Exploring CBDCs and the future of technology in the Nordics and across Europe, Paige McNamee, senior reporter at Finextra discussed the painpoints central bank digital currencies could help to alleviate and what level of cybersecurity, AML and KYC is required.
Jussi Snellman, senior manager, P27 Nordic Payments, provided an overview of the state of play of CBDCs in the Nordics and explained that these digital instruments combine two existing elements – central-bank issued public money such as notes and coins, and digital central bank money such as reserve deposits. “This combination was not available until now. Depending on the design [of the currency], there could be wildly different instruments all labelled CBDCs. Therefore, we cannot talk about the benefits and the downsides without knowing what kind of CBDC we are talking about,” Snellman said.
Nordic central banks have been exploring CBDCs since 2017 and although pilots and experiments have been completed, most countries have concluded that “at this point, there is not sufficient social need for a launch of a CBDC,” Snellman added.
However, the panel agreed that technology and political trends may drive people to reconsider, especially as the ECB is on a different track with the digital euro.
Krister Billing, market infrastructures and regulatory affairs, corporate banking, SEB, added that 80% of central banks are exploring CBDCs in one form or another. While trends suggest we are moving towards a cashless society, Billing mentioned that a “great deal of clarity from the government and a balanced conclusion across the potential areas of opportunity would be needed. However, there is no urgent societal need for CBDCs.”
Jonas Palm, Nordic product manager cash management, BNP Paribas, also said that it must be considered that there are “different needs and uses for CBDCs.” He referenced that the addition of digital currency will be cumbersome, however, in areas such as Asia and South America, where they are “enabling the digital journey,” there is “more potential for digital currencies in developing countries.”
Nicolas Kozakiewicz, chief innovation officer, Worldline, who is also part of the ECB CBDC market advisory group, provided a fresh perspective. He said that it is of paramount importance that “all central banks have moved at the same time.” This can either be a huge opportunity or a big threat: “if all animals are going one way, there must be a reason. After all, the banking industry is orchestrated.”
Kozakiewicz explained that in Europe, the ECB are at the highest level, national central banks sit underneath and the commercial banks under them. What this means is that “central banks do not talk directly with the user, they are talking via commercial banks. CBDCs are a threat to them, but in my opinion, it is not.
“CBDCs can show commercial banks where to go because they provide payments and loans – it is a virtuous circle. But what would happen if payments got out of the hands of commercial banks?” Banking has been a protected, fenced environment and in the past, only some could provide payments services. Kozakiewicz stated: “now everyone can because of blockchain.”
Further to this, Brazil and India have seen exponential innovation. The same goes for PayPal, Apple, Amazon, and even Twitter. These companies are now more valued than banks, they have more users and better payment means. “CBDCs are a way for central banks to tell commercial banks to wake up.”
Billing added: “Banks should be concerned. Retail CBDCs could jeopardise the deposit base of banks, which is fundamental to running a bank. This is potentially because under our usual model, banks would be intermediary or distributor of CBDCs.” However, they are not required – Billing said that one of the motivators from central banks is to support and foster innovation and competition, and doing it in a mindful way.
While Kozakiewicz agreed that innovation is increasing, “people don’t want diesel engines anymore.” However, Palm disagreed and did not see the competitive advantage for banks to get involved with CBDCs.
“CBDCs are not the big game changer because it’s a ledger, distributed or not, it is how the current system works. There needs to be more focus on constantly being aware and one point of control. Central banks want to control this, but the main goal is financial stability, and we must always look at risk. Banks will always be able to loan out money, the financial system won’t lose out.” Message from central banks to say, upgrade to competition will be bringing to keep pace.
Emilio Rocchi, director of market planning for fraud and identity, LexisNexis Risk Solutions, spoke on this and said that the level of trust, security, AML and KYC that is being used at the moment “would not be enough. A robust security framework, tokenisation, strong encryption is required.” Rocchi also mentioned that there is a blurred line between fraud, compliance and monitoring – the pattern might look fraudulent, but enriched data needs to be leveraged to ensure that it isn’t.”