multilateral approach.

You know, given the level of fragmentation, the geopolitical fragmentation that we have seen around the world, you know, that is certainly difficult. But I do think there’s an opportunity to actually come together and to agree on, you know, improving cross-border payments as foundation of financial systems, banking systems more broadly.

So I think it’s—while it is ambitious, I think it’s possible and it is very important for the world.

ALLYSON VERSPRILL: And when you’re also thinking about the global payment system and some of maybe, you know, these different projects or countries moving forward how do you ensure that, you know, different systems aren’t being set up to evade, you know, maybe AML [antimony laundering] or KYC [know your customer] requirements or sanctions or things like that? How do you think about that?

TOBIAS ADRIAN: Yeah. So globally there are mechanisms to enforce AML/CFT [countering of financing terrorism] so FATF certifications are particularly important here. Within our FSAPs—our financial sector assessment programs—we also have an AML/CFT component where we are assessing the institutional capacity of countries and we are providing technical assistance to help countries build the capacity to do AML/CFT around the world.

It is difficult and it is challenging. You know, when I moved to the IMF seven years ago and I’m reflecting sort of, like, on what I’ve learned it’s really, you know, the institution capacity is so crucial for economic activity, for economic development. And, you know, technology can help but it doesn’t solve institutional weakness, weakness of legal systems, of enforcement, etc.

So it is hard work but multilateral institutions such as the IMF or FATF or the FSB really are there to help countries implement AML/CFT requirements, broader financial integrity requirements, and to assess how far they are and where they have to go.

Of course, that is complemented by enforcement mechanisms through, you know, law enforcement and, you know, courts around the world. So, you know, there are no silver bullets, unfortunately. But I do think infrastructure can be the basis for providing strong incentives for countries to sort out upgrade identity, KYC, AML/CFT in order to get to higher standards of financial integrity.

ALLYSON VERSPRILL: And so this question, I mean, during your presentation you mentioned that a lot of this will have to involve both the public sector and the private sector. Can you maybe elaborate on the role you envision the private sector playing in all of this?

TOBIAS ADRIAN: Yeah, absolutely. So, you know, the financial system is run by the private sector. And the public sector is providing backstops, is providing oversight, and is providing regulations. But, ultimately, we need to create a financial sector that helps economic activity, that improves economic efficiency, financial inclusion. And so it’s the interplay between policies and regulations and private-sector initiatives that are going to lead to success, right?

So, you know, these are processes that evolve over time. And I think, when you look, you know, in cross-border payment space at platforms that are very successful, these tend to be public-private partnerships that have come to governance mechanisms and regulatory oversight that has worked for the benefits of countries for, you know, payments purposes, which, again, is the basis for capital markets and economic activity.

ALLYSON VERSPRILL: And what happens, I mean, if there are countries that, you know, decide they’re not going to maybe invest in exploring these new technologies or moving forward in this way? I mean, what happens? I mean, what is your prediction on those that fall behind?

TOBIAS ADRIAN: So, you know, payments are multipronged, right? I mean, if I want to pay you for, you know, some service or so, I can do that in many different ways today, right? And I don’t think we want to think of cross-border payments as having one solution that solves our problems. I think there will always be a multitude of approaches. And different countries will make different choices, right? So, you know, we don’t want to think about, you know, one thing that works for everybody. So it is multipronged.

So, you know, the incentive of participating in platforms are net-worth effects, right? It is that the more countries and the more institutions participate, the higher efficiency can be achieved. And that’s a very powerful economic force. Now, it does require that you fulfill these requirements to be participating on the platform. And, you know, that requires that you have the legal, institutional, and regulatory frameworks, you know, to participate. And I think, you know, some countries may not meet that. Some institutions may not meet that. But, you know, being part of the platform or the platforms in principle provides incentives to improve the institutional environment.

ALLYSON VERSPRILL: And I guess, to switch gears a little bit here, I know you started with CBDCs. I guess I will switch and end with CBDCs. Let’s talk about, you know, CBDCs versus stablecoins. And, you know, I’ve heard some chatter of, well, if you just regulate stablecoins, then that can, you know, kind of have the advantages of having a CBDC. Especially, you know, the U.S. right now seems—there’s some political headwinds on the CBDC front.

Can you talk a little bit about that? I mean, does the—do those serve essentially the same function? What are kind of the benefits, the risks, of either one of those?

TOBIAS ADRIAN: Yeah. So, you know, I think there are two important dimensions to stable clients. So the first one is about technology. So do you use DLT and encryption for payments? And, you know, in principle you can use those without stablecoins or CBDC, right? So a number of countries are moving towards exploring tokenization of commercial bank deposits. And I think, again, this morning we heard some discussion around that. So, you know, new technologies could in principle be used by banks, as well as by, say, stablecoin providers, and potentially by central banks. There are many hurdles, many regulatory and legal hurdles at the moment to do so. But there’s certainly a push by countries to understand how to do that.

The second aspect to stablecoins is that, you know, they have some features either more like money market funds or more like narrow banks. So, you know, the money market fund version of stablecoins holds its assets in marketable securities, such as treasury bills are so, while the narrow banking version would hold it in either commercial bank deposits or in central bank reserves. You know, so the question for countries is whether they allow stablecoin providers to actually hold reserves in central bank money, which, you know, many countries don’t allow at the moment, but are exploring. And whether, you know, stablecoins that are more like money market funds, where the stability of the liability is not guaranteed because the asset is fluctuating, you know, whether that is considered to be a stablecoin.

So, I think, you know, what is the reserve is one question and what’s the technology in terms of having more of a tokenized and wallet-based payment system, as opposed to an account-based payment system? So those are, I think, the two economic questions. You know, countries are exploring, you know, phasing in CBDC as well as tokenized deposits, as well as stablecoins, so that you can think of that as upgrading not just one of those things but, so, like the entire ecosystem of the financial system. You know, where countries are coming out could be very different across jurisdictions. And, again, we see our role at the IMF not so much as telling countries what the right pathway forward is, but to help them make the right choices and take the right decisions in terms of thinking through tradeoffs and making policy choices.

ALLYSON VERSPRILL: Well, in terms of countries that are moving forward with CBDC, are there common threads on the ones that are kind of moving fastest? Or what are the use cases that are cropping up?

TOBIAS ADRIAN: Yeah, so I think when you think of the CBDCs that are already in existence, you know, three of those in the Caribbean. And the use case is very much motivated by the catastrophic risk of hurricanes, right? Where it’s extremely difficult to get cash into—across, you know, the hundreds of islands. And so having electronic money that can be used for transactions but also potentially for payments, for transfer payments, is extremely powerful. I think this is why we have seen quite a bit of movement in the Caribbean there.

I think the second important use case is, again, what Cecilia was talking about earlier today, which is about the disappearance of cash, right? As we’re moving to a digital world, cash usage is disappearing. And countries would like to have some ability for individuals or corporations to actually hold central bank liabilities. Even if 95 percent of monetary liabilities are private sector liabilities, i.e., deposits, you know, as a central bank you would like to be able to issue liabilities that people can hold in principle. And if there’s no more cash, no more physical cash, you know, there’s a strong case for some form of CBDC. Though, you know, countries could take another approach here, right, which is to allow banks to issue, you know, tokenized forms of money, but to have a very strong backing by central banks, so to exchange tokenized private money against tokenized central bank money in wholesale CBDCs.

So I don’t think we will necessarily see retail CBDC everywhere, but we may see, you know, more motivation to wholesale CBDC, perhaps combined with tokenization of deposits—though, again, you know, that is—you know, from a legal perspective, that is possible in some countries but in other countries it’s extremely, extremely challenging to tokenize deposits. So, again, there’s a lot of difference across legal and regulatory frameworks across different countries. So I would think that we will see some movement in this direction, but it’s not going to be the same across the world.

And I think the third use case for CBDC is financial inclusion. So, you know, in advanced economies, you know, the financial sector assets relative to GDP can be, you know, 300, 400, 500 percent or so. In many low-income countries and emerging markets, it’s like 20 or 30 or 50 percent. So the potential for financial inclusion is tremendous, and extending payment systems is a first step towards credit and other financial services. And we have seen in some countries tremendous inclusion benefits through broad access to payment systems.

ALLYSON VERSPRILL: And I also wanted to talk—I mean, one of the things you mentioned in your—in your speech was the CBDC handbook, and in that I thought there was an interesting point about, you know, one of the potential risks being larger and more volatile gross capital flows. Can you speak a little bit to that and how countries should be thinking about that as they’re designing CBDCs?

TOBIAS ADRIAN: Yeah. So it goes back to sort of like my main theme, which is about institutional fragility, right?

So, you know, the vast majority of countries does have some form of capital controls, right? And that is a way to make sure that capital isn’t leaving the country and to make sure that monetary sovereignty is still staying in the country. So a digital form of money from an individual perspective might be very rational, right? So you might want to hold your savings in foreign currency, and that could be that much easier in a digital form. But of course, from the point of view of the government, it does undermine your ability to conduct monetary policy.

