The central bank digital currency (CBDC) field has become crowded, global in scope, and yet in many cases, fragmented.
Generally speaking, in concept, the CBDC affords a central bank a way to battle the proliferation of cryptocurrencies, which are still in the midst of a ferocious regulatory debate no matter where you look.
As proof positive of the fragmentation, consider these stats from the Atlantic Council: 11 countries have launched CBDCs, 18 are in pilot programs and dozens more are in various stages of research and/or development.
What’s been lacking is one CBDC to rule them all, to borrow a phrase from author J.R.R. Tolkien. Call it Tolkien on tokens? (We’ll stop with the puns).
The issue with CBDCs is one of global reach, of interoperability. Each central bank can conceivably — if it has the willpower and the digital infrastructure in place and the acceptance of businesses and consumers — launch a CBDC that works well for domestic commerce and disbursements of government aid.
For CBDCs to truly gain ground, though, they need to be interoperable across borders to facilitate trade and commercial payments in the global age, existing alongside and interacting with far-flung payment systems.
To that end, as reported on Monday (April 10), the Digital Currency Monetary Authority has unveiled what has been termed an international version of a CBDC.
The digital offering was introduced at the spring meeting of the International Monetary Fund.
Dubbed the Universal Monetary Unit (UMU), the CBDC is designed to act “legally a money commodity,” and “can transact in any legal tender settlement currency, and functions like a CBDC to enforce banking regulations and to protect the financial integrity of the international banking system,” per the Monday announcement. In terms of the workings of the CBDC itself, Banks can attach SWIFT codes and bank accounts to a UMU digital currency wallet and transact “SWIFT-like cross-border payments over digital currency rails.”
Designed with International Intentions
In an IMF fund paper discussing CBDCs for use in cross-border payments, the IMF wrote, “if CBDCs are not designed with the international dimension in mind, fragmentation of CBDC systems similar to the existing fragmentation of payment systems is possible. Hence, in order to benefit from the potential of a clean slate, it is essential that central banks take interoperability issues into account when designing their domestic CBDC. Central banks are considering both retail and wholesale CBDC arrangements. Motivations for each differ as do their objectives.”
The announcement does not seem designed to push other CBDC efforts aside. But in coexisting with the myriad CBDCs likely to take root in the coming months and years, a seemingly universal option seems to be one that can unify a fragmented landscape.
For now, the pan-global efforts seem to be focused on showing that global interoperability can make the leap from concept to reality. As noted in this space in recent months, other global initiatives are in place. In January of this year, the Universal Digital Payments Network was launched at the World Economic Forum.
A comprehensive CBDC option would also likely have the impact of moving cryptos — namely, bitcoin and its brethren — firmly to the side when it comes to international transactions, especially commercial transactions. The regulatory landscape is anything but certain, and as relayed here, Agustín Carstens, general manager of the Bank for International Settlements (BIS), said in remarks in February that “a few years ago, crypto assets and cryptocurrencies have been put as an alternative to fiat money. That battle has been won,” he told PYMNTS. Technology, he said, does not pave the way for “trusted money” — and it’s the central banks, and their infrastructure, that gives money “credibility.”