CBDC: Central Banks and the Future of Payment Infrastructure — TGB Intelligence Report Q2 2024

Where central banks stand

The BIS survey, carried out between October 2023 and January 2024, drew replies from 86 central banks whose jurisdictions account for 81% of the world's population and 94% of global economic output. At the end of 2023, 94% of them were engaged in CBDC work. More than half (54%) were experimenting with proofs of concept and 31% were running pilots.

The headline number hides a shift in emphasis. The share of advanced-economy central banks running wholesale proofs of concept rose to 81% from 60%, and the share running wholesale pilots to 33% from 10%. In emerging market and developing economies the equivalent shares rose more modestly, to 39% and 19% from 37% and 16%. The BIS reports that wholesale CBDC work is driven mainly by the aim of improving cross-border payments.

Retail CBDCs remain an emerging-market phenomenon. All four live retail CBDCs were issued in emerging and developing economies: The Bahamas, the Eastern Caribbean, Jamaica and Nigeria. Expectations of further retail issuance have fallen, while the share of central banks seeing a wholesale CBDC as likely within four to six years has risen and the share calling it unlikely has fallen to 38% from 44%. On the BIS count, six more retail and nine more wholesale CBDCs could be circulating towards the end of this decade.

Retail design choices are defensive. A potential retail CBDC with holding limits is considered by 68% of advanced-economy and 63% of emerging-economy respondents. More than one in two central banks does not intend to pay interest on a retail CBDC. The ECB states the reasoning plainly: a digital euro must be usable as a means of payment while preserving financial stability and the transmission of monetary policy.

Retail CBDCs in advanced economies: preparation, not issuance

The ECB's Governing Council moved the digital euro into a preparation phase on 1 November 2023, initially for two years, covering the rulebook and the selection of providers. This is not a decision to issue, which will only be considered once the EU legislative process is complete. The ECB's first progress report, published on 24 June 2024, stated that individuals' holdings would not be remunerated and would be subject to holding limits, to be calibrated closer to issuance, with merchants at a zero limit. An updated rulebook is due by the end of 2024.

The Bank of England and HM Treasury said on 25 January 2024 that no final decision had been made to pursue a digital pound. After 51,529 consultation responses, they are minded to proceed with a holding limit of £10,000 to £20,000 per individual, at least initially; banks generally preferred £3,000 to £5,000 to limit deposit outflows. A digital pound would not pay interest, and if one were introduced, primary legislation would guarantee users' privacy and control. The decision on whether to build will come at the end of the design phase, around the middle of the decade.

The Bank of Japan has run a CBDC pilot programme since April 2023, and its CBDC Forum had 64 participating firms as of March 2024. Its position is that whether to issue a CBDC in Japan should be decided by public discussion. The Federal Reserve said in January 2022 that it did not intend to proceed with a CBDC without clear support from the executive branch and Congress, ideally through a specific authorising law. Separately, the Federal Reserve's FedNow instant payment service went live on 20 July 2023 with 35 banks and credit unions and had 607 participating financial institutions by 14 March 2024.

Asia: scale in China, pilots elsewhere

China's e-CNY operates on a different scale from the pilots elsewhere in Asia. On 5 September 2024 the People's Bank of China said cumulative e-CNY transactions had reached 7 trillion yuan by the end of June 2024, with pilots in 17 provincial-level regions. After more than six years of development and more than four years of pilots, the PBoC considers the e-CNY's feasibility and reliability preliminarily verified.

India's retail digital rupee began its live pilot on 1 December 2022, and the value in circulation rose from ₹5.70 crore at end-March 2023 to ₹234.04 crore at end-March 2024. The comparison is with UPI, India's fast payment system, which handled ₹200.0 lakh crore of payments in 2023-24. The retail e₹ has to show what it adds to an instant payment system that already works at that scale.

The HKMA completed Phase 1 of its e-HKD Pilot Programme in October 2023 and launched Phase 2 on 14 March 2024, focusing on programmability, tokenisation and atomic settlement. On 7 March 2024 it announced Project Ensemble, a wholesale CBDC project to support interbank settlement of tokenised deposits. The Bank of Korea and Korea's financial regulators announced on 4 October 2023 a pilot in which banks would settle in wholesale CBDC and issue tokenised deposits to the public, with public testing expected around the fourth quarter of 2024.