And in our assessment for some emerging markets, you know, that is of macro-critical magnitude. So dollarization has always been a challenge for emerging markets, but it can be more of a challenge in [a] digital age. So, you know, this is, again, where so, like, policy objectives and individual objectives might not be fully aligned, but where policy frameworks are extremely important. So, as we’re thinking about [an] upgrade in cross-border payments, we also have to think about the role of, you know, capital controls in the world, which, you know, given institutional weaknesses in countries, is an important element to make sure that macroeconomic stability is—can be managed.

ALLYSON VERSPRILL: Well, and it looks like with that we are running up on the end of our time here. I’m sure these are going to be topics that we’re discussing for years to come, so I’m sure there will be plenty to learn from you in the future. But thank you for joining me.

TOBIAS ADRIAN: Thank you.

Watch the full event

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Flagship Event Tue, November 28, 2023 • 9:00 am ET

Exploring central bank digital currency: Evaluating challenges & developing international standards

This first-of-its-kind convening of leaders from international financial institutions, central banks, businesses, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

Digital Currencies Economy & Business International Financial Institutions

Event transcript

Uncorrected transcript: Check against delivery

Speaker

Cecilia Skingsley
Head, BIS Innovation Hub, Bank for International Settlements

Moderator

Alice Fulwood
Wall Street Correspondent, the Economist

CECILIA SKINGSLEY: So it’s a great honor to be here, to speak at this fantastic conference about the subject of innovation and the possibilities that central bank digital currencies can provide. Thanks to Josh Lipsky for sending me the invitation. And hello, everybody that participates online.

So I hope to contribute to this discussion along two dimensions. First, I’d like to tell you why I thoroughly believe that the public sector must focus on innovation. And, second, coming more to the topic of the conference, I’d like to lay out some of my thoughts around what this concept, central bank digital currencies, can and cannot do. And your task, or our all task, [is] to develop international standards for them.

Now, I’m a great fan of history. But I also know that we can really only call a moment historic in hindsight. But still, I’m taking the risk of saying I think we’re going through really an inflection point in history, one of these moments where the way we think about certain topics [is] changing in fundamental ways. Technological progress increases humankind’s appetite for better goods and services and, in the example of money and payments, this means the appetite for transactions available 24/7 to settle instantly and be generally more available and efficient domestically, but also, importantly, across borders. And it’s critical to get the right infrastructures in place to facilitate that.

I think it’s also fair to say that technological change is so fast and foundational that it alters some core concepts in how we think of the financial system. So here I think about the very notion of money as a social and institutional construct. We accept money, paper money, in our accounts today because we expect that other people will accept it tomorrow as well. And this is a trust that hasn’t come by itself. It’s based on the institutional arrangements that have evolved over generations and have central banks working at the core of it.

Sometimes you can hear claims, sometimes within the tech industry, sometimes from without, that they can replace this framework of trust and functionality with algorithms and encryption. I think it’s fair to say that the practical results have been mostly unconvincing so far in the sense that all of us, almost, still prefer fiat money to pay for our shopping and our bills. But I think it’s also fair that we need to pay attention.

There are many technological ideas out there that have the power and the willpower that there’s a lot of potential. And two, if this is left unchecked, these technologies may develop into services used in our societies in a way that may not have the public interest as a first priority.

I think very much of money as a public good. It really [sits] there—up there with the military defense to protect us and the law and order also to protect us in a society. It’s a clever solution to make our need—to make economic value portable. And traditionally across the world through a long history of hard-earned lessons, the responsibility has been assigned to central banks to make sure that the money that is being offered meets criteria, such [as] being a stable store of value and being an efficient medium of exchange.

And central banks are, you could say, monopolists in the provision of money as a public good. I think about it as a starting point, because it’s really the starting point of an ecosystem. I think it should stay like that. But it’s important that central banks, together with the private sector, think about how do we make sure it works and it meets the needs of the future in the sense that we’re all going in a more digitalized way. And this is not a time to become complacent.

There is a lot of heated debate around these questions. I think it makes sense, and I welcome the discussion, because it raises very fundamental questions on how we think about, on one hand, the state and the private sector. But the acceleration of the digitalization of our society is both good and bad. It brings new possibilities, but it also brings reasons for concern. And in saying that I like history, I like to paraphrase what the French politician George Clemenceau once said about war and generals, which is that money is too important to be left a matter only to central bankers.

So when it comes to rebuilding the current but also possibly designing a future financial system, we will have to grapple with many complicated questions. It’s about protecting people’s privacy, choice, financial inclusion, stability, innovation, and also geopolitics, just to name a few.

I don’t pretend to have all the answers, but I am absolutely convinced that we need to have the debate to reach some deliberate answers. I think central banks should be a part of that discussion as the ultimate trustees of the monetary system. Investigate, explore what the money of the future will look like.

I’m also convinced that the current infrastructures in the financial system need to be upgraded to handle all these new kinds of demands that we see around us. Public policy objectives, such as protecting what we call the singleness of money, financial inclusion, again, and efficiency, again, resilience, they need to be met. And, that said, I acknowledge the fact that different countries with their different currencies approach this in a different way. A starting point you have in a particular country and the pace of transition vary and also the ambitions vary from the industry and from the central bank and from the legislators.

And that’s fine. We are different as human beings. Our societies are different. We approach things in a different way, and the fact that we see different pace in different world—in different parts of the world makes a lot of sense.

Just to give you one example, some countries trust the private sector to deliver greatly on what I would call more public policy objectives. But others, on the other hand, they have very different approaches and take a much more hands-on approach.

Let’s go into the CBDC world and—but before I do that let me say a few words about cash. The role that cash plays in our society is also being disrupted by technology both from incumbents and new players, and my firm belief is that I think cash should continue to play a role. People should have the option to use it if they want.

Coming from Sweden, one of the, I would say, most cashless societies in the world I see a very clear writing on the wall. Cash usage is rapidly going down and the network effects that used to be very favorable for cash nowadays goes against it.

Sometimes you can hear the scenario of a cashless society that there’s some sort of conspiracy led by banks and credit card companies forcing people out of cash. But I think this is—the reality is actually more boring. We just see a behavior shift towards digitalization and dematerialization, and speaking from my own experience once you have stopped using cash you really don’t go back because the convenience of digital payments is so powerful.

But it’s not the same. Again, it’s in every country and there are many social, economic, and development dynamics around it. But the trend is clear. It’s going, roughly, in the same direction everywhere.

So I would say that policymakers need to think very carefully about what they want to do. This is one of those situations where you have to think quite for a long time. . . Think about the structure that reflects societal preferences and work over time. Ensuring access to and then protecting the right to use cash is a policy decision and requires specific action. . . Taking those decisions, protecting societal preferences, doesn’t happen by itself. It takes work from our elected politicians.

And that brings me to CBDCs, the main topic of this conference. CBDC refers to money issued in a digital form by the central bank for use amongst either financial institutions only—that’s what we typically call wholesale—or available for public such as household and companies and then we call it retail.

So I’ll talk a bit about the retail CBDC in a domestic context and then I’ll expand the thoughts around the wholesale CBDC and what that could mean. Again, there’s a lot of discussion around this and there’s a lot of opinions so let me take just a few minutes to discuss some common statements when it comes to retail CBDC for domestic purposes.

It is a solution looking for a problem. Why should there be such thing in the first place? Things are just fine, and I can often hear people in the financial sector making us this argument. Now, let’s stop here for a while and think about is there any industry except, perhaps, the financial industry that would get away with that kind of statement.

Think about the pharmaceutical industry saying nope, that’s it. No more research. This is good as it is. We don’t—we don’t need any new drugs. You will have to go with the ones that we have. Or the car industry saying no, this is it. You know, no more safety improvements and no more climate improvements.

And I would also claim that things are not fantastic when it comes to payments. They are often opaque, they’re slow, and they’re expensive, and I would claim that innovation—and I think about retail CBDC as not only having the access but I think about it as a possible new infrastructure. It takes us to new places and could open up possibilities that is not obvious when you first venture down that avenue.

Another example from history that I like, from where I come in Sweden there is a phone company from Ericsson. They’ve been around for, I think, more than one hundred years. And in 1989, they were trying to develop something called wireless headsets. Before, you know, we were all dependent on headsets with cord. And they invented a technology that we now all know called Bluetooth. I think I have a picture of that. Yes, that’s the example. They were not trying to stream wirelessly from a tablet to a TV, like we do now, or have any fancy wireless speakers around the house or, as this example, in a car. They were not thinking about wearables, as we do—I have one here—power meters for bikes, or the Internet of Things.

