The Swiss extend experiment on central bank digital currencies
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The Swiss National Bank (SNB) — basically, the Fed of Switzerland — will extend its experiment with wholesale central bank digital currencies (CBDCs), according to its private sector partner, an exchange.
Why it matters: If CBDCs keep advancing the way they are now, they could become both widely used and never used by people like you and me.
The big picture: Wholesale CBDCs are becoming the model that industrialized nations want to explore.
- Unlike retail CBDCs, wholesale models don't provide citizens with a way to store cash under the mattress (albeit with a thumb drive). Wholesale tokens represent direct liabilities on a central bank, but only get used for settlement between member banks.
- Banks like this because it's the lowest possible counterparty risk for these transactions.
Between the lines: As the Atlantic Council's Ananya Kumar explained to Axios via email, when banks settle accounts with each other using commercial bank money, they all run the risk that one of their peers will fail.
- It's a small risk, but a real one, something they each have to account for. But if everyone settles in central bank money, that risk goes to zero.
- Plus, a wholesale CBDC will enable member banks to have one source of truth that's distributed among them, but which no one entity controls.
For the SNB, the sole issuer of the Swiss franc, getting to this point has been coming for a while. Project Helvetia started as a pilot with the Bank of International Settlements (BIS), where first they modeled a program, and then the SNB put it into the field for two years in collaboration with SDX, a financial market infrastructure firm.
- The final planned phase of that project had been scheduled to end this month.
What they're saying: "The SNB's decision to extend Project Helvetia III for another two years is a positive development for the Swiss digital finance ecosystem. The lack of digital cash compatible with distributed ledger technology is often a significant obstacle," Vincent Gusdorf, of Moody's Ratings digital economy team, said in a statement.
- Not only does digital cash decrease counterparty risk, it might also open up new applications, such as automating transactions between banks using smart contracts.
Fun fact: We can't help but notice that BIS and SNB are using the "W" shorthand ahead of CBDC (wholesale CBDC = WCBDC). They are using it to mean "wholesale," but in the crypto world, it means "wrapped."
- It looks like a little tell that the big banks are paying more attention to blockchains than they admit.
The intrigue: Many people in the cryptocurrency world have had an eye on CBDCs as a way of increasing financial surveillance, but wholesale CBDCs will never touch the accounts of regular people.
- That said, the European Central Bank is still on track to roll out a digital euro.
