Transcript: Central banks from Stockholm to Beijing are about to change the way the world uses money

Watch the full event

Event transcript


Welcome Remarks

Frederick Kempe
President and Chief Executive Officer, Atlantic Council

Keynote Remarks

Kristalina Georgieva
Managing Director, International Monetary Fund


Mu Changchun
Director-General, Digital Currency Institute, People’s Bank of China

Tobias Adrian
Financial Counsellor and Director, Monetary and Capital Markets Department, International Monetary Fund

Gabriela Guibourg
Head of Analysis and Policy, Payments Department, Swedish Riksbank


Alice Fulwood
Finance Correspondent, the Economist

Closing Remarks

Josh Lipsky
Director, GeoEconomics Center, Atlantic Council

FREDERICK KEMPE: Good morning. I’m Fred Kempe, president and chief executive officer of the Atlantic Council. And it is a pleasure to welcome you to today’s conversation, hosted by the Atlantic Council’s GeoEconomics Center in partnership with the International Monetary Fund. This morning marks the launch of the IMF’s new paper, which dives into the inner workings of central bank digital currencies in six countries and currency unions. And that includes China, Sweden, Uruguay, Canada, the Bahamas, and the Eastern Caribbean Currency Union.

Both the event and the IMF’s paper could not be more timely or more significant. Last month the US Federal Reserve announced its intention to explore the creation of a central bank-backed digital dollar. Last week, India surprised many with their plans to have a digital rupee online by 2023. So truly the race for the future of money is underway.

The Atlantic Council’s GeoEconomics Center, under the leadership of Director Josh Lipsky, has been in the forefront of this issue. As cited in this new IMF report, the Center’s flagship Central Bank Digital Currency Tracker reveals that ninety-one countries representing 90 percent of global GDP are exploring [or] issuing their own digital currency. The center’s research, writing, and testimony to Congress have helped galvanize action both in the US and abroad. In short, this is important work, and this is an important day in that work.

And to mark the occasion, we are honored to welcome back to the Atlantic Council Kristalina Georgieva, the managing director of the IMF. Ms. Georgieva is a distinguished public servant and leader. She was previously the chief executive officer of the World Bank and vice president of the European Commission. She has served as the managing director of the IMF since October 2019, and in this role has steered the IMF through COVID-19’s enormous economic challenges. Managing director Georgieva was awarded the Atlantic Council’s Distinguished Leadership Award in 2020, our highest honor. Ms. Georgieva, welcome back.

After the managing director’s remarks, Alice Fulwood, finance correspondent for The Economist, will lead a discussion with senior representatives from the IMF and central banks featured in the report. And to conclude, GeoEconomics Center Director Josh Lipsky will outline the ambitious plans ahead for the Atlantic Council’s digital currency work.

But first, Managing Director Georgieva, Kristalina, the floor is yours.

KRISTALINA GEORGIEVA: Thank you very much, dear Fred, for the introduction. And many thanks to the Atlantic Council for providing a fitting venue to discuss central banks’ forays into digital currencies. Since the founding of the Atlantic Council in 1961, it has made important contributions to strategic political and economic policy debates. Those debates have served us well, helping us to test the boundaries of our thinking and be better prepared for what lies ahead.

So today we aim to test our thinking again. We have moved beyond conceptual discussions of CBDCs, and we are now in the phase of experimentation. Central banks are rolling up their sleeves and familiarizing themselves with the bits and bytes of digital money.

These are still early days for CBDCs. We don’t quite know how far, how fast they will go. But what we know is that central banks are building capacity to harness new technologies to be ready for what may lie ahead.

If CBDCs are designed prudently, they can potentially offer more resilience, more safety, greater availability, and lower cost than private forms of digital money. That is clearly the case when compared to unbacked crypto assets that are inherently volatile. And even the better-managed and -regulated stablecoins may not be quite a match against a stable and well-designed central bank digital currency.

We know that the move toward CBDCs is gaining momentum. President Kempe was very clear on that. It is driven by the ingenuity of central banks. All told, around a hundred countries are exploring CBDCs at one level or another—some researching, some testing, and a few already distributing CBDCs to the public. In the Bahamas, the Sand Dollar, the local CBDC, has been in circulation for more than a year. Sweden’s Riksbank has developed a proof of concept, and it is exploring the technology and policy implications of CBDCs.

In China, the digital renminbi, called e-CNY, continues to progress with more than one-hundred million individual users and billions of yuans in transactions. And as we heard from Fred, just last month the Federal Reserve issued a report on CBDCs and it noted that a CBDC could fundamentally change the structure of the US financial system.

As you might expect, the IMF is deeply involved in this issue, including to providing technical assistance to many members. An important role for the Fund is to promote exchange of experience and support the interoperability of CBDCs. As part of the service to our members, today we are publishing a paper that shines a spotlight on the experiences of six central banks at the frontier, including China and Sweden, to be covered in the panel discussion following my remarks.

We take away three common lessons from these central banks from which others may benefit.

Lesson number one: No one size fits all. There is no universal case for CBDCs because each economy is different. In some cases, a CBDC may be an important path to financial inclusion; for instance, when geography is an obstacle to physical banking. In others, a CBDC could provide an essential backup in the event that other payment instruments fail. One such case was when the Eastern Caribbean Central Bank extended its CBDC pilot to areas struck by volcanic eruption last year. So central banks should tailor plans to their specific circumstances and needs.

Lesson number two: Financial stability and privacy considerations are paramount to the design of CBDCs. Central banks are committed to minimizing the impact of CBDCs on financial intermediation and credit provision, very important for the wheels of the economy to run smoothly.

The countries we studied offer CBDCs that are not interest bearing, which makes a CBDC useful but not as attractive as a vehicle for savings as traditional bank deposits. We also saw in all three active CBDC projects in the Bahamas, China, and Eastern Caribbean Currency Union that they placed limits on holdings of CBDCs, again, to prevent sudden outflows of bank deposits into CBDC.

Limits on holdings of CBDCs also helps meet people’s desire for privacy while guarding against illicit financial flows. Smaller holdings are allowed without the need for full identification if the risks of money laundering and terrorist financing are low. This could be a boon for financial inclusion at the same time.

