R3 has put out a new paper comparing central bank digital currencies.

Is it fairly technical? Yes.

Is it an academic read? Yes.

Is it important? Definitely.

There are various reasons why a central bank might want to create a digital currency:

  • It could help facilitate interbank settlement via distributed ledger technology (DLT). Most payment systems settle in central bank money, because of its safety, availability, efficiency, neutrality and finality. Settlement via DLT would need to replicate these qualities – one way of doing this is allowing central bank money to be transferred digitally.

  • It could also create a substitute for cash which could be used by firms and individuals other than banks, essentially creating even more high-tech banknotes.

Central bank money underpins securities settlement globally. Replicating it digitally is one of the main hurdles to broad adoption of DLT in securities settlement (i.e. the process by which money and securities actually change hands). This is why the R3 consortium has put so much work into CAD-coin, a digital currency developed with the Bank of Canada (BoC). CAD-coin works on a on a private, permissioned system. Banks pledge cash to a special BoC account, and receive from the BoC CAD-coin of equal value, which can be used to make payments to other participating banks. For all intents and purposes, CAD-coin is a form of central bank money.

Fedcoin – a project mooted by central bankers in the USA – goes a different route and looks markedly different. Fedcoin is intended as a retail payment solution, would be issued onto a public ledger and its value would be fixed to USD. This would create a new type of money, in effect a stable version of bitcoin.

Claire posted recently on the change in tone from central bankers, this latest paper highlights the options open to those central banks that are looking to dabble with DLT.