Central Banks want to solve delivery versus payment problems with CBDC

Over the past year, central banks have hinted that they are open to a state-supported digital currency.

Dozens of them have started to explore the technology. This technology shares the DNA of blockchain-based cryptocurrency such as bitcoin, and the promise is to speed up and simplify transactions. The Bank for International Settlements (BIS) has drawn up provisional standards and even the Chairman of the US Fed, Jay Powell, talked about a US CBDC.

If you cannot beat them, then join
The main driver of the current interest in CBDCs is the need for national sovereignty over those technologies,‘ says Ken Timsit. He lists two threats: the arrival of Libra from Facebook and that China is developing its own CBDC. Central Banks realise that if they don’t keep abreast of these technologies, they could give other organisations, commercial or sovereign, complete dominance.

Development team achieves success
Timsit leads the CBDC development team at Consensys. This is a The News Spy blockchain startup founded by Joe Lubin, known from Ethereum. Consensys is doing well with their CBDC’s: last month the company announced to collaborate with Forge, the digital assets platform of the French bank Societe Generale, to investigate CBDC technology for the French central bank. Consensys is also working on CBDC pilots or exploratory projects with the Central Banks of Thailand, Australia, Singapore and South Africa and the equivalent of a Central Bank in Hong Kong.

Money gets stuck in the system
They are working on a solution to a shortcoming in the current banking and securities system. This is known as ‚delivery versus payment,‘ in English it is Delivery vs Payment or DVP. Using current banking technology, Timsit says, buying and selling securities is a surprisingly lengthy process, entangled in a jumble of collateral and confirmations. Especially now that trading desks and corporate treasuries are linking deposits and transactions. The standard window for this settlement process is two days. That is an eternity in modern markets, and the capital involved in transactions is often blocked for a period of time, which adds costs and reduces flexibility.

Most of the delays that occur today are due to the fact that there is not a single source of truth,‘ says Timmer. Blockchain-like CBDCs would create a shared general ledger of reliable and almost instantaneous transaction and balance sheet data. Theoretically, the tormenting process of back-office paper-shifting would be eliminated. If you have access to a CBDC, you can free up liquidity one day rather than within a few days‘.

Small organisations benefit
He also says that the impact can be great for smaller organisations that want to raise money. The issue of bonds, for example, is both complex and slow, making it meaningless below a certain amount. CBDCs could also transform the so-called ‚repo market‘, where securities are lent out for very short-term cash, a process where speed and accuracy are crucial.

Consensys‘ strategy for its CBDC projects, Timsit says, is simple: ‚We use pieces of technology that are readily available from Consensys,‘ he says, in the hope that those products will become part of the long-term structure of the systems. He thinks the work is necessary, because despite the efforts of Centale Banken, there is hardly any real expertise present in these organisations.

Timsit sees many advantages in CBDCs from a technical point of view. But there are also many critics. In the next article we will take a closer look at the risks.