All these things became possible after the basic technology of Bluetooth was developed. And someone back in 1980s could have said: What’s the problem with wires? It works really well. And Bluetooth, I’m afraid, may not ever have been invented. So similarly, if we dismiss CBDCs as a structure and a service because we don’t think that they address any immediate needs, I think we might be foregoing opportunities to improve the precious public good, which is money, and we could miss opportunities to provide better and cheaper services to people.

The next thing I wish to discuss, and this is an accusation often hurled at CBDCs, that this is a threat against privacy and an instrument for social controls. So technology, we know, can be used for good but also misused. And many people I think are rightly worried about how much privacy we’re losing in our societies nowadays because of technology, and how much our lives are already being monitored through our phones. So I think that sense of vulnerability certainly influenced the debate about privacy and financial innovations.

But let me remind you that privacy is not something that we have that comes by chance. There is a legal framework around these things as well. And our banks, they know exactly what we spend in everything, where, and how. But this information is protected by robust legal frameworks in most countries. So I think about these mechanisms, and they should be preserved and, if those countries decide to launch a retail CBDC, should follow the same framework. But it’s not enough to just talk or even legislate about it. We need to have the right sort of technologies as well.

And at the BIS Innovation Hub, which I lead, we are trying to walk the talk and we are experimenting with privacy-enhancing technologies. We have a project called Polaris, which is looking into this. And we will later in the week present our conclusions from another project called Tourbillon, which proposes new privacy solutions for retail CBDC. Let me also point out that offering a CBDC for those countries who choose to do that, it should be seen as an offer. It provides more alternatives. And those of us who are trained economists, we know that choices, more choices, enhance welfare.

It should not be something that should be offered—that should be forced on individuals, but more as a possibility. If you’re super happy with using cash, if you’re super happy with using your cards, you don’t have to do anything. You can just carry on using those things. And privacy is a social and legal construct which correlates with the developments and the strength of democratic institutions of each country. So this is not just a question about the central bank. This is something much bigger. And it should actually be a much broader debate, I think, about the privacy in our societies than only about money.

A third statement is that CBDC is a risk to financial stability, that they could facilitate bank runs and disintermediate the bank financial system. And here, I would say in terms of the risk of digital bank runs, the train has really already left the station even without CBDCs. We are already living in a world where digital runs can happen. And I think the correct question to ask is, could the CBDC make the problem worse? And here, I would say central banks have come together, many of the big ones, and said with the right—they have the access to the right sort of tools and they can make countermeasures if this is a problem.

But I’m not taking this question lightly. It is a big question and there is a vast literature around it.

Now I hopefully dispelled some, I would say, misperceptions. Let me take you to the global stage. We’ve already heard this morning about the cross-border payments. There are room for improvements. I don’t think there is an imminent role for retail CBDCs in the cross-border space. That’s probably very far away into the future. But definitely there is interesting work around wholesale CBDC.

But innovation is also about trying to improve the existing systems. We don’t only need to look into CBDCs. So let me just very quickly tell you a little bit about Nexus.

So there are about sixty-five and growing number of fast-payment systems in the world, but they only work in a domestic space. You can’t do a cross-border, cross-currency transaction in the fast-payment systems. Now, in Asia, where we heard before a lot of things is happening very quickly, some bilateral corridors, so banking—fast payments cross-border, cross-currency are available. It’s already there. But if you scale this up to all sixty-plus and growing fast-payments [systems] in the world, you would get a maze of almost two thousand bilateral connections.

So the Project Nexus is the answer to this problem. And we already have countries in Asia that is very committed in building this, and we hope to see other countries joining in the next couple of years to follow so we can get this going.

So say a little bit, then, coming back to the wholesale CBDCs. So they serve—they could serve a similar role to reserves in the current system, but they could have added functionalities that could address many of the frictions that we see today. And there is quite a lot of work that is happening in that space. We’ve done some experiments. We can see that we could have faster settlements and less risks. So this is something that is worth going—exploring going forward.

And one thing that we’ve also heard is about the possibilities of tokenized—tokenization, about tokenizing assets. And if we want to go down that road—which many are interested in, including the BIS—we need a system built on the trust of central bank money that could work as a settlement asset. And there you would probably need, we think, what we call a wholesale CBDC that would be used as a vehicle for settlements.

And if you look at the last—the latest Annual Economic Report from the Bank for International Settlements that was published in June, we sort of published our thoughts what we call the structure of a unified ledger that could be a common platform where assets and payment methods could come together and settle in central bank money. This is a vision, but the Innovation Hub is exploring projects that will experiment further with this concept.

When I come to this part of the speech, a lot of people sort of zoom out and say, oh, gosh, CBDCs, retail, wholesale, tokenization, ah, science fiction, blue-sky stuff. So let me tell you something that is happening not too few miles away from here. But we’re actually doing a real—building a real structure around tokenization together with the World Bank. And this is the first time I can talk about this in the—in the public space.

So we worked together with the World Bank and with the Swiss National Bank, run by the Swiss Center and the BIS Innovation Hub, simplifying the process for making development money available for emerging and developing economies through international financial institutions. This is a structure called promissory notes, and it’s quite an arcane structure as it is today. It’s paper-based. There are papers—piles of paper sitting in vaults across central banks, the World Bank, and receiving institutions across the world.

So here we are collaborating and say, can we actually get the tokenization methodology to work in reality? It’s not going to revolutionize the world, ladies and gentlemen, but by trying these things and make it work in a real-life setting, I think we will make a lot of progress.

So in the last bit of this speech at this conference, I know that we need to think about the regulations and the international standards. And what we need to do—sorry, can I go back one? What we need to do is to look at the three broad categories that we need to work together on. First, we have the legal and regulatory standards already existing. And these are the principles for financial market infrastructures and the multiple recommendations on financial integrity that are developed by, for example, the Basel Committee on Banking Supervision and also the Financial Action Task Force. And these are the one—sort of the committees that that align the rails across the world, so it works in a more seamless fashion.

The second category here relates to payment-specific technologies and operational standards. It’s about messaging formats and communications protocols. And finally, the cross-cutting technology standards. That is about general application that goes beyond just digital currencies. And here we are talking about everything that is how the public sector sort of presents itself to our citizens in the digital sphere. And here, I’m thinking about how to protect our resilience, security, but also how we can identify ourselves in a safe and efficient way. And these bits are super crucial if we’re going to get a much better improved financial services for the end users.

So a lot of work is done in this area. One of the critical things to ask is: Do you need to put these standards implemented early to get things going, or will that become difficult because you need to change them later? And to what extent do they need to be adapted so they can also facilitate countries who choose not to do any CBDCs? So in different ways, these questions are already being addressed. But I’m also hopeful that this conference could add further light on the way CBDCs could improve in terms of international standards.

So I hope I have convinced you that central banks needs to be participating in the discussion around central bank digital currencies and how to make it better, but they are not the only ones. We need to have a much broader discussion. There is no one solution to rule all solutions. I think different countries have different homeworks to do. But the many issues rhyme. So collaboration is useful. And this is one of the key objectives of the BIS innovation hub, in a structured way bring central banks together, but also private sector. Explore and do it in a transparent way.

I said I like history, so let me bring one last bit of that. And Joseph Schumpeter, he sometimes defined history in a bit negative way because he said, quote, “History is a record of effects, that vast majority of which nobody intended to produce.” And that’s not very nice, I think. Technology is something that doesn’t slow down for anyone. I think digitization affects us all. And I don’t think we should end up in a position of just having to live with the effects. I think we should be ambitious. And it’s a really collective responsibility to make sure technology ultimately serve economically meaningful activities, and ultimately everyone living on this planet.

So I thank you very much for your attention.

ALICE FULWOOD: All right. I think what you said was excellent. And I’ll take a seat here.

CECILIA SKINGSLEY: All right. OK.

ALICE FULWOOD: OK. Hello, everyone. Thank you so much. Thank you to Cecilia. I’m sure I echo everyone’s sentiments when saying thank you so much for your remarks. Usually central bankers get a bad rep of being slightly dull speakers, but there’s nothing like a couple of military analogies to really grip the room and grab everyone’s attention. I’m Alice Fulwood. I write for The Economist, as Jen said earlier.

So you started your remarks by saying that you thought that although you couldn’t call the moment historic, that you thought that we were at an inflection point in history. And if I reflect on the sort of debate that people have had about CBDCs over the past two or three years, I remember a couple of years ago the sentiment seemed to be very much that central banks were reacting to a couple of sort of threats to their potential sovereignty. So everyone was sort of very animated about Libra, that project. Crypto as well in 2021 seemed to be sort of a potential sort of alternative monetary system.

Both of those projects are either nonexistent or suffered some pretty significant blows over the past couple of years. So why is it that you think there is this urgency for CBDCs now?

CECILIA SKINGSLEY: Well, thank you for pointing out these events. I think about them as a sort of wakeup call, that there are so much going on in the tech space that the idea that central banks can just sit on their hands and not participate in the discussion on how these things should evolve, that doesn’t work anymore. But that is not necessarily the same thing to say that we need to rush things.