But larger transactions and holdings require more stringent checks, as you would expect if you deposit a bag of cash at the bank. In many countries, privacy concerns are a potential deal breaker when it comes to CBDC legislation and adoption. So it is vital that policymakers get the mix right.

And that brings me to lesson number three: Balance. Introducing a CBDC is about finding the delicate balance between developments on the design front and on the policy front. Getting the design right calls for time and resources and continuous learning from experience including shared experience across countries, and in many cases, this would require close partnerships with private firms to successfully distribute CBDCs, build e-wallets, add features, push the bounds of technology.

But the policy aspects are also paramount, including developing new legal frameworks, new regulations, new case law. On both fronts, CBDC also requires prudent planning to satisfy policy targets like financial inclusion and avoid, at the same time, undesirable spillovers such as sudden capital outflows that could undermine financial stability. Taken together, careful design and policy considerations will underpin trust in CBDCs.

But let’s not forget that trust must be anchored in [a] credible central bank with history of delivering on its mandate. Introducing a CBDC is no substitute for this underlying trust built over decades, a public good that allows money to grease the wheels of our economies.

The success of a CBDC, if and when issued, will depend on sufficient trust and, in turn, any successful CBDC should continue to build trust in central banks.

So let me conclude. As we heard from President Kempe, the history of money is entering a new chapter. Countries are seeking to preserve key aspects of their traditional monetary and financial systems while experimenting with new digital forms of money.

The paper we’re releasing today shows that for those experiments to succeed policymakers need to deal with many open questions, technical obstacles, policy tradeoffs. It may not be easy or straightforward, but I’m confident that the bright minds in central banks can succeed, thanks to their trademark resourcefulness and perseverance.

Fittingly, even the great inventor Thomas Edison acknowledged that there is no substitute for hard work. And this is what we embrace at the IMF. This hard work has already advanced. We are supporting countries in various CBDC experiments to understand big-picture tradeoffs, to provide technical assistance, to serve as a transmission line of learning and best practice across all our 190 members. And we are stepping up collaboration with other institutions, such as the Bank for International Settlements, at par with the rapidly growing significance of digital money.

Today’s discussion is only the beginning of an exciting journey. And we have a great panel to take us further on it. Thank you.

ALICE FULWOOD: Thank you very much, Kristalina, for those remarks. I found them very insightful, and you have very beautifully summarized the paper. I do encourage everyone watching to take a look at it as well.

It is my great pleasure now to introduce our panelists. I am delighted to be joined by Mr. Mu Changchun. He is the director-general of the Digital Currency Institute of the People’s Bank of China. Welcome, Mr. Mu. I’m also thrilled to be joined by Mr. Tobias Adrian, the financial counsellor and director for the IMF’s Monetary and Capital Markets Department. Hello, Tobias.


ALICE FULWOOD: And finally, by Ms. Gabriela Guibourg, who is the head of analysis and policy at Sweden’s Riksbank. Hi, Gabriela.


ALICE FULWOOD: My name is Alice Fulwood. I write about Wall Street for the Economist. And I will be moderating today’s discussion. We have just under an hour to talk about the paper with this—with our three panelists. Please feel free to ask questions using the Q&A function, and I will try to get to some of these at the end.

One of the things that fell out of Kristalina’s remarks to me was this idea that we’ve moved from the innovation stage into the experimentation phase. And I guess the most urgent question to me, it seems, as a journalist is how close we are to CBDC’s really becoming a reality that lots of people are using in their everyday lives. Dozens of countries around the world have begun experimenting with these, as you should be able to see using the Atlantic Council’s tracker. So I would like to give our panelists a chance to give me a sense of how far they think we are from making CBDCs a reality, and what state their pilots are in.

Could I first go to Mr. Mu?

MU CHANGCHUN: Thank you, Alice. Thank you for having me here today. E-CNY, our CBDC project is still running its pilot phase currently. E-CNY pilots have been running in eleven areas, including Shenzhen, Suzhou, Xiong’an, Chengdu, Shanghai, Hainan, Changsha, Xi’an, Qingdao, Dalian, and 2022 Beijing Winter Olympics venues. There will be more cities that join e-CNY pilot soon. But now private authorized arbiters have joined the e-CNY system, including the ICBC, ABC, Bank of China—BOC, CCB, Bank of Communications, Postal Savings Bank of China, China Merchants Bank, as well as Alipay and Tenpay in the name of their commercial banks’ arm.

With the pilots going on, there will be more qualified private-sector operators joining the e-CNY system. By October 8, 2021, there were over 123 million digital wallets registered with individuals, and around 9.2 million wallets held by corporate firms. And it’s accepted in more than 1.3 million merchants in pilot areas. And we actually fill obliged to start our CBDC due to the following motivations: First, to improve the efficiency of the central bank payment system. In recent years, we have witnessed a trend that a lot of central banks are improving their payment systems by building up faster payment systems, which will widen their access, and they include more participants from different sectors.

The e-CNY project is one of our efforts to improve the efficiency of the central bank payment system. We provide [24/7] services to the general public, which will greatly extend the service hours. In addition, our system realizes higher efficiency with the feature of settlement upon payment. Furthermore, we strengthened the e-CNY capability. For now, we can support ten thousand [technical service providers].

Last but not least, e-CNY joins hands with more participants from different sectors, including not only commercial banks and financial market infrastructures, also [payment service providers], fintech companies, telecom operators, and so on. With their efforts, we managed to increase the efficiency of the central bank payment system.

Secondly, in order to provide a backup or redundancy for the retail payment system, we built up this e-CNY payment system. You may know that Alipay and Tenpay seem to have already became significantly important financial infrastructure. If anything bad happened to them either financially or technically, that will bring very significant negative impact to the financial system. It’s the case when Alipay and Tenpay are not allowed inside the Winter Olympics venues, due to the business privilege of the Olympic sponsors, because Visa is the only one who can provide the mobile payments services inside of the Olympics venues. But since e-CNY has the legal tender status, it’s no doubt available in the Winter Olympic venues and, further, offers various kinds of wallets for the audience and athletes to take deep into the convenience of mobile payments in China. It’s the same in other cities, when e-CNY can offer a backup in extreme scenarios like connectivity and a power shortage.

