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Central Bank Digital Currencies Can Build New "Ecosystem" – White Paper

Tom Burroughes

2 June 2023

Central bank digital currencies – forms of fiat currency – could foster greater financial stability, encourage new commercial tie-ups and simplify compliance, among other outcomes, according to a White Paper from and PwC China.

In a relatively brief caveat, however, the document noted that CBDCs could affect individuals’ financial privacy, given the data-sharing/access implications of these entities.

The study was issued following the Hong Kong Monetary Authority’s recent start of its e-HKD pilot programme, where Standard Chartered was one of the participants selected, based on its proposed use case of e-HKD in offline payment scenarios. (See a reaction to the pilot project.)

The feasibility of using wholesale CBDCs for cross-border payments between central banks has already been tested through pilots such as mBridge – a joint project between the Bank for International Settlements Innovation Hub and four central banks. Studies and pilots on retail CBDCs are also underway in mainland China, Hong Kong and a number of other jurisdictions. (The Bank for International Settlements has weighed in on CBDCs’ potential impact on competition and financial markets.)

At present, many loyalty schemes are restricted in their geographical scope. Complexities of technical, regulatory and tax issues across jurisdictions can hinder cross-border efficient schemes, the study said.

“Standard Chartered is optimistic about the future of CBDCs and their tremendous potential for the economy of China and the wider world,” Anthony Lin, CEO, GBA, Standard Chartered, said. “The power of CBDCs to create a seamless and innovative digital economy cross-border will be especially important in the context of the Greater Bay Area (GBA). Combining trust and programmability, CBDCs will transform ecosystems and the payments landscape for individuals and businesses across the region and beyond.”

It's all in the programme
Programmed CBDCs can enable small firms or networks of niche brands to form alliances and offer compelling digital loyalty schemes, thus greatly enriching the retail space, the White paper said. Programmed CBDCs can also be used to widen access to trade and supply chain finance. While widely available to buyers and suppliers with sound credit ratings, many SMEs still face barriers when seeking to access these financing solutions due to their lack of scale, collateral or credit history. 

(“Programmability” refers to the deployment of smart contracts to programme self-executing transactions with pre-defined conditions.)

Cashless growth
The rise of the “cashless” economy has been rapid. According to a study by in 2021, there were 1,035 billion global cashless payments in 2020. This figure is expected to increase by 82 per cent in 2025 and to almost triple by 2030. Research by the World Bank finds that two-thirds of adults worldwide have made or received a digital payment.

The study argues that “programmable banking innovations” enabled by CBDC could “drive the need for central bank money, ensuring its role as the anchor of monetary and financial stability.” This is controversial: as argued in this recent book by Edward Chancellor (and reviewed by this news service), central bank monetary policy of recent years has arguably driven the boom/bust cycle, widening inequalities and distorting business as a result of quantitative easing and the suppression of market interest rates. 

Big Brother?
The idea of such currencies worries privacy campaigners – an issue certain to exercise the private banking industry, for obvious reasons. As the report itself notes: “Sharing data related to consumers’ wallet transactions and their use of loyalty programme services will be a critical factor for the adoption of this CBDC use case by the merchants and the network.”

Concerns about CBDCs include how, for example, they could form part of a China-style “social credit” system of incentives/penalties for behaviours – such as spending money on a gym membership, or buying large amounts of alcohol, purchasing subversive literature, and the like. A paper, called Central bank digital currencies risk becoming a digital Leviathan by Andrea Baronchelli, Hanna Halaburda, and Alexander Teytelboym, was published in Nature Human Behaviour in 2022, highlighting such concerns. The researchers said that if the wrong technology is chosen, states, even if they are democratic, could know a user’s identity, income and transactions.