I think many countries are sort of exploring this at a good pace. I’m very pleased to see that many countries are, you know, thinking what is money and how do we want this to work? OK, if we want cash really to work, maybe we need to put in legislation. That’s something my own country did, making sure that there is a sort of—not many—a particular group of—just 45,000, I think it is, should have more than forty-five kilometers to the nearest ATM. And that might sound a bit detailed. But I think legislators should sort of walk the talk and say, OK, if cash is important for people, we need to put the right legislation in place.

But at the same time, investigate. OK, if these opportunities are there with the technology, can we actually, yeah, be ambitious and see if we can put the system to a new equilibrium? And the first picture I have was not a coincidence. It was to try to illustrate infrastructure. And if you go back in history, often the private sector is first. We can think about that when it comes to canals in the U.K. and railways. But after a while sort of the public sector steps in and sorts out the foundation so that the private sector can innovate on top of that.

And that’s how we build our societies across history. And when it comes to money, it takes a bit of time, because you want to get things right. And that is not going to be sort of up and down because FTX goes up or down or something else goes up and down. We’re here for the long run.

ALICE FULWOOD: Yes, exactly. OK, and in the development of retail CBDCs, say that, as you described, this sort of new technological platform that other people can build on top of, we have seen several central banks sort of launch, you know—in sort of smaller countries launch their retail CBDCs and then sort of a very advanced pilot in China. And it doesn’t seem like there’s necessarily been this sort of big bang. Everyone adopts it. It sort of changes how everything works.

Do you think it’s possible to make a CBDC that is sort of useful enough that people mass-adopt it without sort of running into some of the risks that you talked about with things like destabilizing the financial system?

CECILIA SKINGSLEY: Thank you. You nailed it exactly. It’s hard to know what people—what we want, really. We don’t want to have too much uptake because we don’t want to have the banking system, you know, grumbling about that or any kind of troubles coming down that road. But when there’s not much of an uptake, then that is being perceived as something that is going against CBDCs.

I think it makes a lot of sense to run these pilots. I think—I’m not concerned about the fact that the uptake can be low. These things takes time. And I think the value of CBDCs sits in the offer, the fact that you can access it. And then there’s obviously a sort of—you have to come down to the real basic question, is it worth for the society to offer this? And I think that depends a lot on where the country is in its own development and its own political preferences. And I agree with those who say that an advanced economy with a high level of financial inclusion, they can be, you know, quite complacent. But not forever, because I think, ultimately, the sort of—the trust that we have in the monetary system—in the fiat monetary system is that it is—we can go from the commercial bank money into central bank money at the flip of a switch. And if we decide to—if we are in a society where cash is no longer working and the central bank by law [chooses] not to offer a CBDC, we have, in essence, a privatized supply of money and payments in that society. You may be able to do that, but that’s also quite a big decision in the same way as it is a big decision to actually offer retail CBDC.

ALICE FULWOOD: And we also talked a bit—well, you talked a bit in your remarks about cross-border CBDCs. And again, this feels like something that has sort of shifted a bit over the last couple of years. There’s been a lot more interest in building these sort of wholesale cross-border projects. There have been a couple of sort of successful ones, like Project Mandala, that seem to have sort of moved the needle in terms of how effective cross-border payments could be. Could you just talk about sort of the motivations for doing those kinds of projects and, you know, how significant you think they could become?

CECILIA SKINGSLEY: Yes, absolutely. So I think the Libra initiative wasn’t fantastic from a sort of business perspective, but I think it was very helpful in the sense that it create an attention around how do we actually want the cross-border payment services to work. And I think there was a general agreement, definitely on the political side, that now this is not good enough. And I think personally it’s—I think it’s a failure every time an honest, hardworking person think that they have to use bitcoin for making a cross-border payment. I would much rather see that he or she could use—you know, have a nice menu of choices of paying in the—in the fiat money space. Others have different opinions, but I think the fiat money should be there to deliver that sort of services.

OK. So, that said, the Group of Twenty agenda around improving cross-border payments is a long list of possible improvements. A lot of this is already sort of happening, but the job of the—the work of the BIS Innovation Hub is to say: OK, can we, through technology, build better structures together? And there is quite a lot of interest in some central banks to say, can we—can we use the wholesale CBDC concept to facilitate especially settlements, because this is just for the—for the ecosystem.

And one of the pain points we have is all these legal checks—again, AML and CFT—which I think is super important, but it also creates the various frictions and delays that we all are aware of. And the Mandala Project is to say: Can we sort of, through the smart contract technology, build into the transactions all these checkups kind of automatically? And then we could—we could, yeah, get the transactions done in a much faster way.

So we try to work—and I know that I’ve spoken to some of you here at the conference. There is a lot of projects going on, and I don’t expect you to kind of be on top of everything of that. And it’s not that we are building a big jigsaw, but think about it more as the Swedish smorgasbord—which is a buffet—where some of these projects going to work really well together and we build on top of that the findings, and others are separate things. But we’re starting to see the possibility of making the sort of tests in a year or two, so things are moving forward.

ALICE FULWOOD: And I guess on that sort of smorgasbord of projects, you know, how do you—especially with the cross-border ones where you—where, you know, maybe a small group of countries now is testing out a project and there’s a different project going on with another group of countries, you know, ultimately, those projects being interoperable and working together is sort of kind of critical. And if they make different technological choices or even ideological choices, you could end up with all these different silos. So how do you prevent that world being the one that develops?

CECILIA SKINGSLEY: Well, I have to say that’s a little bit beyond my pay grade in the sense that we want to demonstrate the art of the possible, and we are happy to advise groups of central banks who want to sort of rally around different ways to move forward.

So if we take Nexus, for example, which has nothing to do with CBDCs. It’s about improving the current systems we see in the world on fast payment systems. So, again, making it possible to go between them, cross-border, cross-currency. And we’re happy to stay on as advisors, but ultimately it’s about the political will in those countries. So that goes for Nexus, and the same for mBridge. We’re there to advise, and we report our progress in a transparent way. And I really like to enforce the importance of it being transparent, so everybody else can sort of look in and see what’s happening.

What’s ultimately going to happen? It’s hard to say, because it’s—again, it’s a question of political willpower. We know that not all countries in the world is happy to make transactions with everybody else. So we won’t have a, you know, completely frictionless global payment system involving all countries. But if we can make improvements from where we are, I think, yeah, then we’ve done a good job.

ALICE FULWOOD: And I guess, you know, maybe all of these sort of projects are proof of concept, as you sort of say. That the technology can work and can exist. And if I, again, sort of reflect, a couple years ago everyone was at the sort of research stage in the Atlantic Council’s sort of tracker. And now it seems like almost everyone is at the sort of project pilot stage. When do you think we might see sort of the map light up with implementation stages?

CECILIA SKINGSLEY: Well, again, as I said, we can—we can demonstrate the art of the possible. What’s ultimately going to kind of see the light of day is going to be decisionmakers on the sort of central bank and certainly political levels in many countries. But without saying too much, I think we will be able to see sort of the first at least test transactions in some of these projects we’re doing in, let’s say, two or three years from now. But then, if that is meaning that we’ll take it into fully operational and scaling, that’s too early to say.

ALICE FULWOOD: Yeah, that’s probably fair. And I guess, just one point on how you think all of this interacts with the sort of private sector offerings. You mentioned that you thought it was a sort of failure that people have to use Bitcoin. But at the same time, some of the projects are borrowing things like automated market makers from decentralized finance and from sort of those other kinds of sort of private sector development of technology. Do you think ultimately a lot of the sort of public projects will interoperate with crypto? Or how will that sort of boundary between the public and private sector evolve?

CECILIA SKINGSLEY: So we have nothing against trying out the technologies that the crypto world has created. I find it hard to see that crypto, as such, would sort of work through the public rails. I think some countries make the choice to regulate and supervise crypto in a sense that it may be possible in the future. But I think ultimately that countries are hesitant in sort of accepting something else as payment vehicles than fiat money. Again, I think it’s about protecting what the public sector thinks is the key offer from the state.

And as I said in my talk, I think the inner and outer defense is sort of key offers from a state. And I think the third thing is making sure there is a version of money so people can transact in a safe and efficient way. And I don’t think many central—many countries, because now we’re on a country or state level that’s sort of above central banks—is willing to let that go into private hands.

ALICE FULWOOD: All right. And on the project that you announced that you could talk about now with the World Bank to sort of tokenize aid and, you know, get rid of the promissory note paper system that is apparently still used, so—basically, I just want you to tell me more details about this.

CECILIA SKINGSLEY: OK.

ALICE FULWOOD: So how is it going to work and what will the efficiency gains be from putting it into place?

