Home Digital Currencies Central bank digital currencies: checking out conditions for take-off

Central bank digital currencies: checking out conditions for take-off

Global Government Fintech Lab 2023 breakout session: Daniel McLean, Katie Fortune, Valentina Ion and Ian Hall (moderator) at the Global Government Fintech Lab 2023


Representatives from the European Central Bank and the Bank of England, as well as the private sector, discuss the policy and technology considerations most important to central bank digital currency (CBDC) architects

A handful of nations – including the Bahamas, Jamaica and Nigeria – have issued a central bank digital currency (CBDC) while most are stepping up their explorations and experimentation around the opportunities and challenges of doing so.

The European Central Bank (ECB) and Bank of England (BoE) are both at similar stages of their CBDC journeys, investigating, respectively, the possibilities of a digital euro and digital pound.

The former’s two-year investigation phase into a potential eurozone CBDC will conclude this autumn. The ECB Governing Council will then decide whether to dig more deeply into the possibilities with effect from October.

UK authorities, meanwhile, are in the midst of a consultation, with the main message at the time of its launch (in February) being that a British CBDC is ‘likely to be needed in the future’. The earliest launch timing, should a digital pound receive the go-ahead, is likely to be the latter half of the 2025-2029 period.

ECB and BoE representatives shared their thoughts on major policy and technological considerations during a breakout session at the Global Government Lab 2023 in Dublin on 18 May.

The discussion – which focused on CBDCs for general population use (also known as retail CBDCs), as differentiated from wholesale CBDC (for institutional use) – also included a private-sector perspective from Microsoft (the session’s knowledge partner).

Daniel McLean

ECB sets sights on ‘preparation phase’

Daniel McLean, distribution lead for the digital euro at the ECB, began by providing an overview of the digital euro project’s progress and potential move into a ‘preparation phase’.

Subject to a green light from the Frankfurt-based authority’s Governing Council, the ECB would increase the intensity of its explorations of a potential digital euro’s “technicalities, use cases and settlement engine”, as well as “standards that need to be updated [and] changed, both in the e-commerce domain, in the physical point-of-sale domain and what type of modalities we should use,” McLean explained.

He mentioned priority use cases (see related article from September 2022), as well as the importance of offline capabilities (a challenge for CBDC designers worldwide). “We want to be able to use the digital euro offline – in case there is an interruption of an internet service provider, you should be still able to transact quite some amounts of the digital euro – so, we need to work on the technicalities,” he said.

Broader challenges include the fact that the eurozone is home to about 340 million people with “very different cultures” and “very different payment habits”, he said.

The European Commission, Parliament and Council will need to approve any decision to proceed. “This [issuance] will be based on legislation, and that legislation is currently being drafted and will go through the [European Union’s] democratic processes hopefully over the coming months,” McLean said.

Overall, he said, the aim of the digital euro would be to ensure “the capability of central bank money in the digital age”.

“So, in ten or 15 years’ time, when certain people do not want to use cash anymore [and] would like to use digital payments, they will always have a public option,” he said. “And that public option will be secure, it will be private and it will make sure that you have that link to the central bank, just as cash gives you today.”

RELATED READING Global Government Fintech’s digital euro coverage

Katie Fortune

BoE on track for ‘design phase

Katie Fortune, senior manager in the BoE’s CBDC unit, started by referencing the digital pound consultation and the fact that its paper (‘Digital pound: a new form of money for households and businesses?’) was jointly issued alongside HM Treasury. “There are a lot of topics that are not solely in the mandate of central banks,” she pointed out.

The BoE also issued a ‘Digital pound: technology working paper’, examining design principles relating to privacy, security, resilience, performance, extensibility and energy usage. “For us, the technology follows the policy,” Fortune said.

A digital pound ‘design phase’ will run for two to three years ahead of a decision about whether to move into an ‘implementation phase’.
“We see the design phase as fleshing things out more, learning more, putting together quite a detailed blueprint and working quite a lot with the private sector,” she said. “I think the next couple of years will really shift our thinking a lot.”

“To date, we’ve concentrated on what the policymakers need from this,” she said. “But for the policymakers to deliver, it needs to be used. And, to be used, we need intermediaries to want to use it, the financial sector and end users (individuals and merchants) to want to use it.”

“In a couple of years, if the decision is made to do it [launch a digital pound], we would have learned a lot, we would have set out the model,” she continued. “But if a decision is made not to do it, we won’t regret the two years of work. This is useful work in how we supervise other entities moving into this kind of space, in helping the private sector evolve and develop, because the world is changing and payments are changing.”

