Initiatives around central bank digital currencies (CBDCs) are advancing globally in the wake of digitalization. At the forefront of research is the Swiss National Bank (SNB), which was early to explore the advantages/disadvantages of blockchain technology and currencies built on top of it.
In 2019, the Swiss National Bank first expressed its opinion on the state of CBDCs at that time and explored the use of a digital franc in the national financial system with infrastructure provider SIX. Two years later, the Bank for International Settlements (BIS) was brought in as part of "Project Helvetia" to settle securities transactions with digital central bank money. This was extended to cross-border payments under the name "Project Jura." Today, the Swiss currency watchdog has a good overview of the nuances of the technology. In an interview with CVJ.CH, Thomas Moser, Alternate Member of the SNB Governing Board, explains what the future of money might look like from the Swiss National Bank's perspective.
CVJ.CH: Digitalization is shaping the most diverse parts of our society. For a good decade now, the digitalization of currencies has also been coming to the fore. What changes is the Swiss National Bank observing in this transition phase?
Thomas Moser: Digitalization is already well advanced in the financial markets, but it has accelerated again in recent years, especially in payment transactions. Transition phases are always associated with risks, because infrastructure and regulation are lagging behind and not all consequences are yet foreseeable.
The Swiss National Bank (SNB) therefore endeavors to accompany developments in such a way as to ensure stability and security in the financial sector. At the same time, we are taking advantage of the opportunities offered by digitalization, for example by operating on the financial markets via the latest trading platforms and using algorithms. The SNB is one of the pioneers among central banks in this area. In cashless payment transactions, we strive to keep Switzerland's central payment system, which SIX Interbank Clearing Ltd operates on behalf of the SNB, up to date.
Subscribe to our newsletter
The best articles of the week, directly delivered into your mailbox.
How is the development of blockchain technology related to these developments?
Today, several separate platforms are needed to conclude a financial market transaction. In addition to the trading platform, there needs to be a clearing platform to settle a transaction and one platform each to transfer the assets and a platform to transfer the money. Blockchain technology can be used to consolidate these steps and bring them onto one "platform." This allows for efficiency gains and more automation, especially when both the assets and the money are in digital form on the same platform.
What challenges do central banks face as adoption of cryptocurrencies like Bitcoin increases?
Bitcoin is interesting because it has enabled blockchain technology to be harnessed. Bitcoin and other cryptocurrencies are not really a challenge for central banks, however, because they have extremely high price volatility and are therefore poorly suited as a means of payment and thus as money. Bitcoin is more of a speculative investment, like gold or other commodities. For this reason, stablecoins take over the function of money on the blockchain. However, stablecoins are denominated in fiat or central bank currency, they are not built on cryptocurrencies but on central bank money and therefore need central banks. Stablecoins are therefore comparable to book money of commercial banks and as a result hardly pose any new challenges, apart from regulatory issues.
What impact will the introduction of CBDCs have on the current financial system?
The implications depend on the nature of the CBDC and its design. One concern is that CBDCs could compete with commercial banks' book money and commercial banks could lose customer funds on a large scale, either permanently or at least during periods of high uncertainty. The more CBDCs resemble banks' demand deposits in their functionality, the greater this risk.
A so-called wholesale CBDC (wCBDC), on the other hand, which would not be accessible to the general public but only to regulated financial institutions, would have little immediate impact. It would, however, allow the current financial system to use blockchain securely.
What factors have contributed to the recent acceleration of CBDC efforts worldwide, particularly in the EU?
In addition to a better understanding of blockchain technology, the emergence of blockchain-based financial market infrastructures such as SIX Digital Exchange (SDX) and the rapid growth of stablecoins are also likely. Should blockchain technology become significant for financial transactions, it would be appropriate to have central bank money available on the blockchain as well. Central bank money is the only risk-free form of money, that is, the only form of money without credit and liquidity risk, and thus the safest and preferred form of payment for systemically significant payments. Concerns about possible digital dollarization, however, probably played a role in some countries as well. The majority of stablecoins in use today are denominated in U.S. dollars.
Is a coexistence between stablecoins and CBDCs conceivable for the Swiss National Bank?
In the current financial system, there is already a coexistence of central bank money and private money (bank deposits) and the vast majority of payments are made with private money. On the blockchain, stablecoins resemble the book money of banks in the traditional financial system, to that extent a coexistence of CBDC and stablecoins is quite conceivable. But this would require that CBDC and stablecoins differ in terms of functionality or convenience. Stablecoins must offer added value compared to CBDCs so that customers do not exclusively hold and use bankruptcy-proof CBDCs.
What is the Swiss National Bank's position on the CBDC issue and what developments is the SNB following in this area?
