Thomas Jordan of SNB, warns against retail CBDC

Swiss flag waving and tourists admire the peaks of Monch and Jungfrau mountains on a Mannlichen viewpoint, Bernese Oberland Switzerland.
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Thomas Jordan, Chairman of the Governing Board at Swiss National Bank (SNB) has described retail central bank digital currency (CBDC) as too risky at an event in Zurich. 

Jordan gave the speech at the ‘Towards the future monetary system’ event in Zurich on Monday (8 April), in which he aimed to “map out” the journey towards the future monetary system.

In the speech Jordan made reference to Helvetia III, a pilot project featuring the issuance of Swiss franc digital central bank money for financial institutions, which made SNB the first central bank to issue central bank money in tokenized form on a regulated third-party financial market infrastructure.

Following this pilot, SNB shared its findings about the role of central banks in the future monetary system.

The two types of money

The Chairman stated that there are two types of money in circulation, central bank money and commercial bank money.

Jordan said: “Central bank money is the anchor of the monetary system. It comprises sight deposits at the central bank accessible to financial institutions, and banknotes accessible to the general public.

“Commercial banks provide their clients with money in the form of deposits. Trust in commercial bank money is based on institutional arrangements such as banking regulation, deposit insurance, and especially clients’ entitlement to have their funds transferred to another bank, or to withdraw them in the form of cash.”

Jordan explained that these two types of money complement each other in the current system as when businesses and individuals make electronic payments, they use commercial bank money, however, payments are ultimately settled via transfers of central bank money between commercial banks’ sight deposits on the balance sheet of a central bank.

He then emphasised that the value of commercial bank money is thus anchored by the value of central bank money, which leads to what is known as the ‘singleness of money’.

Wholesale CBDC

Switzerland stands out as a frontrunner in adopting tokenization within its regulated financial system. In the current year, approximately 2.5% of Swiss franc bonds have been issued in tokenized format.

However, this development raises the question: How can transactions with tokenized assets be settled with central bank money?

Jordan gave one possibility, which SNB is currently evaluating. The idea is to provide financial institutions with Swiss franc central bank money in a tokenized form, often referred to as wholesale central bank digital currency or wholesale CBDC. 

The aforementioned Helvetia III pilot allowed SNB to test this theory. Jordan said that although it is to draw final conclusions from the pilot it showed that wholesale CBDC does provide a mechanism for maintaining the benefits of settlement in central bank money in a tokenized world.

Retail CBDC

As the tech is evolving the banking world, it is also evolving the retail world, affecting electronic retail payments made by individuals and businesses.

Several central banks are investigating the possibility of issuing digital cash as a retail payment option, one of them being India. However, the SNB currently deems retail central bank digital (retail CBDC) currency unnecessary for the general public in Switzerland.

Jordan said: “From a Swiss perspective, the risks of retail CBDC currently outweigh its potential benefits.”

Instead, the Chairman pointed out a new version of the SIC payment system, which it launched last November. The new system aims to “substantially” improve the way retail payments are processed and in the future promises that individuals and companies will be able to make payments to each other, from account to account, within seconds.

What’s next?

Looking forward, the SNB has emphasised the need for central bank money to maintain its role as the “anchor of the monetary system” and serve as a safe settlement asset that can be used efficiently for payments between financial institutions.

Jordan concluded: “In order to achieve this, central banks must make sure that central bank money and central bank payment systems reflect technological advances. Helvetia III, the SNB’s pilot for Swiss franc wholesale CBDC, and the introduction of instant payments with the new version of SIC are two concrete examples.”