Driving Growth in Digital Securities through Central Bank Digital Currencies

CBDC Overview

What is a CBDC? A central bank digital currency is a national currency that is represented by digital tokens using blockchain technology. CBDC is centralized and would be regulated by the country’s monetary system.

CBDC Pilots and Programmes

CBDC initiatives are occurring in numerous countries. China has experimented by offering $1.5 million in digital currencies this past October. Singapore launched project UBIN, testing digital currencies in the settlement of payments and securities. North American jurisdictions are also dabbling into the world of digital currencies, with the Bank of Canada researching “potential system designs and business models for a digital currency that, like a banknote, would be widely accessible, secure and denominated in Canadian dollars.”(4)

  • Canada — Project Jasper: The first experiment to test the future of the payment industry was conducted by Bank of Canada, Payments Canada, and several private financial institutions in four phases in 2016. Project Jasper also partnered with the Monetary Authority of Singapore and the Bank of England to work on a cross-border, cross-currency settlement system. The collaboration combined with Singapore’s Project Ubin to use DLT to make cross-border payments faster and less expensive.
  • Singapore — Project UBIN: The Monetary Authority of Singapore validated smart contracts in payments network prototype in cases such as Delivery-versus-Payment (DvP) settlement, thereby creating a milestone in the payment industry. Singapore is currently collaborating with People’s Bank of China (PBoC) to work towards reducing cross border payment costs, speed up settlement and ensure security.
  • China — Digital Currency Electronic Payment (DCEP): The PBOC has reportedly filed 84 patents relating to its CBDC initiatives, revealing that the central bank has major plans to integrate digital currency wallets into existing retail bank accounts in the short-medium term (5). Over the last decade, private companies with online payments such as Alipay by Ant Group and WeChat Pay by Tencent have been growing rapidly and stand to benefit from CBDC adoption.
  • USA — Digital Dollar: With competition from China’s digital Yuan, the US announced that the Federal Reserve would authorize the “Digital Dollar Account Wallets,” which similar to China’s DCEP would provide U.S. residents and businesses a platform to carry out financial activities via an app on their mobile phone. However, the actual implementation date for the kick start of the Digital Dollar is under development.
  • Switzerland — Project Helvetia: Just as Canada and Singapore did, Switzerland carried out an experiment called Project Helvetia which successfully tested the integration of tokenized digital assets and central bank money. Switzerland tested both technical and legal aspects of the wholesale payment system with SIX Digital Exchange (SDX), the Swiss National Bank (SNB) and BIS Innovation Hub (BISIH).

Stable Coins from Regulated Players Emerging

With the world moving toward a cashless future, leading banks have started investing time and resources to come up with their own digital currencies — which we will refer to as financial coins to differentiate from stable coins. JP Morgan Chase & Co. created its own financial coin called the “JPM Coin”, and established a whole new business unit called ‘Onyx by J.P. Morgan’ that focuses on blockchain technology and digital currency. JPMorgan is the biggest settlement bank in the world, moving more than $6 trillion a day across more than 100 countries (6). The impact of the migration to JPM Coin will be felt globally.

CBDCs are key to enabling digital assets

With all the developments in CBDCs and related financial coins, the prospect for catalyzing digital securities growth is strong. The key benefit CBDCs bring to the DSO market is to collapse the settlement time of transactions from several days (or even weeks) to instant.

Conclusion: CBDCs or Stablecoins from Regulated Entities are Key

Many might suggest using crypto assets to create the instant settlement needed to drive DSO growth. The challenge with even stablecoins like USDT/C is they are not readily usable in the real world and they still have uncertain value. Although adoption of Bitcoin is rising, institutions with fiduciary responsibilities will still be reluctant to hold stablecoins as settlement for DSO purchases. CBDCs will bring a regulated standard to the stablecoin ecosystem, increasing institutional trust in blockchain-based official currencies. Our view is that a mix of both cryptocurrencies and regulated digital currencies will likely make up the settlement instrument universe. Both would be positive for driving the growth of digital securities.

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Atlas One Digital Securities

Atlas One Digital Securities

Co-Founder & CEO, Altas One Digital Securities