RELATED READING Global Government Fintech’s digital pound coverage: this includes ‘Bank of England awards digital pound ‘sample wallet’ contract’ – an article (2 June 2023) on the BoE appointing a consultancy (Kin + Carta) to develop a digital wallet proof-of-concept as it looks to ‘make the CBDC product more tangible’ (this contract is apparently the BoE’s most sizeable single contract to date awarded for CBDC-related work)

Valentina Ion

CBDC as ‘use-case for web 3.0’

Microsoft’s director business strategy Valentina Ion kicked off her comments by outlining reasons why CBDCs are gaining traction across the world.

She mentioned reasons included helping with financial inclusion (typically more of a factor in the developing world); improving payment system efficiencies; connecting fiscal and monetary policies (for example, when government “needs to take targeted interventions and support vulnerable segments” – potentially informed by real-time CBDC data); and helping with “auditability and traceability across supply-chains and preventing illicit behaviours”.

She then moved onto design considerations. Microsoft, she said, considers CBDC as a “specific use-case for ‘web 3.0’” – reference to the third generation of internet-based technologies, incorporating concepts such as decentralisation and token-based economics.

She highlighted Microsoft’s Confidential Consortium Framework, an open-source framework intended to accelerate the take-up of blockchain technology. Blockchain is seen to have advantages when it comes to CBDC, but it also presents challenges.

“We’re working with many central banks, consulting, answering public consultations and even running pilots,” she said. “We’ve seen what the requirements on retail CBDC and wholesale CBDC are – the platform brings a number of benefits.”

“The more nodes and the more members you have in an ecosystem, then the risk of failure will decrease,” Ion continued, adding that “you can operate offline with this type of technology and then do the reconciliation when the system is back up.”

ECB executive board member Fabio Panetta has said that a digital euro would ‘never be programmable money’ and that ‘central banks issue money, not vouchers’. He has drawn a distinction between programmable money and programmable payments (or ‘conditional payments’). ‘Our definition of conditional payments is that people could decide to authorise an automatic payment where pre-defined conditions of their own choosing are met,’ Panetta said in January (click here for our article). ‘For example: the payer could decide to set an automatic monthly payment in digital euro to pay their rent. But the payee would not face any limitations as to what they can do with this money they receive every month.’

‘Conditional payments’ possibilities

The session’s Q&A section got underway with discussion about the possibility of ‘programmable’ CBDC – having rules embedded that define or constrain use, for example time limits or restrictions on what the CBDC could be used to buy.

McLean emphasised the ECB’s focus on ‘conditional payments’ (as has previously been discussed by ECB governing board member Fabio Panetta – see above). “Subsets of conditional payments [are] what we see today in the market,” he explained, pointing to direct debits and standing orders. “Of course, we would leave that open for the market to innovate on. So, no [to] programmability – we have to be very clear. I do know the market and tech people really like the whole ‘programmable’ aspect. But the value [of a eurozone CBDC] cannot fluctuate on a built-in algorithm.”

Fortune set programmability in the context of two CBDC ‘pillars’ that, she said, supported the BoE’s stance that a digital pound is ‘likely to be needed’: CBDC as an “anchor of confidence in the monetary system” and CBDC as a way to ensure that central bank infrastructure is “fit for the future”.

To illustrate the first pillar, she provided an example. “You can imagine a world where Amazon wants to develop some kind of [digital] coin. You might use that coin if you’re buying books on their website or they’ve got some supermarkets – you might use it there. You might be an ‘Amazon type of person’ and your friend might be a ‘Google kind of person’ or a ‘Facebook kind of person’, and you end up in this fragmented world where it’s hard for you to shop across boundaries or to send money across boundaries. Can this [CBDC] provide that bridging asset that ensures that that never happens?”.

“I think programmability comes across those two [pillars] really nicely,” she continued. “In order to meet that first objective you really do need this rock-solid [position of] ‘there will be no government-initiated programmability, your money won’t expire, it won’t only be usable for certain payments – a pound is a pound (or a euro is a euro)’. But in order to support innovation, we do need to ensure we are providing the infrastructure that allows programmable payments – conditional payments [that would be] private-sector initiated, at the behest of the user.”

“So, we are keen to provide the platform that enables it but without ruining that ‘universal asset, trust in the money’ aspect,” she said.

RELATED ARTICLE No ‘one-size-fits-all’ solution for offline CBDC payments: BIS handbook – an article (11 May 2023) on ‘Project Polaris: A handbook for offline payments with CBDC’ published by the Bank for International Settlements

Data privacy matters

Users’ data privacy is one of the more emotive and potentially controversial topics related to CBDCs, with sceptics concerned about state surveillance.

An ECB public consultation (which received 8,221 responses – more than any previous ECB public consultation – and whose results were published in January 2021) saw privacy ranked by respondents as a digital euro’s most important feature.

“We want to make sure that the ECB does not see user data,” said McLean. “We are looking at technology that will do this. So, no matter what happens, no matter if the ECB is hacked (or whatever may happen), we cannot infer a balance [and] we cannot infer a balance to a person. Of course, the intermediary that people may bank with for the digital euro will have to have more data for AML [anti-money laundering] purposes. There may be lower limits for anonymity in payments when it comes to offline [use]. But that will be very much up to the European Commission and the legislator to define those limits.”