Last but not least, to improve the financial inclusion. The private sector provides financial services that cover 80 percent of the population while remaining 10 to 20 percent are disadvantaged in their access to the basic banking services. In addition, as mobile payments are so prevalent in China, short-term foreign visitors and nonresidents may also have difficulties in making payments in China because most of the merchants don’t accept cash, paper notes, credit cards, or debit cards. So it will be the obligation or responsibility for the central bank to cover those users.

First, as e-CNY is loosely coupled with bank account system, digital wallets could be opened without the support of traditional bank account system. On one hand, disadvantaged people can enjoy the basic financial services. On the other hand, the short-term foreign visitors and nonresidents can enjoy the mobile payments system in China. Moreover, e-CNY charge no fee from the authorized arbiters and the individual users. It will reduce the burden on the real economy and improve the business environment.

I will stop here. Back to you, Alice.

ALICE FULWOOD: Thank you for that. That was very helpful in clarifying where you’re at with your CBDC and what your goals are.

Could I put a similar question to Gabriela? The Riksbank was also sort of at the forefront of exploring CBDCs but it hasn’t yet quite launched a pilot. What’s holding you back? How do you anticipate sort of proceeding with your CBDC soon? And what goals are you hopeful to achieve with a CBDC?

GABRIELA GUIBOURG: Well, let’s start with the background why we were—thank you, Alice for the question. Let me start with the background why we were at the forefront. Not that we were wiser than other central banks; it’s more like the future, as Ms. Georgieva was talking about, came to use a little bit earlier.

We became almost fully digitalized very early. Cash almost disappeared, was completely marginalized in Sweden in the last ten years. So then, as a central bank with our role of providing the population with central-bank currency, we began to think, well, [are] the people abandoning cash because they don’t feel that they need this trust given by the central bank in providing the unit of account, the currency? Or is it that the technology is not really fit for purpose in this new digital environment? Sweden is a very digitalized country, as I said before. For example, we even have our transactions and activities with authorities digitally nowadays.

So the answer to that question, we began to think about the what. What do we need to do, and how? So we did a lot of policy analysis on what the central bank digital currency would look like at the very, very high conceptual level and what the policy implications in terms of the central banks’ other mandates on monetary policy and financial stability could possibly be.

But we understood also very early on that this decision, the decision of launching a central bank digital currency, was something that was a very big step, a step that could not be a decision, at least could not be taken by a central bank by itself alone. It needed to have broad discussion with stakeholders and with national authorities and with politicians. We needed to get the support of the whole society in order to do that.

So we asked the parliament, the Swedish parliament, to start an inquiry. An inquiry was broad. It was not only about whether the Riksbank should launch or not, a CBDC, but also what is the role of the state vis-à-vis the private sector in the payments market in a completely or a very, very exceedingly digitalized society, and, within that broad scope, whether the Riksbank should be allowed to issue a CBDC; and in that case, what the legal statutes of the CBDC would be, legal tender or what.

This inquiry started at the end of 2020, and we are expecting the result. In simplifying the whole thing, we are expecting whether we have the green light or not. And we expect the result from this inquiry in November this year.

But at the same time, we are not sitting with closed arms waiting for the result, but we continue working. And it’s not that we have gone from the conceptual level to the experimental level. We are doing both, because there is a need of an interaction between the policy analysis and the lessons that we draw from learning from technology and the other way around.

So the pilot that you mentioned, we do have a pilot, and it started in 2020. The pilot is by no means a blueprint for how potentially e-krona—that’s the name for our CBDC—would look like. The pilot is a pilot with Accenture. It’s a [distributed-ledger-technology]-based model; in the beginning was a proof of concept with demos for the user tools and so on.

The second phase of the pilot integrated some stakeholders, one big bank, and one fintech company, and also some point-of-sale interaction. And in that second phase, we also looked into some issues of offline, for example. And now we are starting to think… as I said, this pilot is not—if we decided we’re going to launch an e-krona, given that we have the political support to do so, we’re not going to say, well, then we continue with this pilot with Accenture.

This pilot was for us to learn, draw lessons from the technology used. At the same time that we continue with policy analysis and see what can the technology provide, what is not there in terms of resilience, in terms of offline capabilities, in terms of scalability, efficiency. And so when we go farther during this year, we need to decide more of the details of the requirements for the tender that is needed in case we decide to launch an e-krona.

So we are going to go to the blueprint that is signed this year, and very much—very important here is the international work that we are doing. We are working very much in cooperation with other central banks, as you very well know, in the Group of Seven central bank group with the [Bank for International Settlements (BIS)]. We have been working with the Group of Seven last year on this subject and we are also working in a very, very, very important aspect of cross-border capabilities of CBDC being within a roadmap of the Group of Twenty and under the chair in this group who is Ms. Cecilia Skingsley, who is the first deputy governor of the Riksbank. And we need to have all these pieces to make the puzzle.

Work at other central banks or the central bank community conversion into in terms of what is needed, what are we thinking ourselves, and what lessons are we drawing from the foreign pilots before we go ahead, and, most importantly now, we need the go ahead. So, as a journalist, I expect that you want me to give you a year, but you won’t have a scope from me. I cannot say. But at least this year we are going to have the answer from the politicians and then we will know.

ALICE FULWOOD: Well, that’s definitive enough for me for now. I won’t ask you to pin down an exact year that you’ll launch.

Moving on to Tobias, you get to look at all different kinds of countries’ pilot projects and all the goals that they’re attempting to achieve with those CBDCs—is there sort of a commonality that you think is driving most people? You heard sort of Gabriela and Mr. Mu talk about the sort of digitization of payments, and how far do you think we are from people really thinking that CBDCs are a technology that we’re actually using and we’ve sort of moved beyond that experimentation phase?

TOBIAS ADRIAN: Yeah. Thanks so much, Alice. As Kristalina Georgieva mentioned at the beginning, there are now over one hundred countries around the world that are either studying CBDCs or have introduced CBDCs. In fact, there are two countries in the world right now that have launched CBDCs. One is the Bahamas. The Bahamas was the very first country in the world to launch a CBDC, and the other one is Nigeria that launched just last year.