The SNB is not currently planning to issue a retail CBDC (rCBDC), i.e. a CBDC for the general public. However, we are experimenting intensively with wholesale CBDCs (wCBDC), i.e. a CBDC that is only available to regulated financial market institutions, such as accounts at the SNB today. In Switzerland, where SDX, a regulated blockchain-based exchange, already exists, the question of whether a wCBDC is needed is not only of theoretical but already of practical relevance. We have published the reports on our wCBDC experiments - the Helvetia and Jura projects. There we have shown the technical feasibility. We are currently deepening this work. For example, we will issue real wCBDC on SDX for selected transactions this year.
How does the SNB assess the advantages and disadvantages of programmable central bank money and which factors outweigh them from Switzerland's perspective?
Programmable central bank money, i.e. central bank money with built-in rules and corresponding restrictions on use, is a highly controversial topic. On the one hand, it could offer interesting opportunities for both central banks and society; it could increase the efficiency of monetary policy, additional security features could be built in, or perhaps even aids could be programmed for the visually impaired or for people with dyscalculia.
On the other hand, restricting usability contradicts an essential property of money. Moreover, programmable central bank money would increase the complexity and thus probably also the error-proneness and compromisability of CBDCs. The SNB does not yet have a definitive position on this. However, programmability could be one of those functionalities offered by private stablecoin providers rather than by the central bank.
What are the biggest challenges in issuing digital currencies in the form of CBDCs?
On the technical level, the biggest challenges are ensuring security, scalability, and adequate privacy protection. Just like a banknote, a CBDC must be absolutely forgery-proof. The SNB is currently testing all three aspects together with the Swiss center of the BIS Innovation Hub as part of the Tourbillon project. In addition to the technical level, however, there are also unresolved legal issues and questions regarding governance when operating a corresponding infrastructure. There is no right or wrong answer to these questions, but answers and, if necessary, new legal foundations are needed.
What impact might CBDCs have on financial inclusion and how do central banks plan to ensure that all members of society have access to these digital currencies?
It is important that all members of society have access to money and secure payment options, but this does not necessarily have to be a CBDC. In the case of a wCBDC, only regulated financial institutions would have access, just as they do today to accounts at the national bank. Access to digital money would then have to be provided by the private sector, as it is today, on the blockchain via stablecoins, for example. Recently, several banks have expressed interest in issuing stablecoins, although banks prefer to talk about tokenized book money rather than stablecoins. However, the SNB will continue to offer cash in the future. Cash is also an ideal offline and backup solution if there is no internet or even electricity available. Digital offline solutions are much less secure.
How does the SNB intend to work with other central banks and international organizations to ensure a coherent strategy in the digitalization of currencies?
When it comes to the digitalization of currencies, there is plenty of scope for national strategies; in this respect, international coordination is not mandatory. However, the SNB is represented in the relevant international bodies that deal with this topic (BIS, FSB, IMF). Coordination is most likely to be necessary in regulatory matters; otherwise, it is primarily a matter of exchanging information and learning from one another.
In recent years, significant progress has been made in the development of quantum computers. The cryptographic protocols commonly used today to secure financial transactions would not withstand an attack by quantum computers. What does this mean for CBDCs?
This is indeed a danger and it cannot be ruled out that state actors are already further advanced in the development of quantum computers than is publicly known. The SNB is addressing this challenge in the Tourbillon project. Together with the Swiss center of the BIS Innovation Hub, we are developing a CBDC prototype that would withstand attacks from quantum computers. To do this, we are using post-quantum secure cryptography for the digital signatures but also to secure the entire system. We expect to publish the project report and source code in the fall.
Decentralized finance promises to work without financial intermediaries and central authorities such as central banks. What is the SNB's view of this development? Is it a threat to the traditional financial sector and central banks?
In the area of Decentralized Finance (DeFi), there are very interesting innovations that could also be of interest to the traditional financial sector and used by banks to increase efficiency. The SNB itself currently has a project called Mariana, in which we are using Automated Market Makers (AMMs), such as those used by the Decentralized Exchanges Uniswap or Curve, to trade wCBDC on an experimental basis together with the central banks of Singapore and France. Experience shows that the majority of customers are very happy to work with intermediaries because they offer services that customers value. And as the example of stablecoins shows, the price stability of fiat money and therefore central banks on the blockchain are also valued. Decentralized finance, however, is certainly very innovative and brings additional competitive pressure for the traditional financial sector.
Thomas Moser has been an Alternate Member of the Governing Board of the Swiss National Bank since 2010. Prior to that, he was Executive Director at the International Monetary Fund (IMF) in Washington, D.C. Thomas Moser is also a visiting professor at the Faculty of Economics at the University of Lucerne and a member of the Executive Board of the Swiss Institute of Banking and Finance at the University of St. Gallen. Thomas Moser holds a PhD in economics from the University of Zurich.