CECILIA SKINGSLEY: Yeah, so here is the thing. When you start a project, you don’t really exactly know how it’s going to work. And this is really—it might sound trivial, but that’s a bit scary when you come from the world where I come from, which is the central bank. Central banks are used to be sort of in full control when they run a project. And they beauty with setting up the BIS Innovation Hub is to identify a problem and say, OK, there is too much frictions going on in a particular area. Let’s see what sort of technological solutions we can apply to that. And then the team sort of go into that together with one or two, sort of private vendors who knows things that we don’t have in house. And say, OK, how can we actually get this to work?

And you don’t exactly know what’s going to come out sort of six to twelve months later. And sometimes it works and sometimes it doesn’t. But you have to try. And I think the try with this particular project is to make sure that you get rid of the paper-based structure that you have in both the sending country and the receiving country, because there are very few people involved. And there are very few transactions. So that sort of knowledge that sits in these institutions can be difficult to sort of handover from person to person. So if you can automate this through this kind of platform, I think it would be—would be safer. Would you save a lot of money, will it revolutionize the world? No, probably not. But I think it’s a very tangible way to actually put the technology to work and sort of build to order to work to an area where you shouldn’t have paper anymore. But we’ll see. We’ve just started that particular project.

ALICE FULWOOD: And I think we have probably time for one more last question. So, you know, we’re at Lansdowne now. And we sort of reflect on how this sort of debate has changed over the past couple of years. You know, there’s been more progress towards putting retail CBDCs into reality. There’s been sort of greater discussion of these sort of cross-border wholesale tokens. In Lansdowne in a few years’ time, if the Atlantic Council is kind enough to host it again, where do you think we’ll be in terms of the tenor of the debate then?

CECILIA SKINGSLEY: So I think many more countries will have discussed and probably legislated around the protection of cash. I think that makes a lot of sense. I think we’re—you know, the public sector is there to serve members of their societies. And if the societal preference is to use cash, I think you need to have a legislation that reflects that. So that’s number one. I think we will—hopefully we will have fast payment systems moving—kind of not the system, but the payments moving cross. And I think we will see tokenized assets being able to move quicker, and with much more choice from the consumer side. And I hope we have been able to build in many of these very tedious controls, that we want to have because we want to fight money laundering and finance—the finance of terrorism, but we really want it to work for everybody else that are honest, hardworking people. And, yeah, basically, they deserve a much better system than the current one.

ALICE FULWOOD: All right. Well, thank you so much, Cecilia. That was a great note to end on. Thank you to the Atlantic Council and to the Digital Dollar Project for having myself and Cecilia on stage.

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CBDC initiatives continued to gather momentum during the first half of 2023 as noted in the Atlantic Council’s CBDC Tracker:

The current leaders in CBDC development and experimentation include the Euro Area, the UK, Sweden, Singapore, China and several developing countries. The United States remains conspicuous by its absence.

Divergent regulatory and technological standards are evolving along geopolitical fault lines. However, the cross-border role of digital currencies requires policymakers to provide at least a modicum of international interoperability in order to deliver operational efficiencies and cost-effective solutions. Therefore, we believe the most likely near-term scenario for CBDC development will see clusters of national CBDCs becoming interoperable only among geopolitically friendly countries—while being ring-fenced against outside state and non-state actors. Indeed, several multi-CBDC cross-border payment test projects have been going on. Generally speaking, fragmentation is the prevailing policy trajectory.

Such an outcome would be costly. Limited, geopolitically-constrained interoperability would introduce frictions and inefficiencies into the global payment system, which in turn would impose costs on businesses and consumers, further fragmenting the world economy.

Divergent regulatory standards 

Three sets of regulatory standards are evolving, closely reflecting the three geoeconomic power centers in the world: China, Europe, and the United States. All seek to address the following issues concerning both CBDCs and the crypto sector:

• Protecting citizens’ privacy
• Safeguarding national security concerning the collection and use of data about financial transactions of individuals and firms
• Interoperability
• Cybersecurity safeguards
• Strict parameters around the use of programmability which can restrict the unfettered use of digital money compared to cash

China: Full, unrestricted government monitoring 

China has proclaimed a “managed privacy” regime where information belonging to businesses and individual users will be protected from each other, but open to the government—especially the security authorities. The “big three” data laws—the Cybersecurity Law, Personal Information Protection Law, and Data Security Law—have prescribed tight control of the collection, transfer, and use of data by companies and private organizations, especially involving the transfer of data to foreign entities. The enhanced ability to monitor citizens’ financial transactions through CBDCs will strengthen China’s efforts to perfect its social credit system to control and influence social behavior of its citizens.

Europe: Regulatory priorities on investor protection, financial stability, and privacy

The European Union (EU), by contrast, has chosen mostly to prioritize rule-making that provides guardrails around private market transactions. Borrowing heavily from securities regulation rules, EU policymakers in 2022 promulgated the regulation of markets in crypto assets (MiCA), covering issuers of utility tokens, asset referenced tokens and stablecoins, and service providers such as trading venues and digital wallets. The aim was to protect investors and financial stability while fostering innovation and competition in the crypto asset sector. The digital currency arena regulatory structure also includes the Digital Markets Act and the Digital Services Act to regulate digital market services and the General Data Protection Regulation which establishes a data protection framework for individuals vis-a-vis corporate and government actors. Substantial additional laws, rules, and regulations are expected as the European system prepares to issue a digital euro.

United States: Stablecoins, not CBDC

By contrast, the United States has been far more cautious. As of this writing, conflicting cross-currents among legislators, regulators, and the central bank render the policy landscape filled with ambiguities.

During 2022, the Fed had been quietly undertaking a range of important technical moves designed to create a glide path for digital dollar issuance. The most important of these initiatives involved a technical project between the Federal Reserve Bank of New York and the Monetary Authority of Singapore regarding a wholesale CBDC. Dubbed “Project Cedar”, the 2022 initiative explored whether distributed ledger technology could be used to make cross-border settlements between currencies more efficient.

But the FTX implosion in late 2022, followed quickly by the “speed-of-light” bank run at Silicon Valley Bank in March 2023, shifted the policy landscape materially. By the time the final report regarding the Project Cedar experiment had been published in May 2023, the policy landscape in the United States regarding digital currencies had shifted significantly.

The Federal Reserve is now deeply cautious if not ambivalent, consistently resisting calls for it to issue a digital dollar. In parallel, many Members of Congress, especially Republicans in the House of Representatives, remain hostile to CBDC issuance. Concerns center on the risk that private financial transactions could become the subject of federal government monitoring and that the acquired information could be used for political purposes. Some Republican House members have even introduced several bills to prohibit the Fed from issuing a digital dollar. 

Separately, a crypto bill has passed the House Finance Services Committee seeking to constrain regulatory discretion regarding cryptocurrencies in general and stablecoins in particular. A stablecoin is a cryptocurrency whose value is pegged to another asset. The bill seeks to foster private stablecoin issuance, effectively creating an alternative to a digital dollar because the vast majority of stablecoins (98.9 percent) are backed by the US dollar. If passed into law and implemented, the bill would place the Federal Reserve at the core of oversight regarding privately issued digital dollars in addition to delivering regulatory clarity regarding cryptocurrencies. 

The Federal Reserve is not waiting for the legislation to become law. 

On August 8, the Federal Reserve formally shifted its stance to promote stablecoin issuance by banks. The new policy at least on paper provides a mechanism for automatic but tacit approval of such issuance for banks that meet specific pre-requisites. The most important pre-requisite involves ensuring that the issuing bank’s digital architecture provides visibility and access to transaction-level data for the purpose of complying with anti-money laundering (AML) laws and rules. The open question is whether such a structure will enhance or hinder market usage of USD-backed stablecoins. Legislative inaction thus provides ample opportunity for regulatory initiatives, with the current policy trajectory favoring private stablecoin issuance rather than official CBDC issuance. 

A fractured future—led by Europe?

Potentially divergent US and European policy trajectories do not occur in a vacuum.  Geopolitical conflict between the United States and China is undermining established, reliable frameworks for international cooperation across multiple disciplines. In global cross-border payments, growing policy divergences are imposing real costs and frictions on the global economy to the disadvantage of all.

The Chinese and American legal and regulatory frameworks regarding digital currencies are rather unique to their national circumstances. They are not likely to provide a policy template for many other countries. We therefore believe that many countries around the world will seek to conform to the comprehensive (and still evolving) digital currency policy framework articulated by the EU.

The United States and Europe have an opportunity to generate a better outcome together through cooperation—but that requires policymakers in Washington to resume their positive leadership role on the global stage.

Risks to the dominant role of the US dollar

CBDC fragmentation creates a significant risk that the US dollar (USD) will experience a gradual diminution of its current prominent role in the international financial and payment system—in three ways.