But as I mentioned, there are over a hundred countries that are exploring or experimenting with CBDCs. The paper that we are launching today that was led by an IMF economist, Gabriel Söderberg, is looking specifically at six countries, including China and Sweden that we just heard from, but also the Bahamas, which I just mentioned, the Eastern Caribbean Currency Union (ECCB) as well as Canada and Uruguay. And so let me share a little bit the motivations of those various countries.

I think the prime motivation at the moment is the technological change that we are seeing in payment space. There are new technologies and those provide opportunities for countries to run more efficient payment systems. So this is the deep cause why it’s happening at the moment, and, clearly, in the world around us we’re seeing a lot of innovation in the financial sector, which is, broadly, called fintech. And so countries are aiming to increase efficiency in the payment system.

Of course, as was mentioned already, trust is at the root of any payment system. So having a payment system that is trustworthy and having a CBDC that is trustworthy is the prime goal of everybody. So you want it to be more efficient, but you want it to be trustworthy.

And so what does that mean? It has to be resilient. It has to be resilient against many risks. And here at the Bahamas and the ECCB are particularly interesting, because of course these are countries that are islands in the Caribbean that are often hit by hurricanes. And during those times, cash distribution is extremely difficult. So one of the motivations that is specific to island countries is to be resilient relative to hurricanes in terms of cash distribution. But, of course, there are many other arguments, such as Gabriela who mentioned that the cash usage in Sweden declined dramatically. And we see similar trends in many other countries. So everybody is moving to a digital world, and it’s very natural for the central bank to also move to be digital.

And of course, another important motivation is financial inclusion and access. In too many countries around the world, we continue to see a fraction of the population that doesn’t have access to financial services, that doesn’t have access to electronic payments. Or, if it has access, those might be very expensive. And so CBDCs can provide more inclusion and more access to a broader segment of the population. You do need to have a cellphone or at least you need to know somebody that has a cellphone in order to participate. But that is a very, very large fraction of the population.

And then lastly, I would say that as economists we believe in competition. And a CBDC, of course, also increases competition in payment space. And if it’s well designed it’s both resilient and competitive, so that efficiency is increased. So I think those are broadly the motivations that are shared across countries, with, of course, some differentiation across countries as to what is the prime objective in one country relative to another.

ALICE FULWOOD: Thank you. No, that’s very clarifying.

I’d like to just quickly follow up with Changchun on what it is that the People’s Bank of China would consider a success relative to the goals that you’ve laid out. So you already say you have 123 million people using the e-CNY. That’s up to 10 percent of the population. What kind of coverage would you need to feel like you’ve been successful in the goals of protecting your monetary system from potential failure of one of the payments giants and those financial inclusion goals?…

MU CHANGCHUN: Thank you, Alice.

Well, actually the e-CNY trials have been running very smoothly, with increased acceptance by the general public, because we adopted, various kind of marketing campaigns, like red packets and lower carbon engagement, which have greatly encouraged citizens to use e-CNY. Just to give you a rough idea, that just even held by Meituan… they offer e-CNY package to encourage users to ride bikes and to take public transportation and to reduce carbon emission. There are already more than nine million users who are registered in that event. And it’s also the same even since—definitely beyond our expectations.

But we actually seek to maintain a level playing field and build the ecosystem for e-CNY, not to reduce the usage of the existing payment vehicles—payment digital wallets such as Alipay and Tenpay. So, firstly, the usage of e-CNY does not threaten the market share of Alipay and Tenpay, the two firms, as I mentioned in the last question, have already joined the e-CNY ecosystem as the second-tier authorized arbiters. And now users could use scan to pay on Tenpay to make e-CNY payments and that still be their own market share, just so their market share will not be reduced and we would not be negatively impacted. Furthermore, Alipay and Tenpay works as a wallet and the e-CNY works as the currency or the payment instrument. So we will provide user cases for them, which will help them to innovate their business. While in the long run it will be a market-driven horserace, commercial banks or traditional incumbent financial institutions will have a new start given that they could provide better services with e-CNY than before. Then they can get back some market share from Alipay and Tenpay. So there is no one bingo for us to achieve to safeguard or diversify in the payments because Alipay and Tenpay—or you call it WePay—they’re already in the ecosystem.

So in terms of monetary sovereignty, as I mentioned above, it is the mandates of the central bank to ensure the public access to the central bank money. Our pilots have already enabled the general public to have a wider and a steady access to the fiat currency, thus to help realize that goal. So, I mean, [those] goals are already achieved with the trials.

Back to you, Alice.

ALICE FULWOOD: Thank you. That’s very—that’s very helpful.

Just very quickly, you have your own app as well as interoperating with WePay and Alipay, right? So do you want your own app to become the one that people use with the CBDC, or do you not really mind either way?

MU CHANGCHUN: Actually, we don’t mind because the market position of our app is not to compete with Alipay and Tenpay. It’s only management software, people to use that app to manage or configure their payment instruments. Like, they can manage the caps in different use cases. For example, to prevent any tele fraud they can reduce the cap or the limit in one-use cases and athlete in another use cases. The goal of that app is to manage or make configurations of their payments instruments. It’s not to compete with all those market players. So in the end or in the long run, I mean, this app will actually go back to the backstage instead of being the players in the field.

ALICE FULWOOD: Yes, thank you for clarifying on that point.

OK. We’ve talked a little bit about goals and where all of you are at with your pilots and experimentation phases. Now we get to move on to some of the risks associated with rolling out these CBDCs. Can I give to Tobias first in the IMF report,as Kristalina laid out, a lot of the CBDCs that have been launched have caps on balances and also don’t pay interest, and those are sort of defensive features to prevent undermining the sort of bank deposit system in a lot of countries. Could you just explain how important that is? And is that the biggest risk associated with CBDCs? Do you think those design features solve it?

TOBIAS ADRIAN: Yes and yes. So I think this is certainly a significant risk that central banks are considering very carefully. So the credit intermediation by the banking system is vital for economies to grow, and of course banks take deposits that are then transformed into loans to corporates and households. And so by introducing a CBDC, you don’t want a significant drainage of deposits out of the banks into the CBDC. There will be some of that, but it has to be within bounds. And so there really are three risks that central banks are concerned about.

