Paper Encourages Collaboration between Public and Private Institutions and Outlines Opportunities, Challenges, and Questions Concerning the Design, Issuance, Legal Status, and Use Cases of wCBDCs
Over 70% of central banks have begun exploring the
possibility of introducing central bank digital currencies (CBDCs). A
new paper, commissioned by the Global Financial Markets Association
(GFMA) from Boston Consulting Group (BCG) and Clifford Chance LLP,
identifies the GFMA’s critical considerations for the success of
potential CBDCs in wholesale markets (wCBDCs).
Entitled Central Bank Digital Currencies: A Global Capital Markets Perspective,
the paper is based on research, as well as extensive interviews
conducted with contributing member firms and market participants with
particular expertise relevant to CBDCs, during the fourth quarter of
2021.
The authors' recommendations stress that:
- Central banks in collaboration with the private sector should
continue to explore the role that wCBDCs can play in driving innovation
and efficiencies in wholesale markets.
- Central banks should take a measured approach in the introduction
of wCBDCs and the timeline should be cautious to mitigate any potential
transition risk impacting safety and soundness, and financial stability.
- wCBDCs are expected to operate alongside legacy instruments and
systems, and not to replace them. It is therefore important for wCBDCs
to be interoperable with the broader financial market ecosystem.
- The use of sandboxes, proof of concept, dialogue with market
participants, and pilot programs based on specific use cases will test
the application of wCBDCs and help identify the impact on capital
markets.
- After sufficient analysis of lessons learned, financial
institutions and regulators should define a transition period that is
reflective of the risks and opportunities, and an effective
implementation.
The paper outlines the opportunities, challenges, and questions
concerning the design, issuance, and legal status of wCBDCs, while
introducing use cases to provide a framework for continuing a
constructive conversation.
GFMA, which represents the leading global financial and capital
market participants, takes particular interest in this topic as its
members will play a critical role in the potential distribution and
intermediation of CBDCs. Allison Parent, executive director, GFMA, said,
"Banks are recognizing that the adoption of wCBDCs could enhance the
efficiency, resilience, and effectiveness of money flows and capital
markets, but for a wCBDC to be a valuable instrument, it must be part of
a collaborative partnership between public and private sectors. In this
paper, we outline a series of critical design and legal factors that
must be taken into account."
"wCBDCs are designed to facilitate wholesale market transactions,
with direct access to the wCBDCs limited to regulated financial
institutions and PSPs. We and our partners recommend following the
current two-tier structure which places central banks at the foundation
of the payment system, while assigning end-user-facing activities to
financial institutions and other PSPs," said Roy Choudhury, managing
director & partner, BCG.
Simon Gleeson, partner, Clifford Chance, said, "The first rule of
medicine is 'do no harm', and we must follow that principle as we work
to transplant wCBDCs into the real world economy. Failure to get the
legal status of wCBDCs right could pose a threat to the safety and
integrity of markets and to privacy rights. The legal status of wCBDCs
would have to be firmly established, guaranteeing wCBDCs as fungible to
fiat currencies, before they became widely used."
A copy of the report can be downloaded here.
AFME
© AFME
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