First, clusters of interoperable CBDCs will greatly reinforce the already growing tendency of using local currencies in bilateral and eventually plurilateral cross-border payments. At present, the dominant role of the USD remains unchallenged, accounting for 85 percent of the $7.5 trillion in global foreign exchange daily trading turnover. Increased interoperability among national CBDCs will reduce reliance on the USD as an intermediary currency in executing exchanges between pairs of currencies. As Hong Kong Monetary Authority Chief Executive Yue recently observed at an ASEAN + Three (South Korea, Japan, China) conference with the Bank of Finland, the questions is when, not whether interoperable CBDC local currencies will reduce the use of major reserve currencies. 

Second, reduced demand for the USD in foreign exchange trading can trigger parallel decreases in central bank USD holdings, amid a long-term gradual decline regarding reliance on the USD as a reserve currency. In 2001 the USD accounted for more than 70 percent of global reserves. By 2023, the USD share has fallen to 59 percent. Interestingly, the shift away from the USD has not generated a parallel increase in any single alternative currency but has benefited a range of smaller currencies.

A shift by importers to rely on local digital currencies interoperable with other non-USD digital currencies decreases the need for central banks to hold USD to cover foreign exchange trading. Central bank reserves currently seek to provide importers with around three months of FX liquidity. As importers shift to local currency CBDCs, central banks will have no choice but to increase their holdings of those currencies to cover the trade account, thus reinforcing declining reliance on the US dollar.

While resistance to the US dollar has existed for decades, its continued dominance in private commerce has been predominantly driven by the lack of an alternative. Enduring value propositions require more than the lack of competition and low transaction costs. Continued free market reliance on the US dollar requires that counterparties globally trust the United States to make the right decisions and serve a positive leadership function. The fabric of trust in the United States has been fraying for two decades.

Globally, many resent being compelled to support US foreign and security policy as the restrictions on permissible counterparties for US dollar-denominated transactions have increased. The rapid rise of cryptocurrencies during the Great Financial Crisis gave voice to a generation of technologically savvy individuals who distrust central authority in general and the Federal Reserve in particular.

Historical precedent encourages economists and analysts to assume that only one global reserve currency can exist at any given moment. But a distributed financial system linked through electronic ledgers creates an alternative scenario for reserve currency shifts. 

No individual currency needs to replace the US dollar for it to lose its role as the main reserve currency. A gradual shift to multiple alternatives can achieve the same result.

If the United States seeks to retain its role as a global reserve currency, it must now win back the trust of the global economy. Locking people into the US dollar through a privately issued stablecoin does not make the positive case for the US dollar. Trust is won in many ways, but one key avenue involves making a positive contribution at the global policy table. It requires joining the policy discussion with a positive, forward-looking agenda.

Instead, for the first time in post-war history the United States will be absent from, or much less effective in, global monetary standard-setting bodies and discussions as the policy focus shifts to CBDCs. 

Failure to initiate a digital dollar strategy domestically creates a significant risk that the United States will be missing in action regarding cross-border payments interoperability. Driving digital dollar policy through a tokenized banking system and bank-issued stablecoins will do little to address the frictions and costs discussed earlier. Markets and central bank reserve policies could easily shift to least-cost alternatives, leaving the Federal Reserve with oversight of a smaller universe of economic activity.

Actively and publicly exploring CBDC architecture and policy options will at least ensure that US priorities are part of the global conversation. US policymakers should be aware of the saying, “If you are not at the table, you are on the menu!”

Hung Tran and Barbara C. Matthews are Nonresident Senior Fellows at the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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As the year comes to a close, we are taking stock of the progress on CBDCs around the world since our last check in, in March.

The single biggest news since then concerns the Eurosystem: The European Central Bank (ECB), one of the largest central banks in the world, took a significant step toward CBDC exploration, announcing a new “preparation phase” for a digital euro in October. The digital euro is intended to be a digital form of cash that provides offline services, high levels of privacy, and instant settlements in central bank money. The ECB spent the last two years in its “investigative phase” where the bank explored potential design and distribution models for a CBDC. The new “preparation phase” will begin in November 2023, and will last for at least two years. This critical phase will lay the foundations for a digital euro, focusing on finalizing a rulebook, selecting providers for platform and infrastructure development, and conducting extensive testing and experimentation. 

One of the key features in the investigative phase is implementing a compensation model. This model aims to create incentives for banks and payment service providers (PSPs) to distribute digital euro and to ensure that these payments will be free of charge and widely accepted across the euro area. Although this phase will not include a decision on whether to issue a digital euro, it signals a commitment to preparing and innovating for the future of digital currency in the Eurozone. The ECB’s approach emphasizes the significance of comprehensive research and collaboration with industry stakeholders. As the preparation phase progresses, it is expected to generate valuable insights that may play a pivotal role in shaping the introduction of a digital euro, and potentially influencing the border financial landscape. 

The ECB is not the only central bank making progress in CBDC development: Here’s a tour of how CBDCs have developed over the past eight months.

Country updates

Argentina

Juan Agustín D’Attellis Noguera, Director of the Central Bank of Argentina, announced that the bank is working on the legal framework for the CBDC project in pesos. Argentina is considering introducing a CBDC to primarily address economic issues and inflation.

Australia

In October, Mastercard successfully concluded a CBDC blockchain pilot with the Reserve Bank of Australia (RBA), demonstrating the potential for CBDCs to interoperate with various blockchains. However, as of November 2023, the RBA suggests that the development of a full-scale CBDC is still a few years away. 

Brazil

The Central Bank of Brazil is addressing issues of privacy and infrastructure as it develops the digital real (DREX). The first-phase launch is planned for May 2024, aiming to expand their CBDC across all financial services. 

China

PetroChina, a Chinese oil and gas company, has completed the first international crude oil trade using China, the e-CNY. The transaction involved the purchase of 1 million barrels of crude oil settled in e-CNY at the Shanghai Petroleum and Natural Gas Exchange. The deal was part of the efforts to address the Shanghai municipal government’s requirements to use the e-CNY in cross-border trade. 

India

The Reserve Bank of India intends to launch its CBDC in the interbank borrowing market, particularly the call money market, using CBDCs as tokens for call money settlement. India’s CBDC is currently undergoing a pilot phase, with the central bank aiming for one million daily transactions by the end of 2023.

Japan

The Bank of Japan launched a forum in partnership with 60 companies for the pilot program on a digital yen. The discussions will focus on various aspects of retail settlements with CBDCs. 

Nepal

Nepal Rastra Bank announced plans to develop a CBDC. However, this will be challenging with ongoing bans on cryptocurrency and stablecoin activity. 

Philippines

The Philippines is moving forward with plans for a wholesale CBDC, partnering with Hyperledger Fabric for its first digital peso pilot, Project Agila. The pilot program aims to enhance large cross-border foreign currency transfers and mitigate settlement risks by using a wholesale CBDC.

Russia

Russia is pushing forward with its plans for a digital ruble, aiming for mass adoption among its citizens by 2027. This follows the Russian Parliament passing a digital ruble bill in August.

South Korea

The Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service are jointly planning a pilot test for a CBDC to assess its potential use in both retail and wholesale payments. Wholesale testing will begin this month and retail testing will begin at the end of 2024.

Switzerland

The Swiss National Bank is partnering with six commercial banks and the SIX Swiss Exchange to pilot a wholesale central bank digital currency (CBDC) named the Swiss franc wCBDC. The pilot, known as Helvetia Phase III, will test the use of the Swiss franc wCBDC for settling digital securities transactions from December 2023 to June 2024.

United States

Congressman Stephen Lynch (D-MA) reintroduced legislation to develop a US CBDC in September. This move followed the announcement of the Congressional Digital Dollar Caucus, a group that will focus on advancing the development and understanding of a digital dollar.

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

Cross-border projects

Project Mariana

The Bank for International Settlements (BIS) concluded Project Mariana, a wholesale CBDC experiment in collaboration with central banks from France, Singapore, and Switzerland, focusing on cross-border trading and settlement using automatic market makers. The project aimed to enhance efficiency and mitigate credit and settlement risks, while highlighting the importance of international cooperation and  interoperability of digital currencies.

Project Sela

The BIS, alongside the central banks of Hong Kong and Israel, successfully completed a retail CBDC test, Project Sela. Their proof-of-concept retail CBDC combined cash-like features with digital infrastructure while emphasizing privacy and accessibility. 

Looking ahead

The GeoEconomics Center will continue to track CBDC exploration around the world, as governments and central banks continue to adopt efficient, resilient, and inclusive digital solutions. To stay updated on these developments, follow our CBDC tracker and our Future of Money work. As we enter 2024, we can expect much more from the digital currency world.

