Central Bank Digital Currencies – A Global Capital Markets Perspective

Over 70% of central banks have started exploring the possibility of introducing central bank digital currencies (CBDCs).

A new paper, commissioned by the Global Financial Markets Association (GFMA) from the Boston Consulting Group (BCG) and Clifford Chance LLP, identifies key GFMA considerations for the success of prospective wholesale CBDCs (wCBDCs).

Titled Central Bank Digital Currencies: A Global Capital Markets Perspective, the paper is based on research, as well as in-depth interviews conducted with contributing member firms and market participants with particular expertise relevant to CBDCs, during the fourth quarter of 2021.

The authors’ recommendations emphasize that:

• Central banks, in collaboration with the private sector, should continue to explore the role that wCBDCs can play in driving innovation and efficiency in wholesale markets.
• Central banks should take a measured approach when introducing wCBDCs and the timing should be careful to mitigate any potential transition risks impacting safety and soundness, as well as financial stability.
• wCBDCs are meant to work alongside existing instruments and systems, not replace them. It is therefore important that wCBDCs are interoperable with the broader financial market ecosystem.
• The use of sandboxes, proof of concept, dialogue with market players and pilot programs based on specific use cases will test the application of wCBDCs and help identify the impact on the markets of the capital.
• After sufficient analysis of lessons learned, financial institutions and regulators should define a transition period that reflects risks and opportunities, and effective implementation.

The paper outlines opportunities, challenges, and questions regarding the design, issuance, and legal status of wCBDCs, while introducing use cases to provide a framework for continuing a constructive conversation.

The GFMA, which represents the world’s leading players in financial and capital markets, is particularly interested in this topic, as its members will play a vital role in the potential distribution and intermediation of CBDCs. Allison Parent, Executive Director of the GFMA, said: “Banks recognize that the adoption of wCBDCs could improve 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 the public and private sectors. In this article, we outline a series of critical design and legal factors that must be considered.

“wCBDCs are designed to facilitate transactions in the wholesale market, with direct access to wCBDCs limited to regulated financial institutions and PSPs. We and our partners recommend following the current two-tier structure that places central banks at the base of the payment system, while allocating end-user activities to financial institutions and other PSPs,” said Roy Choudhury, Managing Director and Partner, BCG.

Simon Gleeson, Partner, Clifford Chance, said: “The first rule of medicine is ‘do no harm’, and we must follow this principle as we work to transplant wCBDCs into the real world economy. could pose a threat to the security and integrity of markets and to the right to privacy. The legal status of wCBDCs should be firmly established, ensuring that wCBDCs are fungible with fiat currencies, before they are widely used.