A programmable payment medium would be practical for applications like smart contracts and machine-to-machine payments, among other uses. But that does not necessarily make a case for central bank digital currencies (CBDC), said Jens Weidmann, president of the Deutsche Bundesbank and chair of the Board of Directors of the Bank for International Settlements, at the digital conference “Fintech and the global payments landscape – exploring new horizons”, in mid-September.
An alternative solution might be for the private sector to tokenize commercial bank money. The European Union’s proposed “MiCa” regulation establishes a framework for payment tokens that the private sector can work within to develop payment solutions for a digitalized economy. However, recipients of large payments may prefer settlement in central bank money since it harbors no risk of default.
“If we were able to build a bridge between private blockchain networks and the existing payment infrastructure, DLT-based trade could be settled in central bank money without requiring CBDC,” he said. “This is why Bundesbank experts are investigating a trigger solution, which could allow smart contracts to trigger conventional TARGET2 transactions.”
Another possibility would be for central banks themselves to issue a token to be used by commercial banks. Such a wholesale CBDC could, for example, complement innovative ways of exchanging and settling financial assets.
“Given that the tokenization of assets is becoming increasingly prominent in the world of finance, such a central bank token could provide important benefit,” he said. Weidmann also spoke about big data regulation and the central bank’s role.
The event was co-hosted with the People’s Bank of China. Yi Gang, governor of PBOC, remarked that “China’s regulators are striving to strike a balance between encouraging fintech development and preventing financial risks”. This includes: ensuring that all financial activities must be regulated and licensed; requiring payment institutions to refocus on original payment business and separate payment instruments from other financial products; doubling anti-monopoly efforts by publishing guidelines; and asking platform companies to improve corporate governance and to implement prudential regulatory requirements in conducting internet lending and deposit, insurance, and fund businesses.