Showcasing UDPN at The CBDC Conference 2023
In the rapidly evolving landscape of digital finance, one term that has gained significant traction in recent years is CBDC, or Central Bank Digital Currency. The CBDC Conference 2023 took place last week in the vibrant city of Istanbul. As a founding member of the Universal Digital Payments Network (UDPN) – a global messaging network supporting government-regulated digital currencies – GFT was fortunate to engage with leaders across central banking, commercial banking, retail banking and policy to discuss the latest developments and trends in CBDCs. The attendees enjoyed a remarkable experience together on a memorable dinner cruise along the Bosphorus Strait.
With an array of presentations, panel discussions and workshops, the conference provided a comprehensive overview of CBDCs’ technical, economic and societal dimensions. This blog presents some of the key takeaways from the conference, including live and pilot CBDC projects, fundamental aspects of CBDC design and policy, and explaining how UDPN is solving the common challenge of interoperability.
1. Updates from live and pilot CBDC projects
Several notable CBDC projects are making significant strides:
- eNaira (live): Nigeria’s CBDC, and the first in Africa to go live. Implementing a tiered Know Your Customer (KYC) system, expanding to include individuals without bank accounts but using mobile phones and KYC, working to reach desired adoption levels
- e-krona (pilot): In phase three, the Swedish Riksbank (central bank) is studying interactions with payment market actors, conditional payments and simplifying cross-border payments, including a collaboration with international central banks
- e-HKD (pilot): The Hong Kong Monetary Authority is exploring potential use cases, including fully-fledged payments, programmable payments, offline payments, tokenised deposits and settlement of Web3 transactions
- Digital Euro (research): Expected to serve as a digital-age monetary anchor, fostering innovation and payment efficiency, but facing competition from existing payment platforms
2. CBDC design and monetary policy
- Unlike cryptocurrencies, CBDCs are directly issued by central banks, giving them the unique ability to influence both the supply and value of these digital currencies
- Unlike tokenised assets, which are a liability of the commercial banks, CBDCs are a liability of the central banks
Design and policy considerations play a pivotal role in the successful implementation of a CBDC. First, it is key to consider the different use cases that will influence design. Offline payment capability is often cited as a critical feature. In some countries, CBDCs can be a powerful tool for financial inclusion, bridging the gap between the unbanked population and traditional banking services, whilst in others, they may be more directed at the opportunity to streamline cross-border payments, enhance payment innovation with programmability / programmable payments, and improve payment system efficiency.
With regards to monetary policy, central banks are exploring various caps to maintain stability and control. These include:
- Ceilings on CBDC holdings
- Transaction limits
- Different levels of KYC based on account holdings and transaction amounts
- Choosing between interest-bearing and non-interest-bearing CBDCs
Each individual geography and business environment is different. For the central banks, It is important when assessing the potential demand for CBDCs within their jurisdictions, that they understand the deposit structure of banks, the velocity of money and that they evaluate the effectiveness of proposed measures to minimise deposit disintermediation.
The challenges and risks associated with CBDCs call for a cautious approach. It is recommended that retail projects commence with niche use cases to mitigate risks, whilst collaborating with commercial banks, service providers and FinTechs. This deliberate strategy allows for the exploration of CBDC benefits, whilst minimising potential pitfalls. It is important for central banks to consider how to get commercial banks on board, and make CBDCs a compelling offering for them, as well as for the general public.
More on how GFT can offer a guided journey to CBDC integration success can be found here
3. The common challenge of interoperability, and how UDPN is solving it
CBDCs have the potential to effectively streamline international payments. As more CBDCs and regulated stablecoins come online, the need for interoperability grows. This is a concern common to all central banks, who cannot dodge the interoperability question when designing their own solutions.
This is where the Universal Digital Payments Network (UDPN) comes into play. Just as SWIFT creates a common standard for messaging between financial institutions across different settlement systems, UDPN serves a similar purpose for the CBDCs and regulated stablecoins. During the event, delegates were shown how this payment messaging backbone can provide interoperability between both centralised and decentralised currency, and has the potential to revolutionise the future of cross-border payments.
UDPN leverages a decentralised permissioned blockchain network which, whilst leveraging the full potential of distributed ledger technology, is less prone to risks seen with public (permissionless) networks. The UDPN operates as a decentralised autonomous organisation (DAO), whereby each node is run by different stakeholders, including commercial enterprises, regulated financial institutions, regulators and UDPN Alliance members.
The UDPN will provide the infrastructure to IT systems that offer digital payment applications and services, in a low cost and convenient manner, allowing any entity to transfer and swap digital currencies across borders, currencies and systems.