3/4 – 3/10
WEEKLY RECAP
- Total market cap. reached $135bn (a 4.0% increase), and 7 day trading volume increased 27.2% for top 100 crypto
THOUGHTS OF THE WEEK
Central Bank Digital Currency (CBDC) Wholesale Payment Systems (WPS) have seen wider and more rapid prototyping than CBDC Retail Payment Systems (RTS). This likely due to the more significant cost savings that may be possible via CBDC WPS. Furthermore, the interests of private financial institutions and central banks are generally aligned in the development of CBDC WPS, while CBDC RTS are viewed as possible competitors to existing RTS operated by private financial institutions.
A wholesale payment system “deals with inter-bank, inter-country large value, large volume real-time payments and related clearing and settlement systems governed by central banks integrating various globally accepted standards.” A CBDC WPS considers how digital currencies can be utilized to improve the efficiency of WPS. A simplified example implementation of a WPS is proposed in Project Ubin, and is outlined in the chart of the week.
In this proposed system, banks hold a special deposit account with the central bank. A bank can deposit funds into this deposit account from the bank’s RTGS account. The balance of this deposit is mirrored in a digital currency wallet on the permissioned blockchain system. Moving funds into the deposit account thus creates digital currency (in this case Deposit Receipts) in the wallet, and withdrawals from the Deposit Account burns Deposit Receipts in the wallet. Banks, with Deposit Accounts, can then transfer Deposits Receipts between bank wallets on the blockchain.
Such a system can be designed around DLT, and the specifics of the system depends on the digital ledger technology chosen. The options most commonly considered are R3’s Corda, Hyperledger’s Fabric, and JP Morgan’s Quorum, which were introduced in part 4, 5, and 6 of this series. Several WPS proof-of-concepts have been developed to date (see part 1 of this series).
The concepts tested in these projects using these systems have generally proven that DLT is able to execute transactions at a rate matching existing RTGS volumes and with finality, albeit often at the cost of limited privacy or system resilience. Further development would be needed to achieve more efficient trade-offs between these aspects. One must also note that a full-fledged CBDC WPS ought to include liquidity management and credit extension functionality. Concepts for both of these functions exist, but are considered beyond the scope of this introduction on the CBDC topic.
As more actors in financial markets consider introducing DLT based systems, the complexity of interoperability and the potential for new business models both increase. We will return to this topic as CBDCs see further development.
CHART OF THE WEEK
© 2018 Standard Kepler