So the first one is that there is sort of like a structural shift away from bank deposits into CBDCs and what the magnitude of that shift is; and so offering zero interest rates, or perhaps in the euro area some countries with negative interest rates—these might even be negative interest rates on the CBDC—that make holding CBDC relatively unattractive to deposits, because, of course, commercial banks can offer interest rates on their deposits. And so that should contain the structural shift of liabilities out of the banking system.

A second concern is bank runs, right. So if there’s a confidence crisis, and in particular if there’s a crisis in the confidence of banks, there could be a sudden outflow from banking liabilities into CBDCs because CBDCs, of course, are the liability of the central bank. So they would be considered as being very trustworthy. And so this is why many countries are imposing limits on how much CBDC any individual can own or how big the transactions can be. There are different design features in different countries.

And then the third risk is particularly for emerging markets and developing economies, that there could be a flight from domestic currency into foreign CBDC, so that’s a kind of like form of electronic dollarization, right. So dollarization has always been a struggle for countries that are viewed as being unstable. But, of course, once you go to a fully digital world, that kind of dollarization or crypto-ization or CBD-ization could be that much quicker and more dangerous.

So that’s a third consideration. And here the only tools that policymakers have are very dramatic. So these are capital-flow measures, so these are measures to basically contain the degree to which you can take money into foreign CBDCs.

So let me stop here and turn back to Alice.

ALICE FULWOOD: Yes, that was all—I mean, I was going to say clarifying, but also scary, all of the risks that you describe.

Gabriela, could you tell me sort of which of those sort of most concerns the Riksbank? And do you take heart in the findings of the paper that suggest that there are technical solutions to some of those issues?

GABRIELA GUIBOURG: Well, yes, those that Tobias was talking about, of course, are the main risks, and he described them very well. And we have been analyzing those risks from the beginning, and we continue to do so. The jury is still out in terms of design, what type of control mechanisms are needed. Whether there are quantitative limits or pricing, interest rates, something will be needed. That’s my opinion. Let me clarify. This is not a Riksbank official point of view, because we don’t have an official point of view as yet. But I am the one leading the policy analysis and participating in the international work. But it’s not the Riksbank official point of view.

So, of course, those are important risks. And we have analyzed those risks also in the international cooperation sphere. At the end of last year—I don’t remember if it was October or November—the group of seven central banks and the BIS published three reports. One of those was on financial-stability aspects of CBDCs. And I think the report is very readable and interesting.

And we continue within the Riksbank to analyze different scenarios of demand for CBDCs in normal times, bank runs, and what kind of mechanisms we need to have in place, and also what kind of collateral the Riksbank would need to have or set in order to be able to contain a crisis scenario with a lack of confidence in a bank system and a very large flow of CBDCs to the Riksbank, whether the Riksbank should have to lend to banks. So we are analyzing all these aspects.

The conclusion of the report that I mentioned is that those risks are there, and they have to be taken seriously and analyzed very carefully in every jurisdiction, but they are manageable. And I think that’s really the Riksbank’s position right now.

Another risk that we see that haven’t been mentioned—and this is in particular for jurisdictions that already have very advanced and very efficient payments systems, like Sweden and the Nordics in general. The payment market is, as payment with large network effects and economies of scale, and where we have large incumbents. So there is also a risk of—for the Riksbank or a central bank to launch and to fail, and that would not be a desirable outcome. So we need also to see that there are user cases for the CBDC. We have to have consultations and discussions with all the stakeholders, as most central banks already have converged to the idea that we are not going to have a centralized model where the central bank would do everything but we would have a two-tiered model where the central bank would provide kind of the platform on which payment service providers would connect to payment service providers themselves, offer service, and innovate and compete with each other. But in that case, we also need to have incentives for payment service providers to adopt and want to—the CBDC platform—and to want to provide services to end users.

So there is a very delicate balance here between having something that is large and that can be dangerous for the financial system and something that really does not take up. So this is complicated, and if we are not moving forward fast enough it’s because we need to consider all these aspects before we launch.

ALICE FULWOOD: Yes, I totally understand. That makes sense.

Could I ask, Changchun, China is one of the countries that has launched its pilot CBDC with a quantitative restriction. So there’s a total cap on the balances that you could hold. Do you think it’s sort of feasible for those caps to always be maintained? If there were a bank run or some kind of financial crisis and the Chinese public were clamoring to hold more balances in the CBDC wallets, do you think it would be politically feasible for those restrictions to be maintained?

MU CHANGCHUN: Thank you, Alice. I think the simple answer to those questions will be yes; we—that e-CNY will not have any material impact—negatively impact on the current financial system and that we are confident. And we don’t expect in the stress scenario that we’ll be politically to to remove those caps. Because, firstly, the e-CNY is operated under a two-tier system, as mentioned by Gabriela, that the commercial banks are still kept in the loop. And we—as Tobias [has] said, that we adopt the policy that we mainly position as M0 and pay no interest. We could also introduce potential fee to charge with frequent withdrawal from the e-CNY system during distress or stressful scenarios.

And most importantly, we have the deposit insurance mechanism in place which will protect the deposits below RMB 500,000. So for those general public, even in distress or a stressful scenario, the general public will have no incentive to move their large chunk of their deposit from the financial intermediaries or financial institutions to the e-CNY system.

And furthermore, in the financial crisis, like Tobias has said just now, it will be a run on the whole financial system. It will be a run on the whole sovereign monetary system instead of individual financial institutions. So, to summarize, we will not remove politically—we don’t have the pressure to remove those restrictions.

And just to give you a rough idea, that currently with our trials the wallet balance is only about RMB 470 million. Compare with our M0, which is RMB 8.6 trillion, M1 RMB 2.6 trillion, M2 RMB 233.6 trillion, you can see the balance—the wallet balance of e-CNY only counts [as] a very small percentage of those financial data, financial monetary supply. So personally, I’m very confident we can guarantee or we can safeguard those restrictions, even in very difficult situations.

Back to you, Alice.

ALICE FULWOOD: I can see that Gabriela wishes to respond. So if there anything you’d like to add?

GABRIELA GUIBOURG: Yes, two points.