Join the GeoEconomics Center on November 28th for an upcoming conference: “Exploring central bank digital currency: Evaluating challenges & developing international standards.” This first-of-its-kind convening of leaders from international financial institutions, central banks, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

November 28, 2023

Exploring central bank digital currency: Evaluating challenges & developing international standards

This first-of-its-kind convening of leaders from international financial institutions, central banks, businesses, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

Register Here

Alisha Chhangani is a program assistant with the GeoEconomics Center focusing on digital currencies. Follow her on Twitter @alisha_chh.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

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Introduction

Central bank narratives on financial inclusion

Industry narratives on financial inclusion

Expanding definitions: Financial inclusion and beyond

Towards a financial inclusion rubric for policymakers

Policy lessons

Introduction

The story of cryptocurrencies is also the story of alternatives to the existing financial infrastructure—which, at the time of crypto’s birth in 2009–2010, was facing severe challenges. Bitcoin was a response to the loss of trust in banks and financial institutions, the first of its kind and an alternative way of sending and receiving value without touching the traditional financial infrastructure. In the decade since its birth, cryptocurrencies have shed their alternative or outsider status, and have entered the mainstream discussion about the future of money. Today, they are not only regularly used by traditional banks and financial institutions, but are also held by one in five Americans looking to invest and transact in bitcoin, ether, USD Coin, tether, and many others.¹ The technology behind them, decentralized ledger technology (DLT), has garnered the interest of governments, technology companies, and investors. However, along with their claims of technological disruption and next-generation products, the proponents of digital currencies often talk of their potential in terms of broadening inclusion and access. The popular term Web 3.0 reflects a suite of these potential applications of DLT, including the products, the technological and operational use cases, and the vision of the industry.

Concurrently, more than one hundred governments around the world are pursuing central bank digital currencies (CBDC), which are meant to provide a digital form of respective fiat currencies.² While the motivations of CBDC development differ across countries, financial inclusion is an oft-cited goal, along with reducing transaction costs and improving resilience and competition in the payments markets. Eleven CBDC projects are fully launched, and another eighteen are in the pilot stage.³

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

However, despite the growth of these CBDC projects in the last two years, adoption remains limited in the countries that launched them, and early data are inconclusive on whether the objectives set out have been achieved. Similarly, despite industry narratives about financial inclusion, most data on crypto’s use have little to do with its successes or failures in broadening financial access, and many projects that aim to expand financial access are in their infancy. Therefore, the claim of financial inclusion for digital currencies is difficult to prove quantitatively at the moment.

The absence of these data, from both the public and private sectors, has led to a gap in the research on financial inclusion motivations of DLT-based products. As the industry grows and CBDCs proliferate, policymakers must gain a deeper understanding of what financial inclusion means for a new generation of products, whether the definitions themselves are robust, and must undertake a goal-setting exercise and assessment of the claims against reality. Of course, this requires valuable data from the existing projects to evaluate these claims, but effectively evaluating and learning from the data also requires developing a benchmark for assessing the impacts on financial inclusion that these products can have. Put simply, we need to ask the right questions. Therefore, the central question of this issue brief is: what questions must be asked to assess the financial inclusion impacts of these products? In order to do so, this issue brief explores the narratives on financial inclusion provided by the proponents of digital currency—central banks that issue CBDCs and the Web 3.0 industry. It compares this set of claims against the conventional concepts of financial inclusion, and address where they fall short or expand existing understanding. It then seeks to develop a model of “asking the right questions”—that is, how to evaluate the financial inclusion benefits of these products across the stack.

Central bank narratives on financial inclusion

Financial inclusion is core to the functioning of central banks, which aim to provide equitable access to financial products, including fiat currencies. More than one hundred governments around the world are pursuing CBDCs, often by building upon decentralized ledger technologies, including blockchain.⁴ While countries pursue retail CBDC projects for a variety of reasons, many of the motivations relate to furthering financial inclusion. The International Monetary Fund (IMF) notes: “CBDC could potentially facilitate financial inclusion by increasing access to digital payments and thus serving as a gateway to wider access to financial services.”⁵ The US Treasury Department, in its “Future of Money and Payments Report,” says: “A CBDC could serve the unbanked and underbanked by providing a low-cost, easily accessible alternative to existing private sector payment services.”⁶

A Bank for International Settlements survey on CBDCs and financial inclusion found that while some central banks view CBDCs as the “catalyst for innovation and economic development,” others view them as complementary to their other financial inclusion initiatives. ⁷ Of the four largest central banks in the world, three have explicitly stated the potential for CBDCs to help with financial inclusion goals.⁸ Thus, while the models vary, most countries embarking on CBDC research do so with an explicit or implicit aim of broadening financial inclusion.

When it comes to financial inclusion, the main proposition of central banks is to provide a method of improved and expanded access to fiat currency. However, there is little proof to substantiate this motivation in existing CBDC projects. Take the example of e-Naira, which was launched in Nigeria in October 2021. As with other central banks, financial inclusion is a top claim on the Central Bank of Nigeria’s website: “eNaira provides financial inclusion by making financial services available to people or communities that do not have (enough) banking opportunity.”⁹ Despite this, access to eNaira is currently limited to those with existing bank accounts, though there is an ongoing effort to provide access to those without accounts in the future. This is a critical problem for a country in which 55 percent of its total population is unbanked.¹⁰ Therefore, the eNaira rollout has left out the majority of Nigerians. It has also proved to be unpopular among them: early numbers indicate that only one in two hundred Nigerians, or 0.5 percent, actively use it.¹¹

Research from the Massachusetts Institute of Technology (MIT) Digital Currency Institute has found a similar lack of practical examples of financial inclusion in CBDC rollouts. The paper’s claim that “CBDC is not a specific payments instrument with common attributes across countries but rather reflects a broad range of instruments that could differ significantly in features and functions,” is largely true.¹² That comes with a caveat, as (many specific differences aside) most CBDC projects are looking at two-tier intermediation solutions, which include interaction with a bank account for CBDC access, as in the case of eNaira.¹³ However, the paper found that emerging digital-currency technology can offer alternatives to the two-tier intermediation model, thereby expanding access to CBDCs. Meanwhile, other findings on barriers to financial inclusion—such as lack of digital identification, connectivity, and interoperability—illustrate the specific financial inclusion concerns for central banks. Increasingly, central banks are experimenting with offline transactions, incorporating digital-ID frameworks and even providing different custodial models, getting to central banks’ fundamental goal of improving and expanding access to fiat.

Industry narratives on financial inclusion

Private companies that issue, store, enable transfers, and build infrastructure for cryptocurrencies and stablecoins (which are fiat-pegged cryptocurrencies) are collectively referred to as the Web 3.0 industry. The industry narratives about how their products can enable financial inclusion are centered around two main claims. First, companies argue that the decentralized nature of their products offers advantages when compared to centralized financial institutions like banks, primarily because it reduces the often-higher intermediation costs of the legacy-payments architecture.¹⁴ Companies claim that decentralization allows for the free and open flow of money globally. The claim of decentralization is used as more than a proxy for technological differences; it also substitutes for claims of an anti-competitive marketplace in financial and technology services.¹⁵ Companies thereby also claim that their products and services improve markets by inducing competition and improving consumer welfare. In sum, cost reduction is a major financial inclusion benefit offered by digital currencies.

Second, companies claim that their products offer a lower barrier of entry than traditional financial products.¹⁶ This can include the ability to transact without bank accounts or to access credit without financial history. This, again, goes to the goal of improving and expanding access, which is shared by central banks. Both CBDCs and other DLT-enabled products offer other implicit financial inclusion benefits. First, the products that use DLT can significantly improve the speed of transactions, allowing for instant settlement times, which can reduce lag times in making payments. Second, factors such as reduced cash usage and increased customer preference for holding money in different forms have led to the need for digital options for traditional fiat, which can be achieved through CBDCs and DLT-enabled products. Thirdly, in many economies, economic volatility has created the need to establish alternative payment channels and stores of value, leading to the proliferation of Web 3.0-enabled products and services. This includes economies like Lebanon, where citizens are using cryptocurrency to protect their wealth against falling fiat and crumbling financial markets, and Ukraine, where Russia’s invasion has led to aid programs that send hundreds of millions in cryptocurrencies.¹⁷

The explicit inclusion claims of centrals banks and industry include improving access through incorporating the financially excluded—that is, including the unbanked and underbanked population through different custody arrangements and reducing costs—and their implicit inclusion claims include, for example, improving transaction speed, providing optionality, and alternative financial channels. Consequently, it is easy to understand why these products are targeted to those marginalized from the existing financial system: those without bank accounts or access to traditional credit and payments systems, those reliant on remittances, and those underserved by banks and other financial institutions. However, there is a need to evaluate these claims against the concept of financial inclusion as a whole, in order to provide appropriate comparisons for substantiation. The next section explores how these narratives by central banks and industry stack up against conventional understanding of financial inclusion.