Retail CBDC programmes: current status

Source: European Central Bank, Governing Council to start digital euro preparation phase following conclusion of two-year investigation phase (press release), 18 October 2023; European Central Bank, ECB publishes first progress report on digital euro preparation phase (press release), 24 June 2024; Bank of England, Bank of England and HM Treasury respond to digital pound consultation (news release), 25 January 2024; Bank of England and HM Treasury, Response to the Bank of England and HM Treasury Consultation Paper: The digital pound: a new form of money for households and businesses? (CP 970), 25 January 2024; Bank of Japan, Central Bank Digital Currency Experiments: Progress on the Pilot Program (April 2024), 31 May 2024; Board of Governors of the Federal Reserve System, Money and Payments: The U.S. Dollar in the Age of Digital Transformation (discussion paper) and press release, 20 January 2022; Federal Reserve Financial Services, Federal Reserve announces the FedNow Service is now live (press release), 20 July 2023; People's Bank of China, State Council Information Office press conference on promoting high-quality development, transcript (国新办举行“推动高质量发展”系列主题新闻发布会), 5 September 2024; Reserve Bank of India, Annual Report 2023-24, Chapter VIII: Currency Management, 30 May 2024; Hong Kong Monetary Authority, HKMA launches Phase 2 of the e-HKD Pilot Programme (press release), 14 March 2024.

Wholesale settlement and tokenisation

On 13 May 2024 the Eurosystem completed its first experiment in settling wholesale transactions in central bank money using new technologies, with Oesterreichische Nationalbank tokenising government bonds. Sixteen private companies were initially onboarded, and trials and experiments are to run over six months on three Eurosystem interoperability solutions.

The Swiss National Bank has taken wholesale CBDC from a test setting to real use. Its Helvetia III pilot, launched in December 2023, is in the SNB's words the world's first issuance of a wholesale CBDC on a regulated third-party platform. By 6 May 2024 four tokenised bond issuances and one secondary market transaction had been settled on SIX Digital Exchange. The SNB is also exploring two alternatives, an RTGS link and backed private token money, and its work so far suggests all three approaches are technically and legally feasible.

The Bank of England has opened an omnibus account in its RTGS system so that DLT-based payment systems can settle in a tokenised representation of central bank money. Its 30 July 2024 discussion paper set out work on a synchronisation interface to connect RTGS to external ledgers, and proposed experiments comparing wholesale CBDC with synchronisation. In Hong Kong, the Project Ensemble Sandbox opened on 28 August 2024 with four themes, from fixed income and investment funds to trade finance. The HKMA has said it will issue wholesale CBDC live at the appropriate time if the sandbox draws enough industry interest.

Cross-border rails

The G20 targets coordinated by the FSB call for the global average cost of cross-border retail payments to be no more than 1%, with no corridor above 3%, by end-2027, and for 75% of cross-border wholesale payments to be credited within one hour.

Project mBridge, a collaboration since 2021 between the BIS Innovation Hub, the Bank of Thailand, the Central Bank of the UAE, the PBoC's Digital Currency Institute and the HKMA, had reached minimum viable product stage, the BIS said on 5 June 2024. The Saudi Central Bank joined as a full participant, and the platform is enabled for real-value transactions, subject to each jurisdiction's preparedness.

Project Agorá, launched on 3 April 2024, brings seven central banks together with the BIS to test how tokenised commercial bank deposits can be integrated with tokenised wholesale central bank money on a public-private programmable platform. The call for private-sector participants ran from 14 May to 31 May 2024.

Project Nexus links domestic instant payment systems so that each operator needs only one connection to reach every other country in the network. On 1 July 2024 the BIS said the blueprint was complete and that the central banks of Malaysia, the Philippines, Singapore and Thailand would be joined by the Reserve Bank of India in the next phase. The BIS estimates that the first wave alone could connect a market of 1.7 billion people.

Wholesale and cross-border projects

Source: European Central Bank, First DLT-related experiment for settlement in central bank money successfully completed (MIP news), 14 May 2024; Swiss National Bank, Project Helvetia III - The SNB's pilot for wholesale CBDC (remarks at the BIS Innovation Summit), 6 May 2024; Hong Kong Monetary Authority, HKMA unveils Project Ensemble to support the development of the Hong Kong tokenisation market (press release), 7 March 2024; Hong Kong Monetary Authority, HKMA launches Project Ensemble Sandbox to accelerate adoption of tokenisation (press release), 28 August 2024; Bank for International Settlements, Project mBridge reaches minimum viable product stage and invites further international participation (media release), 5 June 2024; Bank for International Settlements, Project Agorá: central banks and banking sector embark on major project to explore tokenisation of cross-border payments (media release), 3 April 2024; Bank for International Settlements, Project Nexus completes comprehensive blueprint for connecting domestic instant payment systems globally (media release), 1 July 2024.

