The Swiss National Bank (SNB) is planning to break new ground next month by issuing ‘real’ wholesale central bank digital currency (CBDC) in Swiss francs on a financial market infrastructure based on distributed-ledger technology (DLT).
The central bank has announced that – together with six commercial banks – on 1 December it will kick off a pilot initiative making wholesale CBDC (CBDC for interbank use) available for the settlement of bond transactions on the SIX Digital Exchange (SDX), a platform for the trading and settlement of tokenised assets.
The move is the third phase of an SNB initiative titled ‘Project Helvetia’, which has been investigating how central bank money can be used for settlement in a world where securities and other financial assets shift from centralised financial market infrastructures to decentralised or tokenised platforms for trading and post-trading activities. Activity is scheduled to run to June 2024.
The first Project Helvetia report, published in conjunction with the Bank for International Settlements (BIS) Innovation Hub, was published almost three years ago. The second phase added commercial banks to the experiment, integrated wholesale CBDC into the core banking systems of the central bank and commercial banks and ran transactions ‘from end to end’.
The new pilot will see the SNB moving its wholesale CBDC activity from test environments into production, with the banks carrying out transactions on the DLT platform as intermediaries for issuers and investors. The tokenised bonds will be settled against wholesale CBDC on a delivery-versus-payment (DvP) basis.
WHOLESALE CBDC: EXPLAINED A wholesale CBDC, often abbreviated to ‘wCBDC’, is a CBDC that would be available for interbank use; it is different from a retail CBDC, which would be for people’s everyday use (also sometimes referred to as a ‘general purpose’ CBDC)
‘Internationally pioneering role’
“For several years now, the SNB has been testing a variety of potential applications for wholesale CBDC. Together with our partners, we have already been able to make important contributions to research in the CBDC field,” said Swiss National Bank governing board chairman Thomas Jordan in the central bank’s announcement of the project.
“With this pilot project, we are now, for the first time, making it possible to securely and efficiently settle transactions with tokenised assets on a regulated and productive DLT platform using real wholesale CBDC,” he added. “We are proud of our internationally pioneering role in this area as we carry out this innovative project together with SIX and the participating banks.”
SDX, which went live almost two years ago, offers issuance, listing, trading, settlement, servicing and custody of digital securities.
As well as the SDX platform, the pilot will use the SIX Interbank Clearing (SIC) system for the tokenisation of central bank money and that of SIX SIS for integration with the traditional bond settlement infrastructure. SIX SIS is Switzerland financial market’s national central securities depository (CSD) and an international CSD (ICSD). In addition, SIX Repo and SDX test systems will be used to explore the trading and settlement of repo transactions (repurchase agreements) with wholesale CBDC.
The six participating banks are Banque Cantonale Vaudoise, Basler Kantonalbank, Commerzbank, Hypothekarbank Lenzburg, UBS and Zürcher Kantonalbank. BIS is not involved.
RELATED ARTICLE Banque de France shares lessons from 12 wholesale CBDC DLT experiments – a news story (27 July 2023) on a report sharing lessons learned from wCBDC experiments involving the use of DLT
Seeking efficiency and transparency gains
DLT and tokenised assets are already being used in some areas of the regulated financial system, ‘where they promise to deliver efficiency gains and greater transparency’, the SNB explains in its announcement.
‘If DLT establishes itself in the financial system, the question for central banks is how token transactions between financial institutions can be settled in central bank money. Central bank money, which poses no counterparty risk, could thus continue to play its key role in maintaining the stability and efficiency of the financial system.’
Details of Project Helvetia’s third stage are confirmed seven months after SNB governing board member Andréa Maechler and governing board alternate member Thomas Moser jointly delivered a speech, ‘Swiss Payments Vision – an ecosystem for future-proof payments’, during which they revealed that the SNB was launching a project in which it would be testing ‘three models in productive payment and settlement infrastructures’.
One model would involve wholesale CBDC issuance for settling tokenised assets; the second would involve the linking of settlement systems for tokenised assets with the existing SIC payment system; and the third would involve the use of private, ‘bankruptcy-protected’ token money backed by central bank money. The upcoming pilot adopts the first model.
The SNB emphasised that the pilot does not constitute a commitment to introduce wholesale CBDC on a permanent basis.
RELATED ARTICLE Swiss city issues blockchain bond – our news story (27 January 2023) on Lugano’s digital bond issuance
Swiss roll with innovation
State authorities in Switzerland, which has a population of about 8.7 million, have been pushing hard to promote financial innovation.
As well as the central bank’s digital money initiatives, the federal government has set up the ‘Swiss Financial Innovation Desk’, operating as an independent unit within State Secretariat for International Finance (SIF) in the Ministry of Finance, as a ‘central public hub to foster financial innovation’.
The country, which is not part of the 27-member European Union (EU), is also home to various regions marketing themselves around crypto: for example, ‘Crypto Valley’, a blockchain hotspot in the canton of Zug; and the affluent lakeside city of Lugano, which is home to 3Achain, an ‘institutional blockchain platform’ promoted by the public administration.
Lugano’s public authority in January issued a six-year bond of up to CHF 100 million (about £88m/$108m) via blockchain – a move trumpeted by those involved as a public sector ‘first’. This pioneering digital bond was dual-listed on the SDX blockchain-based platform and the traditional SIX Swiss Exchange infrastructure.
The issuance was the first digital bond approved by the SNB for its ‘General Collateral Basket’ (making it the first digital native asset accepted as eligible collateral for SNB repos) and it was included in the Swiss Bond Index.
RELATED ARTICLE Blockchain bonds: digital issuance breakthroughs build buzz – a write-up of a webinar (convened by Global Government Fintech on 23 March 2023) asking: ‘Blockchain-based bonds: what potential for the public sector?’: Lugano’s deputy chief financial officer Paolo Bortolin was the opening panellist, giving the inside track on the municipality’s blockchain bond issuance
World Bank’s new DLT milestone
In a separate development, the World Bank has announced that it has issued the first digital securities on a new digital financial market infrastructure DLT platform developed by Belgium-based financial services company Euroclear.
The Washington DC-headquartered international financial institution issued the world’s first blockchain bond – ‘bond-i’ – in 2018.
Its new Euroclear issuance, announced on 24 October, raised EUR 100 million (about £86.7m/$107.3m) to support the financing of World Bank’s sustainable development activities.
World Bank Group managing director and chief financial officer Anshula Kant described the collaboration as “a milestone in our efforts to create scalable, transparent and efficient markets for our member countries” and presenting “a transformational opportunity to expand digitisation in the capital markets.”
TD Securities was dealer for the transaction and Citibank was paying and issuer agent. Investors from North America and Europe participated.