2023-Public-Sector-Perspectives

Why interoperability is key Developments in CBDCs are not occurring in a vacuum. Over the past 15 years, and especially in the past five, there has been an explosion of digital and e-money, including central bank money (such as CBDCs), commercial bank money, and e-money issued by regulated non-banks (see graphic below). The unprecedented pace and scale of innovation is welcome. It has spurred improvements to traditional infrastructures, such as the development of instant and end-to end traceable payment systems and the adoption of the ISO20022 standard, which enhances payment messaging fidelity and facilitates easier interlinkages between domestic systems. 1 | © 2022 Citigroup Inc. All rights reserved. Electronic money (or Stored Value) is a liability of a regulated non-bank payment company. It is redeemable on demand at par value. E-money operators have brought hundreds of millions of consumers / businesses into digital payments. Some regulators are considering whether stablecoins are a new form of e-money. Commercial bank money is a liability of a commercial bank in favor of the depositor. It is stored in accounts and is the dominant form of money. Commercial bank money is not generally available in tokenized format for retail or wholesale usage. Central bank money is a liability of the central bank. It exists in two forms: Reserves held by commercial banks and cash in circulation. Central bank liabilities don’t currently exist digitally for widespread domestic / international usage. Dozens of central banks are in CBDC exploration stage. China is already running pilots, several years ahead of the U.S. & Europe. Cryptocurrencies (such as Bitcoin) are generally intangible assets traded on exchanges and peer-to-peer. Cryptocurrencies haven’t been commonly used for payments due to volatility. Financial crime risks associated with their nature as bearer instrument. Significant increase in public interest, particularly Bitcoin. Stablecoins seek to deliver the benefits of tokenization while removing volatility. However, legal and regulatory uncertainty exists. An important aspect of stablecoins is their link to Big Techs and their network- effect (e.g., Diem’s link to Facebook via Novi wallet). Stablecoins in national currency units are growing fast and may cross the rubicon to become a new rail for digital payments. Source: Citi Global Insights E-MONEY DIGITAL MONEY 2.0 Electronic Money Commercial Bank Money Central Bank Money Cryptocurrencies Stablecoins However, technological developments have not been uniformly positive. A BIS report in June 2022 6 cited that there are now over 10,000 cryptocurrencies; it is worth assessing whether any have fulfilled their original use case as mediums of payment, and uncertainty of their role as stable stores of value, given current price trends. As the European Central Bank noted in November, the market valuation of Bitcoin, for example, is “based purely on speculation”. 7 Even the supposed unhackability of underlying blockchains has been called into question. 8 Similarly, the collapse of a number of stablecoins in 2022 – with many more breaking their peg to fiat currencies – has undermined confidence in their potential role in the financial system. Impending regulatory developments in many jurisdictions are likely to impact the viability of some digital and e-money models. However, regardless of which technologies or use cases succeed in the coming years, it is clear that the future of money will be much more varied than the past. This development raises the specter of potential payment silos, which could hinder trade flows and harm the global economy. Fortunately, there are a number of initiatives underway to enhance interoperability – both within and across technologies and geographies. 6 https://www.bis.org/publ/arpdf/ar2021e3.htm 7 https://www.ecb.europa.eu/press/blog/date/2022/html/ecb.blog221130~5301eecd19.en.html 8 https://blog.trailofbits.com/2022/06/21/are-blockchains-decentralized/ Citi Perspectives for the Public Sector 53