Today Thomas Jordan, Chairman of the Swiss National Bank Governing Board, outlined the pros and cons of wholesale central bank digital currency (wholesale CBDC) at the BIS Innovation Hub Summit. The SNB is currently conducting live pilots as part of Project Helvetia III, in which the digital Swiss Franc is being tokenized on the SIX Digital Exchange (SDX) and used for settlement.
Helvetia III is unique in many ways. Firstly, it uses a production DLT financial market infrastructure, which is a rarity and makes for a better pilot. Another is the issuance of the CBDC on a third party platform, which is where governance is critical in order to give the central bank the control and monitoring capability it desires. Governance was one of two wholesale CBDC challenges outlined by Chairman Jordan.
SDX is part of the SIX group, which also operates the country’s real time gross settlement (RTGS) system, SIC. Hence, it is dealing with a group that already has a significant track record with the central bank, lowering it’s risk. We’d also observe that before the wholesale CBDC, SDX was privately tokenizing cash from its central bank account using the same system, reducing the risk even further.
The second challenge identified by Chairman Jordan is fragmentation by creating a second pocket of central bank money on SDX. However, by automating the tokenization and movement between the SDX platform and RTGS account, this fragmentation is reduced. Synchronizing the operating hours of both helps address the fragmentation. However, we’d observe in future that could also limit the utility of potentially expanding hours when secondary DLT markets are more active than now.
Alternatives to wholesale CBDC
Chairman Jordan compared the wholesale CBDC to two alternatives. One is a direct link to an RTGS system, which is a little similar to the Bundesbank’s Trigger solution. He acknowledged this addresses both the governance and fragmentation challenges. But it also uses the old way of siloing operations and linking via messaging. This reduces the DLT benefits as it still requires reconciliations and has many of the drawbacks of the status quo.
Another alternative is to have private tokenized currency backed by a bankruptcy remote vehicle and central bank money deposits. This is similar to Fnality, the UK-based infrastructure that’s starting by tokenizing pounds with plans for dollars and euros.
Chairman Jordan noted that private tokenized money addresses the governance challenge, but not the fragmentation one. And the regulatory treatment needs reviewing as it’s not a direct claim on the central bank.
Hence, in summary there are tradeoffs between governance and risk issues versus the ability to deliver efficiency gains. The SNB plans to continue assessing these issues before deciding on one or more approaches.
Last month Chairman Jordan gave another speech about CBDC in which he discussed different issues, including design questions for a wholesale CBDC. He also stated that a retail CBDC was too risky for Switzerland.
