Thomas Jordan, the Chair of the Swiss National Bank (SNB), believes a retail central bank digital currency (CBDC) is too risky. However, the SNB is actively piloting a wholesale CBDC as part of Project Helvetia III, and he gave a progress update. He also shared the outstanding questions in order for the pilot to enter production.
On the retail CBDC front, he started from the usual advanced economy perspective – there’s no need because payment requirements are already satisfied. However, he was more adamant than other central bankers.
“Retail CBDC could fundamentally alter the current monetary system and the role of central banks and commercial banks, with far-reaching consequences for the financial system,” said Dr Jordan. “From a Swiss perspective, the risks of retail CBDC currently outweigh its potential benefits.”
Helvetia wholesale CBDC
The central bank has been courageous, not just in piloting a wholesale CBDC, but also in its willingness to issue the digital currency on a third party platform. If you read comments from other central bankers, including some Federal Reserve Governors, the idea of issuing a CBDC on a platform not controlled by the central bank is like giving out the keys to the castle.
For the Swiss pilots the CBDC is issued on the SIX Digital Exchange (SDX) platform. That said, Switzerland is in a unique position in that SIX also operates the Swiss real time gross settlement (RTGS) system, SIC. Hence, it’s not as if the SNB is putting its trust in some unknown company. It’s merely extending an existing trust relationship, albeit in an important way.
So far the CBDC has been used to settle the issuance of four municipal bonds issued by Basel, Zurich, Lugano and St Gallen. Dr Jordan shared that the SNB is exploring the use of the wholesale CBDC for monetary policy operations such as SNB bills and repurchase agreements (repo).
Regarding the learning points from the pilots, the central bank has demonstrated it can keep control over the issuance on the SDX platform by technology and contractual means. Additionally, banks have been able to accommodate the CBDC.
Remaining wholesale CBDC questions
To decide whether to move into production, the central bank is pondering if the timing is right, whether there are alternatives, what the design might be, and how to decide which platforms can host the CBDC.
Is the timing now right or should the central bank wait to see if tokenization takes off? This one surprised us given usually a central bank raises it because it wants to wait before going to the expense and effort. In the case of SDX, the central bank is using the same production solution SDX was already using to tokenize cash. Admittedly, the volumes have been pretty small. Perhaps there’s still considerable work to do, or the pilot may not be that well integrated.
Secondly, the central bank is considering whether the CBDC is the best option. Alternatives include linking to the SIC payment system or private wholesale solutions. In the UK, there’s no urgency for a wholesale CBDC because of the privately backed Fnality settlement solution, where settlement tokens are backed by central bank money. Twenty major institutions invested in Fnality, including the Nasdaq, DTCC, Euroclear, BNP Paribas and Goldman Sachs.
Thirdly there are design questions: can the CBDC be held overnight, what level of interest, and who can access it? Can foreign banks use it for cross border payments?
Finally, it’s important to consider the criteria to assess which platforms it will use to issue a CBDC. Plus, the related governance arrangements are critical.