“As a technology provider, we say that there shouldn’t be a trade-off between privacy and security. Because now technology can cater for privacy,” said Ion. “We don’t need to see, and the central banks and the financial sector do not need to see, information on transactions. We are interested in behaviour being compliant and that it respects regulation.”

In terms of specific technologies, she referred to confidential computing and its ability to “enable several layers of ensuring privacy within the technology,” with end-users having “the opportunity to add [an] additional encryption mechanism.”

‘Digital financial inclusion’ challenge

Financial inclusion is often promoted as a benefit of CBDC (as mentioned by Ion in her opening comments). 

“For us it’s not about financial inclusion, it’s about digital financial inclusion,” said McLean, explaining that about 98.5 per cent of the eurozone population are ‘banked’. “The problem is that among people who have bank accounts, almost one in six has issues with using that bank account online. We have to address that problem.”

“With a digital euro, we cannot leave a section of society behind,” he continued. “We propose that there’ll be a dedicated entity in every member state that would actually provide that input for people who would like to be financially included – or digitally included – that way”.

As an example, he suggested the post office network in the Lab’s host country, Ireland, could be “leveraged” to help. “Where a person who wants to [use] the digital euro has difficulty with the [prospective] app or difficulty with opening accounts, that person could go into the post office, and there would be a one-on-one FaceTime with somebody to help them through that process, to bring them on board and to facilitate that leap into the digital space.”

“We’ve been told very clearly by consumer groups in Europe, by elderly groups in Europe, that this has to be there – that they feel left out in the whole digital narrative. And if we move forward a digital currency, we cannot leave a section of society out. We have to bring them on board, we have to give them the option,” he said.

RELATED ARTICLE All or nothing? Central bank digital currencies’ financial inclusion challenge – write-up of a Global Government Fintech webinar (7 February 2023) featuring panellists from the central banks of the Bahamas, Eastern Caribbean and Canada

‘Scalable, reliable, efficient and private’

McLean summed up the broader challenge facing CBDC as saying that it “really has to do probably what no other digital method of payment or digital settlement instrument has done so far: be secure, reliable, efficient and private.”

“We have to make sure that is the case because people, I would hope, trust central banks (some people, of course, don’t). But, in general, we are trustworthy entities. And we have to make sure that trust is sustained when we launch a product as ambitious as this,” he said.

Echoing one of Fortune’s opening comments that ‘technology follows the policy’, he said that “most” of the technology already exists although he acknowledged “major complexity” as regards offline payments.

One rather different challenge is that of explaining CBDC to the public. “It’s difficult to communicate this [CBDC] to my mother. If I can communicate this correctly to my mum and my dad, I’ve done a good job. We’ve a long way to go on that,” reflected McLean, adding that there was also a more immediate communications challenge – explaining CBDC to all-important European legislators.

Referring to an audience ‘show of hands’ as to who in the audience believed that a digital euro and digital pound would be live within 10 to 15 years (about two-thirds of hands were raised), Fortune pointed out: “The voices we hear a lot from [on CBDC-related issues] are not necessarily a representative sample. You can be in one room and get a very high proportion [inclined to think] one way and another room and get very high proportion the other way.”

Next steps on the journey(s)

The session concluded with the panel asked what the most important CBDC development they foresaw in the next year, whether with their own projects or beyond.  

McLean and Fortune focused on their own authority’s initiatives.  

“The legislative initiative is now making its way through the European Commission, the Parliament and the Council. Those discussions about what this is all going to look like, what they will mandate the ECB to facilitate – that’s going to be the key aspect,” said McLean. “Then [it would be] the decision of the [ECB] Governing Council to move forward into the next phase of the project. We will have to adapt and facilitate the project based on the outcome of that legislative process.”

“We’re working jointly with government [on CBDC] and so I think it will be driven by that: do they want to speed up, slow down, react to what’s going on in other jurisdictions,” said Fortune, describing the BoE’s pace of CBDC development as exemplifying central bankers’ typically “quite steady” and “conservative” approach to such projects.

“We’re doing a lot of experiments, we’re learning a lot about this technology, we’re forming positions. The ‘big bangs’ come from [outside],” she said.

Ion opted for an overarching observation. “Whatever the final decision on [whether to launch] digital currencies, these consultations and all the working groups are forcing the private sector and public sector to work together and learn from each other within countries and cross-border. It’s also an opportunity to get educated on what technology innovation is able to offer,” she said.


Watch the session in full (it runs from about 05:28:10 to 06:23:10 if clicking on the full-day event video) =>


CBDCs on the rise: public policy motivations under the microscope – write-up of the CBDC session at the Global Government Fintech Lab 2022