Central bank digital currencies (CBDCs) are currently being trialed and researched by a number of major central banks around the world.

Statistical findings

Released on 25 October 2018, the collaborative study between IBM Blockchain World Wire and the Official Monetary and Financial Institutions Forum (OMFIF) has found that 38% of the 21 central banks studied and trialed CBDCs to “inform the next upgrades” of their real-time gross settlement (RTGS) systems.

The remaining 62% were not active in this field, though the study does reveal a growing sentiment toward distributed ledger technology (DLT) in fintech, as well as smart contracts.

According to the report, central bank experiments with CBDC DLT systems resulted in “mixed results”, which it boils down to the mixed objectives set out by researchers, seemingly these goals are outlined by “novel avenues” being explored as opposed to the creation of an entire RTGS system replacement.

A majority of the respondents (76%) were unsure as to whether or not DLT is the solution, questioning its ability to live up to the hype with regulation being a contentious area. That said, the report notes that the central banks themselves are not putting sufficient effort into to researching the regulation of DLT payments and how they would work.

Of all the legal frameworks available that wholesale CBDCs would have to abide by, the Principles for Financial Market Infrastructures (PFMIs) are most relevant, which are the international standards for “payment, clearing and settlement systems”, as defined by the Bank for International Settlements.

Expert views

Lael Brainard, Federal Reserve Board of Governors offers a quote to the report saying: “Digital tokens for wholesale payments and some aspects of distributed ledger technology – the key technologies underlying cryptocurrencies – may hold promise for strengthening traditional financial instruments and markets.”

The report concludes that cross-border collaboration is essential to overcoming the complexities that come with RTGS in domestic and cross-border payments.

Michelle Bullock, Assistant Governor (Financial System) of the Reserve Bank of Australia (RBA), writes that “cross-border payments are widely regarded as an area in which significant efficiency gains exist. Current processes are slow and costly, involving significant compliance burden and a number of different financial institutions in different jurisdictions.”

Offering somewhat of a solution, she adds, “New technologies and new business models could be used to address some of these frictions.”

Practicality

Aside the statistical results and opinions, the report also breaks down particular areas of the subject across five sections, also offering some suggestions for those seeking to create CBDCs and how to manage particular issues that may arise.

It also makes note of several countries that are actively exploring DLT solutions and engaging with the potential issuance of a national CBDC, such as the Bank of Thailand who is developing a wholesale CBDC and has successfully tested its key payment capabilities, and the Bank of Canada who have tested DLT in payment systems to mixed results.

Furthermore, the need for a cooperative international regulation effort is considered as “critical” by the study, writing that PFMIs offer a “solid foundation”, but are limited as a long-term solution due to the potential of “regulatory arbitrage in different jurisdictions”.

 

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