And related to what Changchun was saying, at some times, particularly the arguments coming from the incumbents, from the banks, these financial stability risks are a little bit exaggerated. We have in Sweden right now currency in circulation to GDP is 1 percent. It used to be 10 percent fifty years ago. It’s still 10 percent in the euro area, which is a large number; we don’t have any goal there. Assuming that we would have CBDC usage corresponding to 10 percent of GDP, this doesn’t seem to have disintermediated the banks in the euro area. In Japan, currency in circulation to GDP is 20 percent, something like that. So sometimes we are putting too much emphasis. This is not saying that we don’t have to analyze this carefully, and of course we need to have control mechanisms in place. That’s what I want to say.

And also, referring to the report, as I mentioned earlier, the BIS and the Group of Seven central banks report from last year, something that we point out is that the financial system is being transformed as we speak. There are not only risks coming from CBDCs; there are risks coming from private money—as Ms. Georgieva was mentioning in the beginning of this debate, coming from stablecoins and bitcoins and you name it. So there is a very, very rapid transformation in terms of digitalization and the banks’ models will have to adapt. But of course, being as we are central banks, we are going to take this in a very responsible way and a very cautious way. But the risks are already there.

ALICE FULWOOD: I can see that Tobias wants to add something as well, and then I will go to audience questions, I promise. I can see that you’ve been sending them in. So, Tobias, what do you want to add?

TOBIAS ADRIAN: Yeah, just very quickly, I just want to concur with both Gabriela and Mu Changchun as well in pointing out that in financial crisis in advanced economies, you typically see deposit inflows. So you don’t usually see deposit outflows.

You do see deposit outflows sometimes in countries with a severe banking crisis. But in those countries—and these are typically emerging markets or developing economies. And in those countries, typically it’s the entire market economy that is destabilized. And of course, CBDC, as Gabriela just pointed out, CBDC is one way to make sure that the monetary system in the country is trustworthy, so that should actually mitigate this pressure and crisis for dollarization or crypo-ization. So, a priori, CBDC can actually help to lean against the macroeconomic outflow of savings.

Let me turn back to Alice.

ALICE FULWOOD: Thank you. No, I feel reassured by all of your answers.

We’re getting a lot of questions in the chat about how people understand that designing CBDCs and ensuring that they work as intended is a big task. But at the same time, lots of other innovation is going on—decentralized finance, Web3 innovations, stablecoins, crypto, et cetera. Is there a sense that the ground is slipping under your feet as you try to develop these? And how do you think about how those might make it more difficult for a central bank digital currency to take hold? I’m not sure who wants to tackle that first…

TOBIAS ADRIAN: I’m very happy to. We have been doing a lot of work on precisely this question. So in many countries you’ll see a fairly sizable shift of investments into cryptocurrencies, which as central bankers we usually call them crypto assets because we don’t want to confuse crypto assets with currencies. So unbacked crypto, such as bitcoin or Ethereum, is highly risky and very volatile. And it does not fulfill the criteria of money. So money is a unit of account, a stored value, and a medium of exchange. And, crypto doesn’t really fulfill that because it is so volatile, and it’s not generally accepted, and it’s not that cheap to transact.

So on the other hand, CBDC is a liability of the central bank. It is the legal tender in those countries that pass CBDCs usually. And it fulfills all the criteria for money. So it is a very different animal. Now, as you point out, Alice, there are banked crypto assets which are generally called stablecoins. And some of those stablecoins do have very safe reserves. So some of them hold cash or hold deposits as reserves, so they do have fairly stable value. While other so-called stablecoins are not all that stable. They actually fluctuate in value quite a bit. So there’s a variance across the stablecoins. But it is certainly true that stablecoins are more money-like, in that they’re backed to some degree at least—or sometimes fully—with cash-like backing.

Now, having said that, the power of crypto and stablecoins and decentralized finance is distributed ledger technology, which is quite powerful. And when we look around the world, and this is documented in the paper that we’re launching today, many of the pilots do use distributed leger technology. So they’re not, per se, crypto assets, but they do use certain aspects of this technology. Not all do that, but many do that because it is a very parsimonious and very powerful technology to use. So at least some of these CBDCs interact quite closely with the crypto universe technologically. But there’s some variance around that. But certainly, you’re right in pointing out that for many countries introducing CBDC is, to some degree, also defensive in terms of making sure that the central bank is in control of the emerging digital money world.

ALICE FULWOOD: Can I just follow up on that sort of question of the extent to which central banks are using distributed ledger technology? We’re getting a lot of questions in the chat about whether or not China is using distributed leger technology. So, Changchun, could you just walk us through how China has rolled its pilot out?

MU CHANGCHUN: Well, actually distributed leger technology is not the single technology we are using. Actually, no single technology is panacea to solve every problem. And as to distributed leger technology in terms of, the CBDC development, it’s actually the scalability issue, the storage issue, is kind of difficult to overcome in this system. So we do not worship any single technology. We are more practical in this sense.

So we call it our strategy is long-term evolution. We borrow the idea from the telecom sector. Any technology could accommodate or could be suitable or appropriate for our CBDC system we will use. And distributed leger technology definitely not the single answer or perfect answer to our e-CNY system.

So for the—we have [a] two-tier system. For the second tier, the retail transactions processing, we actually do not use distributed leger technology in that tier. And we use the centralized system for the retail transactions processing. And for the first tier, we use distributed leger technology for the reconciliation process. And also, we borrowed some ideas from the crypto assets such as the tokens, the value system, and the smart contracts. But we don’t use them all, actually, for our whole system. We are more a hybrid system. We are more practical in this sense. So we call it hybrid long-term evolution system, not a distributed leger technology or decentralized-finance system.

Thank you. Back to you, Alice.


I can see Gabriela is keen to come back on this. We’re also getting lots of questions about whether Sweden is going to use distributed leger technology as well. So Gabriela, what is Sweden doing?

GABRIELA GUIBOURG: Thank you, Alice.

I wanted to ask a clarification question to Changchun first, if I may.

ALICE FULWOOD: Yes, go ahead.

GABRIELA GUIBOURG: Did I interpret you correctly, Changchun, that you will have the core of the platform provided by the People’s Bank of China will be distributed leger technology-based and it will be interoperable with the payment-service providers’ own systems so that they can continue to provide the end users with legacy systems? Is that interpretation correct?