Expanding definitions: Financial inclusion and beyond

Since 2011, the World Bank’s Global Findex Database has measured financial inclusion, and its data are used to track progress toward the Sustainable Development Goals. Its primary measurement is access to accounts, whether at a bank, credit union, or through a mobile-money provider.¹⁸ Indeed, account ownership can potentially provide a gateway into other kinds of financial services, such as loan provision. Over the years, account ownership has been impacted by a parallel technological development—mobile money—creating exponential growth in account ownership, especially in emerging economies in sub-Saharan Africa. Mobile-money accounts have also led to a new category of savings for many households, especially in sub-Saharan Africa, where adults have reported saving alongside or solely in their mobile-money accounts. In addition to mobile money, digital bank transfers are increasingly becoming the norm for public- and private-sector wage payments, government transfers, and cross-border remittances.¹⁹

Despite account ownership with financial institutions and mobile-money providers steadily rising since 2011, barriers such as lacks of liquid savings and credit access have persisted. Only 55 percent of adults in developing countries can access extra funds within thirty days, and more than 66 percent of adults in developing economies are worried about paying for emergencies.²⁰ Savings rates widely differ between developed and developing economies but, on average, only 28 percent of adults save using liquid accounts.²¹. A majority of those adults save solely for short-term needs.

The latest Global Findex Database report focuses on digital payments, but it uses “mobile money” and “digital payments” as overly broad categories that contain a variety of products and services within them. Mobile-money accounts using M-PESA, a Kenyan provider, use retailers to convert cash into digital credits, which can be transferred using mobile-phone personal-identification number (PIN) confirmation.²² This looks very different from a Venmo account in the United States, which is often connected to a debit card or bank account. Another key difference is the architecture that enables these payments to go through. For example, India and Brazil have both popularized digital wallets using instant-payment networks for peer-to-peer payments, but a Venmo payment still relies on the automated clearinghouse (ACH) to complete settlements. ²³

These differences across payment platforms, on both the front and back ends, create differential functions and costs, which can impact user behavior and interaction with these products. Similarly, factors such as access to internet connectivity or a mobile phone can also lead to different inclusion outcomes. Therefore, what a mobile-money account looks like, what services it can provide, and how it achieves those functions will determine how useful it can be in achieving financial inclusion goals. Many of these lessons are also integral to designing and assessing the impact of digital currencies.

Experts have argued that the financial inclusion goals of digital currencies must go beyond the current forms of money. Comprehensive values such as financial inclusion are difficult to measure and validate, and measuring benchmarks such as account ownership—even with its positive correlation with better outcomes—can provide a narrow perspective on inclusion. As we have seen, these data in isolation can fall short of explaining trends in consumer behavior and do not capture the complexity of an increasingly digitizing infrastructure. That is why some have called for a broader perspective on inclusion, informed by behavioral outcomes such as savings, credit use and access, and opportunities for investment and financial planning. A financial health, or FinHealth, score is one such measure that considers indicators such as responsible use of income (e.g., spending less than income and paying bills on time); sufficient liquid and long-term savings; credit access and manageability (e.g., having manageable debt and a prime credit score); and financial planning (including appropriate insurance and planning ahead).²⁴

Others have called for a better understanding of customer needs through user surveys, in order to ascertain the functions of future-generation financial products. These surveys have found some aspects of digital currencies to be desirable—such as self-custody funds (e.g., noncustodial wallets), the ability to hold them oneself instead of relying on a third party, cost reduction, transparency and trustworthiness, and the ability to “build” several kinds of functions into a wallet.²⁵ They have also found that a lack of enabling infrastructure, trust, and financial illiteracy can actually deepen digital divides between those who are financially included and those who are not.²⁶

So what do these expanded definitions of financial inclusion mean for the fate of digital currencies seeking to bridge gaps? The good news is that because many of these projects are in their infancy, there is an opportunity to address the technical and policy aspects best suited to make them financially inclusive. The section below creates a rubric for policymakers designing these projects and assessing their impact.

Towards a financial inclusion rubric for policymakers

The last twenty years of mobile-money developments and the expanded definitions of financial inclusion can offer insights into what to consider while designing the next generation of financial products in order to achieve financial inclusion. There are several components that enable interaction between human beings and digital currencies, and the model below illustrates the layers of this interaction and the choices that designers must make across them in order to achieve financial inclusion. Each layer is accompanied by an inexhaustive list of considerations, which serve as a rubric for those involved in the creation of these projects as well as those interested in studying their impact.

Human layer: Although users are not a technical consideration, they often function as enablers in any mobile-money ecosystem. This applies across scenarios in which users seek each other’s help to successfully use an application and as they onboard their community to these networks, often functioning as vectors of trustworthiness. Issues such as lack of information or trust reside in the human layer. So do considerations across social differences, such as gender, class, or geography.

Considerations: How do we enable better financial literacy and education? How do women and men differ in their use of payments applications? How do people of different generations interact with digital currencies? Who do people go to when they have a question about their mobile-money applications? How much time do people spend learning how to use an application?

Hardware layer: Every digital currency will ultimately require a device, whether mobile phones, laptops, computers, or hardware wallets (usually in the form of microchip-enabled cards). Issues of access to hardware reside in this layer.

Considerations: What kind of a device does the digital currency run through: a phone, card, smartphone, or laptop? What kind of function does a device need in order to be usable: does it have a camera to scan QR codes or a text-messaging service? How many people have access to it? Can it work through a shared device? Is it accepted by all merchants in an area?

Application layer: Once people connect to their accounts through a phone, they will look for an application to interface between their money and how they would use it. This can be for something as simple as looking at account balances or something as complicated as a wallet that allows for government payments like Social Security or tax refunds.

Considerations: How can the user be onboarded to the application? Does it require a digital identification? How easy is the application to use? How much time will the customer spend to file a complaint, if needed? What functions does it provide? Can it track users’ savings? Can it enable automatic payments? Can it determine credit scores? Can it track debt payments? 

Network layer: This layer determines how the application communicates with the rest of the infrastructure. This can use the internet in the form of broadband connection or telephone connectivity.

Considerations: How many people have access to broadband networks? Do networks need to be expanded to achieve the benefits? How reliable is the connectivity to phone networks? Can hard-to-reach areas be covered through the application? If not, is there an offline version that can work reliably?

Infrastructure layer: This refers to the back-end technology of the application. As discussed previously, depending on the technology choice, products can be made faster, cheaper, or safer, which will impact user behavior. Some of these technology choices are informed by the private sector, while others—such as national payments infrastructure—can be a public-sector endeavor.

Consideration: Does the application use distributed-ledger technology? Can it handle large volumes and scale of payments? Does it rely on fast-payments infrastructure, which can settle payments in less than twenty-four hours? Can it offer better transparency into the flows of money? Does it eliminate or lower costs?

While these considerations can provide a blueprint for better-designed products that account for expansive definitions of financial inclusion, the success of financial products ultimately depends on local factors and policy. The lesson from the success of M-PESA or Alipay is that some kinds of digital currencies will be more successful because they address specific user needs in certain geographies. Introducing internet-enabled digital currency in a country or region with low levels of access to the internet will not provide the best results. Similarly, requiring digital IDs for “know your client” (KYC) rules in countries with low levels of ID infrastructure will be counterproductive. Therefore, considerations need to be adjusted for local needs, and the resulting products will look different from one place to another.

Secondly, national and regional policies can actually bridge the gaps when it comes to access. For example, policies that enable more access to mobile phones can yield beneficial financial inclusion results. So can public education programs that address financial fraud and provide basic financial literacy. Similarly, economic policies that can control for volatility and inflation can enable trust and ensure sustainable, liquid avenues of income, spending, and borrowing. By themselves, products can do very little if national and regional policies aren’t working in tandem toward the goal of financial inclusion. Sound policy and local perspectives are, therefore, significant steps toward the goal of financial inclusion.

Policy lessons

One challenge in creating this paper was the limited amount of quantitative data proving the claim of financial inclusion underlying the developments in private and central bank digital currencies. There is an acute need for the private and public sectors to provide credible data in order to assess the impact of digital currencies on financial inclusion, so more experimentation and testing for CBDCs and private digital currencies are a valuable first step. The second consideration is how to assess these experiments. We have discussed the industry and public-sector narratives claiming potential benefits, and compared these claims to conventional understanding of financial inclusion. In doing so, we found the definitions of financial inclusion to be too narrowly focused on benchmarks such as account ownership.

We find that digital currencies can be desirable in expanding the definition of financial inclusion to include user behavior and outcomes. Given that most of these projects are in the research, development, or pilot stages, there is an opportunity to build them in a way that enables financial inclusion. The resulting rubric for financial inclusion addresses the central question of this paper: what questions must we ask in order to assess products’ financial inclusion impacts? By separating the components of the digital currency ecosystem, we provide financial inclusion considerations across the stack, which can serve as a checklist for those designing and those studying the impact of these products. Finally, policymakers must consider the local factors at play, as well as broad national and regional policies, in order to fully realize the financial inclusion potential of these products. The runway on digital currency development is long, but central banks and private companies considering these products must ensure they are designed to achieve gains in financial inclusion and, ultimately, drive adoption and impact.

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About the author

Staff

Ananya Kumar

Deputy Director, Future of Money

GeoEconomics Center

Arabic Digital Currencies

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