Private money and what it means for banks

At the end of May 2024 the market capitalisation of stablecoins was $161 billion, 6% of a cryptoasset market of $2.7 trillion. The BIS found stablecoins are rarely used for payments outside the crypto ecosystem. The Bank of England has said current stablecoins do not meet the standards it would expect for wider payment use. The PRA will treat a tokenised deposit like a traditional deposit where tokenisation does not change the underlying economics of the depositor's claim.

Agorá, Ensemble and the Korean pilot are all built around tokenised commercial bank deposits settling against central bank money. That model keeps deposits on bank balance sheets while changing how they move, and the retail designs under discussion limit how much money could leave banks. The investment burden for banks is therefore shifting from defending deposits to building tokenised deposit platforms and connections to central bank settlement.

Primary sources: European Central Bank, ECB publishes first progress report on digital euro preparation phase (press release), 24 June 2024; Bank for International Settlements, BIS Papers No 147: Embracing diversity, advancing together - results of the 2023 BIS survey on central bank digital currencies and crypto, 14 June 2024; European Central Bank, Governing Council to start digital euro preparation phase following conclusion of two-year investigation phase (press release), 18 October 2023; Bank of England, Bank of England and HM Treasury respond to digital pound consultation (news release), 25 January 2024; Bank of England and HM Treasury, Response to the Bank of England and HM Treasury Consultation Paper: The digital pound: a new form of money for households and businesses? (CP 970), 25 January 2024; European Central Bank, First DLT-related experiment for settlement in central bank money successfully completed (MIP news), 14 May 2024; Swiss National Bank, Project Helvetia III - The SNB's pilot for wholesale CBDC (remarks at the BIS Innovation Summit), 6 May 2024; Hong Kong Monetary Authority, HKMA unveils Project Ensemble to support the development of the Hong Kong tokenisation market (press release), 7 March 2024; Bank for International Settlements, Project mBridge reaches minimum viable product stage and invites further international participation (media release), 5 June 2024; Bank for International Settlements, Project Agorá: central banks and banking sector embark on major project to explore tokenisation of cross-border payments (media release), 3 April 2024; Bank for International Settlements, Project Nexus completes comprehensive blueprint for connecting domestic instant payment systems globally (media release), 1 July 2024; People's Bank of China, State Council Information Office press conference on promoting high-quality development, transcript (国新办举行“推动高质量发展”系列主题新闻发布会), 5 September 2024; Bank of Japan, Central Bank Digital Currency Experiments: Progress on the Pilot Program (April 2024), 31 May 2024; Board of Governors of the Federal Reserve System, Money and Payments: The U.S. Dollar in the Age of Digital Transformation (discussion paper) and press release, 20 January 2022; Federal Reserve Financial Services, Federal Reserve announces the FedNow Service is now live (press release), 20 July 2023; Federal Reserve Financial Services, Federal Reserve Financial Services introduces FedNow User Group among more than 600 FedNow participants (press release), 14 March 2024; Reserve Bank of India, Annual Report 2023-24, Chapter VIII: Currency Management, 30 May 2024; Reserve Bank of India, Annual Report 2023-24, Chapter IX: Payment and Settlement Systems and Information Technology, 30 May 2024; Hong Kong Monetary Authority, HKMA launches Phase 2 of the e-HKD Pilot Programme (press release), 14 March 2024; Bank of Korea, BOK, FSC, and FSS, in cooperation with the BIS, have launched a project to explore a future monetary system for Korea (press release), 4 October 2023; Bank of England, Innovation in money and payments - speech at the Innovate Finance Global Summit 2024, 15 April 2024; Bank of England, The Bank of England's approach to innovation in money and payments (discussion paper), 30 July 2024; Hong Kong Monetary Authority, HKMA launches Project Ensemble Sandbox to accelerate adoption of tokenisation (press release), 28 August 2024; Financial Stability Board, Targets for Addressing the Four Challenges of Cross-Border Payments: Final Report, 13 October 2021; Bank for International Settlements, BIS, central banks and the IIF invite private financial institutions to join Project Agorá (media release), 14 May 2024.