MU CHANGCHUN: Well, I can interpret that more like a hybrid system, not a core with distributed leger technology system. For the distributed leger technology part, we only use distributed leger technology in reconciliation part for our system. That means for the reconciliation, for the error-correcting, that part, all the participants or all the authorized arbiters, they can use the distributed leger technology to reconcile at end of days, end of business days, and correct all the errors.

But for the core, I mean, retail-transaction processing, that part, we use a centralized system, actually a traditional centralized system, not a distributed leger technology system.


GABRIELA GUIBOURG: And back to you, Alice, you asked whether Sweden is intending to use distributed leger technology or not. Is that correct?


GABRIELA GUIBOURD: Well, as I said before, we are completely technology agnostic. So the pilot that we have been having is distributed-leger-technology-based. But that does not mean that we are married to distributed leger technology. We have been drawing lessons on the capabilities, efficiency-enhancement possibilities, and limitations. Capability is actually one issue. So it’s not decided.

In this sense, we are also looking very closely to what other central banks are doing, because one aspect that is very important—although all central banks are coming to the CBDC from a domestic perspective—so we have to be aware of the risk of every jurisdiction having their own CBDC silo that cannot talk with CBDCs from other [jurisdictions]. It is so important that we have the cross-border aspect—cross-currency aspect in mind when we design our CBDCs.

So it’s not only the domestic aspect and it’s not technology oriented. It’s policy issues that are leading the way and technology have to provide, and it’s possible. I think that what Changchun said is very reasonable, that you cannot use one technology alone, that it will have to accommodate for different technologies and also be flexible because the future, you don’t know what awaits and technology is changing very much. So we need to be—whatever we do we need to have this flexible approach so we can make amends or changes as time goes by.

So no decision on distributed leger technology, summarizing.

ALICE FULWOOD: Very, very clear. No—technology agnostic thus far. But you’ll make a decision at some point.

Am I right in thinking the sort of main advantages for central banks of using distributed ledger technology are that they might make the sort of core system resilient? Say there was a tech attack on sort of one node. You wouldn’t take down the entire network, and that sort of resilience is very appealing to central banks.

But then the problems, I guess, are with scale. Is that the sort of general sense of the tradeoffs that you’re hearing? I was going to direct it to Tobias, as I believe you’re plugged into many central banks.

TOBIAS ADRIAN: Yes, absolutely. Very happy to answer that.

So as was pointed out for both China and Sweden, typically, central banks customize technologies a lot. So, typically, they would not use a distributed leger technology as it’s used in bitcoin, what is called a permissioned blockchain.

So that means that the central bank has a central node and that it’s using the powerful ledger technology but that there’s an ability of the central bank to understand who’s doing what with the currency, because, of course, one of the challenges for central banks is what is called financial integrity. So it’s the usage of its currency for criminal and terrorist financing, money laundering, et cetera.

And so, typically, central banks will want to have some understanding and some ability for law enforcement to come in and track who’s doing what. So in the fully decentralized system, either you can do it or you can’t. I mean, there are different ways of doing this and so a permission system is typically what is being used.

Now, of course, that raises privacy concerns, which is something we haven’t talked about yet, right, because as a central bank you don’t want to be able to know who is doing what in every transaction. Citizens don’t like that at all. So there has to be some wall.

But, on the other hand, you have to do the law enforcement because you don’t want your currency to suddenly be used for things you don’t want it to be used. So these are very, very stark policy tradeoffs where the technology is offering solutions to the policy but there’s no one-size-fit-all for every country. The Bahamas, which has a central bank digital currency is using distributed leger technology as is ECCU. But many other countries are either not using it or are using some sort of variant such as a permissioned blockchain.

So, I think, I would agree that it’s not the technology that should be driving the CBDC. It’s the policy framework and the policy objectives that should be driving the technology and then how that ends up depends on the country.

But interoperability across borders, of course, is very important and this work under the—under the framework of the Financial Stability Board on cross-border payments—in particular, there’s one, Working Group 19, which is about the cross-border interlinkages of CBDCs, and interoperability is extremely key to get to a global financial system and a global monetary system that is going to be smooth and interoperable while being safe. So, the complexity is very high. And that is why we see some progress, but we also see a lot of thinking all around the world. And everybody’s watching everybody else to learn from what you see out there.

ALICE FULWOOD: Yes. We’re getting a lot of questions about cross-border payments and interoperability of CBDCs. I’m going to put one quick one to Changchun first, which asks whether the PBOC is exploring an e-CNY in Hong Kong in particular that might allow people who live there to get e-CNY wallets. Is that something you’re looking at?

MU CHANGCHUN: Yes. But, the e-CNY project is carried our primarily out of domestic considerations. So we focus on the domestic retail sector because we positioned e-CNY as M0, we actually mainly used in the domestic retail market. But of course, we in response to the initiative of Group of Twenty, we also explored that whole CBDC, such as e-CNY can be used to enhance the cross-border payments. In this process, we hare exploring the possibilities with Hong Kong in terms of to have interoperability between e-CNY and the Faster Payment System of Hong Kong, to see whether we can speed up or solve the trilemma of the cross-border payment issues.

But of course, in that process we introduce the principle of no disruption, which is similar to the do no harm principle and the compliance interoperability principles in our research. For the no disruption, we think the CBDC supplied by one central bank should continue to support the heavy evolution of the international monetary system, and should not disrupt other central banks’ currency, sovereignty, and their ability to fulfill the mandate for monetary and financial stability.

And a second, compliance. We have to comply with the local regulations and laws of the jurisdiction concerned, such as capital management and the foreign exchange mechanism, and also the regulatory requirements for anti-money laundering safety. And thirdly, that is interoperability. The development of CBDC should truly tap into the role of existing infrastructure and leverage the fintech, so as to enable interoperability between CBDC systems of different jurisdictions, a well between CBDC system and incumbent payment systems.

And the currency conversion will be processed on the virtual border between wallets. So in that case, there is no… the financial risks such as currency substitution, since domestic CBDC should be converted to the other currencies as payments cross borders, to avoid the potential adverse macroeconomic implications. So those are the principles that we adopted in the research with Hong Kong about the cross-border payment services. Back to you, Alice.

