ZURICH, Switzerland–Three countries have made new announcements around their plans and views on digital currencies.
Switzerland’s central bank said it has successfully tested using digital money to settle large scale transactions between financial institutions, it said, but has not decided whether to issue its own digital currency.
Canada’s central bank, meanwhile, has made a digital currency announcement of its own.
The Swiss experiment, known as Project Helvetia, was run by the Swiss National Bank (SNB) with Swiss bourse operator SIX and the Bank for International Settlements (BIS), and looked at using central bank digital currencies (CBDCs) for so-called wholesale transactions between financial institutions to make trading assets on a planned SIX exchange that will specialize in digital versions of conventional assets more efficient, Reuters said.
It also examined connecting an upcoming SIX platform built specifically for digital assets such as cryptocurrencies with Switzerland’s existing wholesale payments system.
The SNB has been skeptical about digital currencies like Facebook’s Diem project, formerly known as Libra, saying they could undermine its ability to conduct monetary policy and achieve its goal of price stability, Reuters noted.
SNB governing board member Andrea Maechler said the project showed wholesale CBDCs were feasible from a technical and legal viewpoint, but the outcome did not mean the SNB was committed to issuing one.
“The simple answer is no, we are not ready to issue one,” she told reporters. “The first phase of Project Helvetia has been a success, but ... important questions remain.”
Bank of Canada Rethinking Timeline
Separately, in Ottawa, the pandemic is apparently forcing the Bank of Canada to rethink its timeline for a central bank digital currency, according to a deputy governor of the bank.
Earlier this year the Bank of Canada said it wasn’t planning to implement a digital currency any time soon, saying it planned to develop one only as a contingency, should the need arise.
Now, Deputy Gov. Timothy Lane said the pandemic may have accelerated some of the necessary preconditions for a potential Central Bank digital currency (CBDC), Decrypt reported.
“In February, we identified two scenarios that we would want to be prepared for,” he said. “I would say that in the last nine months we’ve seen developments that look like they’re in the direction of some of those things coming to pass sooner than expected.”
A New Role Seen in London
Meanwhile, in London, Andy Haldane, the chief economist at the Bank of England, believes digital currencies could mitigate the need for negative interest rates.
“At root, the Zero Lower Bound arises from a technological constraint on the ability to pay or receive interest on physical cash, whether positive or negative,” he said.
Zero Lower Bound or Zero Nominal Lower Bound is a macroeconomic problem that occurs when the short-term nominal interest rate is at or near zero, causing a liquidity trap and limiting the central bank's capacity to stimulate economic growth.
“In principle, a widely-used digital currency could mitigate, if not eliminate, that technological constraint by enabling interest rates to be levied on retail monetary assets.”
Mulling Decision
The Bank of England is reportedly currently mulling over whether to cut the base rate to below zero, which would likely mean that banks would have to start charging customers for deposits. Sam Woods, chief executive of the Prudential Regulation Authority, sent a letter to banks seeking information about how negative interest rates would affect them. Negative interest rates already prevail in the Eurozone, The Block reported.
Speaking at a conference, Haldane laid out both the risks and benefits of various different variations of digital currency – including Central Bank Digital Currencies and private stablecoins.
“While the focus so far has been on the costs of this disruption – for funding and credit provision – weight needs also to be given to the potential longer-term benefits of such a structural shift,” he was quoted by The Block as saying.
Profound Effects
Haldane said that a widely-used digital currency could have profound effects on financial stability, giving rise to something he described as “closer to narrow banking” – in which payments and credit-based activities are more cleanly divided, The Block explained.
Instabilities in the banking sector often arise from risk and duration mismatches on either side of banks’ balance sheets, he told The Block.
“In principle, separating safe payments and risky lending activities could lead to a closer alignment of risk and duration on the balance sheets of those institutions offering these services,” Haldane said.
CBI Goes Live With Gross Settlement System
Meanwhile, in Reykjavik, Iceland, the Central Bank of Iceland (CBI) and SIA, a European payment services and infrastructures company, have gone live with a new real-time gross settlement system (RTGS) and a new instant payment platform.
From now on, CBI can rely on a more strategic and modern infrastructure for its high and low-value payment systems also enabling closer cooperation with other central banks with SIA’s technology and innovation, The Fintech Times said.
The Central Bank of Iceland manages all interbank payments in the country: it currently processes a large daily volume of transactions – up to one million payments with peaks of 160,000 per hour – despite the small population of just over 365,000 inhabitants.
The new system has been developed in order to manage up to five million payments per day and each transaction is on average processed in less than 40 milliseconds.
“The launch of the new gross settlement system and the new instant payment platform puts the Central Bank of Iceland in a prominent position within the evolution of digital payment infrastructures. They have implemented a single platform developed by SIA which processes all types of payments (bank to bank, P2P, P2B and B2B) resulting in a consolidated operating model and in a higher level of efficiency in the whole country,” The Fintech Times said.