Jennifer O’Rourke is Director of Innovation Strategy and Design at DTCC
This year has continued to see countless headlines about the digitalization of financial markets, including the growing proliferation of cryptocurrencies and, more recently, growing commentary on the progress of central bank digital currencies.
The United States offers a good example of the momentum behind CBDCs. In March, US President Joe Biden ordered government agencies to begin efforts to research and develop a potential design for a USD-denominated digital currency. This was then followed by Federal Reserve Chairman Jay Powell announcing in May that he was seeking public comment on a possible digital version of the US dollar.
The recent momentum with CBDCs in the United States is representative of developments in other jurisdictions. A recent survey by the Bank for International Settlements of CBDCs revealed that more and more central banks are exploring or will soon start working around this new type of digital currency.
The survey revealed that 80% of central banks are carrying out work on this subject and around 40% of them have moved from “conceptual research to experiments or proofs of concept and 10% have developed pilot projects”.
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The results of the BRI survey combined with central bank digital currency projects underway in major economies, albeit at varying paces, mean it is not a question of if, but when CBDCs will be introduced. in the financial ecosystem.
However, for CBDCs to become a successful means of payment, they will need to be supported by a robust market infrastructure. So what are the main considerations in this area?
The first consideration is that as CBDCs are implemented, they should simply be viewed as another form of payment offering an option with traditional, or fiat, currency and other alternative forms of money. liquid such as stablecoins.
There has always been a wide variety of choices in traditional payment methods including checks, wire transfers and debit cards and therefore the implementation of new digital currency continues to support the maturation payment systems.
The role of market infrastructure providers in the development of CBDCs, as with all new payment rails, would be to implement governance models and standardized post-trade practices, building on their current position in ecosystem as trusted utility providers and their experience in dealing with traditional assets. and operating in regulated environments.
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Second, to optimize efficiency, wholesale CBDCs should be implemented alongside tokenized assets to generate value. In effect, tokenization takes a real asset and converts it into a digital asset allowing the digital transfer, ownership and storage of that asset. This in turn brings ease of use and greater opportunity to reduce infrastructure costs.
Third, market infrastructure providers that support CBDCs should accommodate all customers who may have varying levels of technological capability. By this we mean that a market infrastructure service must enable the widespread adoption of the innovation without disadvantaging any particular customer.
The final consideration is that without a robust market infrastructure, CBDCs will not reach their full potential. As such, now is the time for market infrastructure providers to consider how they could support CBDCs.
While the US Federal Reserve and the European Commission are in the exploratory and research stages of their CBDC projects, CBDC pilots are underway in other jurisdictions, such as the Riksbank of Sweden and the Monetary Authority of Singapore. The implementation of CBDCs, although still a long way off, is planned, and the contribution of market infrastructure providers to the development of CBDCs will be invaluable.
CBDCs have the potential to deliver significant benefits to financial markets and ultimately investors by reducing risk, increasing efficiency and streamlining cross-border payments. However, if CBDCs are to be widely used and accepted, they will need to be supported by market infrastructure providers to ensure the high levels of efficiency and effective risk management that are required for financial markets.
The exact approach that market infrastructure solutions will take to support CBDCs will depend on central bank policies regarding the design and development of each respective CBDC, as well as the results of current market infrastructure provider pilots.
There is no doubt that market infrastructure providers will have an important role to play as payment systems continue to evolve.