ALICE FULWOOD: Do you think it’s possible to build a CBDC that’s interoperable with other CBDC’s tech, and works across borders without creating some sort of risk of currency substitution?

Let’s go to Gabriela first. Is that possible?

GABRIELA GUIBOURG: Well, this is something that we are currently analyzing within the building block 19 that Tobias was mentioning. It’s very much the IMF involved in this analysis, in the do no harm at the cross-border level. I would say that dollarization in general is mostly a problem of an economy that is not well managed. But you still have a problem. And we need to have also mechanisms here, Changchun was mentioning some, in order to mitigate the risks of too large currency flows from one country to another, especially from emerging markets, for example, that are more prone to those risks.

I don’t have a silver bullet. This is something that is being analyzed now. But the do no harm that is the first principle that central banks agreed on in the first report that the group of seven central banks and the BIS published in 2020 is the first principle. And it has to also be present at the cross-border level to mitigate those risks.

ALICE FULWOOD: Tobias, is the IMF the standard setter here for creating that cross-border linkage without risking currency substitution?

TOBIAS ADRIAN: We are not the standard setter. So our articles of agreement give us certain powers, but certainly not those of a regulator. So we are working with the Financial Stability Board, which is the regulatory body, in order to make sure that there is interoperability. Let me just point out that interoperability goes far beyond technology, right? So technology is one aspect. But it’s really the institutional arrangement around cross-border transactions that is key here. And let me point to two different models that are possible.

So one is where CBDCs in any currency can be held in any country, right? And so there you certainly have a risk of dollarization or CBDC-ization, foreign CBDC-ization. But of course, the response to that is sound macroeconomic policies, sound institutions. A country like Sweden, for example, is not too worried about being euroized or so, or dollarized, right, because it has very sound institutions, which is not the case for all countries.

There’s a second model which is very different, where foreign CBDC would have to be exchanged through intermediaries. And so you just couldn’t hold the foreign CBDC in your country. And so that would require very different standards and arrangements. And so it is a work in progress, as Gabriela pointed out.

On dollarization, the first best is good policies in the overall institutions, the macro economy, et cetera.

ALICE FULWOOD: OK. I think I have time for one final question. And I’m going to put it to Changchun. Is digital dollarization something China is acutely worried about? Or do you feel safe that if a dollar were introduced it would not threaten China?

MU CHANGCHUN: Well, I think under the guidance of international savings bodies we don’t actually worry about dollarization in the future. And for example, with the support of the BIS and IMF, and we have already developed the mBridge project. And under that project, we can have the—all the central banks join in this multilateral CBDC platform that supports instant cross-border PvP in multiple currencies and multiple jurisdictions. So, with that, international organizations initiatives, for example like Tobias said… we’re working on the building block 19 on the CBDC, interoperability issues in terms of the cross-border payment services. So in that scenario, in that support of all the international standing bodies initiatives, we don’t actually worry about the dollarization issue.

At the same time, we have the capital management matters in place. With that measure of support, we don’t expect any, I mean, significant impact of the dollarization impact.

Back to you, Alice.

ALICE FULWOOD: Thank you very much for that answer.

And a huge thank you to all of my panelists who have joined myself, the Atlantic Council, and the IMF today. Thank you, Tobias, Gabriela, and Changchun. I thought your answers were extremely interesting. I was thrilled to be able to discuss some of those super dynamic questions with you—the idea of financial stability, cross-border currency substitution, and the idea that economies’ payments systems are digitizing all the time and CBDCs are just one part of that.

Thank you to everyone who’s tuned in. I’d highly recommend that you go and look at the IMF’s paper. In particular, there are four charts of—that lay out the various different decisions and choices that different central banks have made to do with the functions of CBDCs, the goals, the technology they’re using, et cetera, and they’re extremely clarifying.

So thank you all. Thank you for having me as well. I’m now going to turn to Josh Lipsky, the director of the Atlantic Council GeoEconomics Center, for some concluding remarks. Thank you.

JOSH LIPSKY: Well, thank you, Alice, for moderating that fascinating conversation. And we covered so much territory, and of course more to cover. I want to thank Mu Changchun, Gabriela Guibourg, Tobias Adrian for your thoughtful insights on digital currency this morning and taking time to share with all of us. Thank you to the IMF and the managing director for joining us at the Atlantic Council to launch your important new paper.

Now, this event was titled “Behind the Scenes on Central Bank Digital Currency,” and the truth is that there are many people at the Atlantic Council, at the IMF, at the Swedish Riksbank, at the People’s Bank of China that worked tirelessly across many time zones for weeks behind the scenes to make this event possible. So thanks to all of you.

We heard two clear messages today.

The first is that over a hundred countries are exploring a central bank digital currency. Think of the rapid change from just a few years ago to today. And they are learning from the innovations of the central banks represented here this morning and in the IMF’s new research paper.

The second thing we heard—and this is equally important—is that very few final decisions have been made. How will a CBDC work with the commercial banking system? Will it use distributed-ledger technology or not, or as we heard maybe a hybrid? Will it be account- or token-based, or both? Will it interact with stablecoins and other private-sector options? What about cross-border? These decisions will be made in the year and years ahead, but they will shape how the entire world uses money for the decade and decades ahead.

And that is why we have made understanding this shift and this transformation a core pillar of our work at the GeoEconomics Center. Next week, we will host a two-day conference with our partners at the University of California San Diego on digital currency in the Asia-Pacific. Next month, we will launch new research on cybersecurity and digital currency—it was brought up today—one of the most important challenges facing both policymakers and engineers in the US and around the world. Our goal is to bring voices together to learn from one another, like I think we did this morning, and help build a financial system that is safer and faster and more inclusive all at the same time.

You can register for our events and publications at the link in the chat. Keep an eye out for everything that’s coming from the Atlantic Council GeoEconomics Center.

Thank you for being part of today’s launch. Have a wonderful rest of the day.

Watch the full event

Further reading

Related Experts: Sarah Bauerle Danzman

Image: A smartphone monitor shows an application for Chinese yuan, known as RMB Digital Currency Electronic Payment, on Jan. 6, 2022. Photo via Reuters/The Yomiuri Shimbun