The number of CBDC solutions is proliferating and each one is very different. Each tokenized bond issuance appears to be on a new siloed blockchain platform. Rather than viewing this as a problem, this fragmentation is a natural feature of innovation, said Jennifer Lassiter who leads the Digital Dollar Project. She made the point during a CBDC panel at the SIBOS banking conference.
And she’s absolutely right. In the early days of the Internet, startup Mozilla competed with Microsoft’s Internet Explorer to capture the web browser market. This was years before Google appeared on the scene. While standards were in the works, some of them were deliberately ignored in order to push the innovation envelope.
Building websites that looked consistent across browsers was almost impossible. If you wanted a website built you had to specify which web browser the website would look great on. The other one would be just so-so. Once the internet reached a certain level of maturity, consistency became critical and web browsers started to conform to standards.
CBDC, fragmentation and the lifecycle of innovation
Ms. Lassiter pointed to the lifecycle of innovation. It starts with academic research, moves into experimentation, and with a CBDC evolves into moving real money. Then you look at use cases and test technologies.
“We’re at that next phase. So we have fragmentation now because the experiments have lived mostly… within the economies that they’ve been developed in,” said Ms. Lassiter. “And in the private sector, you have a lot of proprietary chains or proprietary tokens that have been stood up. And it is very natural for us to be in that state.”
For CBDC she sees a transition over one to two decades as standards evolve – technical protocols, technical standards and policy standards. Policy frameworks need to be developed.
One of the challenges is how to have a “flexible architecture that can accommodate the maturation of these technologies and policies together, so that we can evolve, and we’re not starting from scratch every couple of years,” said Ms. Lassiter.
CBDC interoperability
Lee Braine from Barclays raised a related point. Currently, there’s a Cambrian explosion of experimentation and innovation. For CBDCs, he believes it’s possible to work out solutions to privacy and interoperability. “To solve the adoption, you’ve got to reduce that innovation,” said Mr Braine. “It reaches a certain point where you’ve done all the experimentation. Then you need to consolidate in order to get the mass adoption, particularly the interop(erability).”
At the end of the panel, the speakers were asked for predictions. One of the most interesting ones was from the BIS, forecasting wholesale CBDC will dominate as a settlement asset at the backend. “But in the retail facing space it will be more of a tokenized deposit or other forms of assets that will take over the customer facing function,” said Sonja Davidovic. In other words, not retail CBDC. She was seconded to the BIS Innovation Hub from the Monetary Authority of Singapore which doesn’t see a need for retail CBDC. Notably, last year she worked at the ECB on the digital euro.
