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(Kitco News) – The Swiss National Bank (SNB) has announced a new partnership with six commercial banks and the SIX Digital Exchange (SDX) that will see the group collaborate on a pilot project focused on tokenized central bank money for financial institutions, also known as a wholesale central bank digital currency (wCBDC).
The pilot project, dubbed Helvetia Phase III, “will, for the first time, see the orchestration of a real Swiss Franc wCBDC settling digital securities transactions,” a press release said. SDX will serve “as a trusted gateway and will host the pilot on its platform,” and the pilot will run from December 2023 to June 2024.
Helvetia Phase III will build on the findings of earlier Helvetia Phases I and II by the BIS Innovation Hub, the SNB and SIX, they said.
The commercial banks involved in the pilot include Banque Cantonale Vaudoise, Basler Kantonalbank, Commerzbank, Hypothekarbank Lenzburg, UBS, and Zürcher Kantonalbank.
Along with the blockchain capabilities offered by the SDX platform, the pilot will also use the infrastructure of Swiss Interbank Clearing SIC, which is operated by SIX and SIX SIS, the national Central Securities Depository (CSD) of the Swiss financial market and an International Central Securities Depository (ICSD).
The goal of the project is to test the settlement of primary and secondary market transactions using a wCBDC in a live production environment. Participants will be able to issue digital Swiss Franc bonds, which will be settled against wCBDC on a delivery-versus-payment basis.
“Helvetia Phase III will also extend to the settlement of repo transactions, which are initiated on the CO:RE trading platform of SIX Repo and administered by the Triparty Agent of SIX SIS,” the release said. “These transactions, which are conducted in test environments, will be collateralized by digital bonds eligible for SNB repo transactions and settled on SDX in wCBDC.”
The SNB hopes that the trial will help showcase the increased transparency and efficiency that blockchain technology offers in a regulated financial system as a way to encourage broader adoption.
“Switzerland has taken a leading role in this technological evolution, with SIX, SDX specifically, and our members and in collaboration with the SNB at the forefront,” said David Newns, head of SDX. “This ground-breaking initiative is poised to open a new era of digital finance and shape the trajectory of the global financial industry.”
A digital dollar is still years away
There have been numerous developments related to CBDCs over the past year – with data from the Atlantic Council showing that 130 countries, representing 98 percent of global GDP, are currently exploring a CBDC – but it could still be several years before a digital dollar is released to the U.S. population, according to analysts at Wells Fargo.
President Joe Biden signed Executive Order #14067 in April 2022, “which authorized the Federal Reserve (Fed) to begin a formal process of assessing the risks and opportunities of a U.S. CBDC,” said Wells Fargo Advisors’ head of real asset strategy John LaForge and investment strategy analyst Mason Mendez. “Should the Fed ultimately craft a design, it would still need to be authorized by law.”
“We suspect it will be some years before a US CBDC is designed, approved, and used. Our best guess would be three to five years,” they said. “The release of FedNow, a new fast payments program (not a blockchain-related technology) launched in July 2023, might give us some clues on the timeline, though.”
“To be clear, no formal design has been released, nor has a release date been announced,” they said. “The Fed formally started studying the potential of FedNow in September 2013 – nearly 10 years before its release. While we are not expecting a CBDC release to take 10 years, we do believe it could be a few more years before a final design is reached.”
LaForge and Mendez also sought to address concerns that a U.S. CBDC would replace the U.S. dollar or physical cash.
“No, we don’t believe a U.S. CBDC would replace the U.S. dollar. A U.S. CBDC would be, simply, another form of the U.S. dollar,” they said. “Dollars come in many forms already — physical cash, digital cash (such as digital wallet payment apps), and credit (credit cards, loans, etc.). When paying for lunch, for example, one could pay with any of these. They are all payments in U.S. dollars. A CBDC will simply be another option, a different digital option, to pay for lunch in U.S. dollars.”
They went on to highlight the benefits offered by the different forms of U.S. dollars, with the privacy offered by physical cash as a key selling point. At the same time, a CBDC would bring greater efficiencies, but come with a loss of privacy.
“Privacy has evolved as a main concern with a CBDC because it will be created by and be a direct liability of the Fed,” they said. This means “A CBDC has the potential to be distributed directly to individuals, which could make government payments, such as stimulus checks, easier for consumers. On the flip side, however, consumers may have concerns over direct dealings with the government over personal finances. Not only could these dealings become cumbersome, but they could come at the expense of individual privacy, too.”
Discussing the differences between a digital dollar and the FedNow system, they said, “FedNow is an upgrade to U.S. payment rails, and a CBDC, it is argued, could be an upgrade to the money that travels over those rails.”
“One way to think of this is like the U.S. financial system receiving a technology upgrade,” they said. “Some of the U.S. payment rails (bank to bank) were recently upgraded to version 2.0 with FedNow, but the money that moves over those rails, the U.S. dollar, is still running on version 1.0. And then there is the potential for version 3.0, which would be a rebuild of both the rails and the money with blockchain-related technologies.”
Overall, they said that a digital dollar holds “the promise of faster, cheaper, more secure, and global payments.”
“Imagine the cost advantages of not having to wait three to five business days for checks to clear, reduced exchange fees on global travel, and the ease of sending remittances to loved ones globally – instantly and cheaply,” they said. “Some countries should benefit greatly from this technology upgrade, in our view, such as those where remittances account for substantial portions of gross domestic product (GDP).”
On the negative side of the equation, “CBDCs are programmable, which means that they have the potential to be tracked, monitored, and shut down by authorities,” they said. “‘Potential’ is the operative word, as the technology is flexible and can be designed to be privacy-friendly, too. While clearly no formal CBDC design has been set, many elected officials have begun to voice their concerns over personal privacy.”
“In our view, a strong case has yet to be made that Americans ‘need’ a CBDC,” they concluded. “Central authorities, such as the Fed and Treasury, could certainly benefit from traceable money. CBDCs could give them valuable insights into not only the American economy, but the global economy, too, with the U.S. dollar as the world’s reserve currency. Better monetary intelligence for central planners, however, must be weighed against the potential loss of individual privacies in a country founded on individual rights.”
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