Central banks have tested the resilience of using digital currencies in typical cross-border wholesale transactions, signalling how seriously they are taking the use of such products.
The Swiss National Bank and the Bank of France conducted a series of transactions to settle foreign exchange payments and a €200,000 10-day euro commercial paper deal to see how central bank digital currencies would work in such scenarios.
The daily turnover in global FX markets can be more than US$6trn and international arrangements only cover a small range of currencies, assets and participants in the market, meaning cross-border settlements are riskier, slower and more costly than domestic ones.
The Bank for International Settlements was also involved in the experiment, called Project Jura. The participants said a key outcome was that such currencies might be used by financial institutions that are not resident in the jurisdiction where the transactions took place.
The three institutions concluded that CBDCs could be used effectively for international settlements between financial institutions.
That has long been a key risk monitored by financial supervisors, who fear that a counterparty could fail before a transaction is completed, as happened with Lehman Brothers’ failure in September 2008.
The deals tested settling FX transactions in euro and Swiss franc CBDCs, and issuing, transferring and redeeming tokenised euro-denominated French commercial paper between French and Swiss financial institutions.
“Project Jura confirms that a well-designed wholesale CBDC can play a critical role as a safe and neutral settlement asset for international financial transactions,” said Benoit Coeure, head of the BIS Innovation Hub.
Private sector firms were involved in the project, including Credit Suisse, UBS and Natixis. The banks directly transferred CBDCs between each other on a single platform based on distributed ledger technology in a near real-time situation that met regulatory requirements.
“Jura demonstrates how wholesale CBDCs can optimise cross-currency and cross-border settlements, which are a key facet of international transactions,” said Sylvie Goulard, deputy governor of the Bank of France.
Some smaller central banks, such as the Bahamas, have already issued CBDCs but larger ones are at different stages of assessing them. Goulard said the eurozone had not yet decided on whether to introduce a euro CBDC.
“We cannot prejudge the decision of the [EU] governing council,” she said. “But we are convinced we need to dig deeper and make sure systems are efficient and safe. We are not at the end of the journey. This is an important first step.”
Coeure said: “The ultimate ambition is to make cross-border transactions simpler and faster.”
"Huge impact"
Mohamed Kallala, co-head of corporate and investment banking at Natixis, told IFR the use of blockchain technology and CBDCs more widely could have “a huge impact on the financial industry”.
He said stablecoin initiatives of this kind would have “more impact than bitcoin and related crypto assets”. Such assets account for 95% of the total market value of all cryptocurrencies, currently over US$2trn.
“This will provide additional services to investors beyond being just another asset class,” he said, noting that stablecoins linked to real currencies would have a wide impact on banks.
“There is a lot of serious work looking at the impact of stablecoins. With CBDCs you may see central banks growing deposits, which are guaranteed direct by the central bank rather than being placed with financial institutions.”
That could change how banks are funded, with them having to rely more on wholesale markets if some of their deposits are lost.
“We will be prepared for this and we are advising [financial] clients on the impact of this as deposits move to central banks and how this will impact how they finance themselves,” said Kallala.
The European Central Bank is understood to be studying this aspect and might cap the level of deposits it could hold from an individual, possibly at €10,000.
“Central bank money is the safest of all assets as the central bank can’t default. It is neutral as it has no commercial interest. But without central bank participation in stablecoin you would lose those points,” said Coeure.
The BIS’s report into Project Jura said the use of CBDCs in securities transactions “could also enhance the operational efficiency of primary and secondary markets and extend the safety of central bank money to new financial market infrastructures, freeing up bank capital.”