Preparing for a Central Bank Digital Currency - (Article)

Preparing for a Central Bank Digital Currency by Dr. Ruth Wandhöfer, Partner at Gauss VC


Technological change in money and payments is not new. In the 1990s, the arrival of e-money promised to deliver benefits of speed, transparency, and efficiency to paying users. Central banks at the time questioned whether commercial bank-issued e-money could create distortionary effects on monetary policy and thus whether they should consider issuing e-money or leave this entirely to commercial entities. Since then a lot has changed.


Since the arrival of private cryptocurrencies with Bitcoin in 2009 and followed by many other crypto coins, a new chapter for the world of money and payments has opened up. These cryptocurrencies are a special form of private digital money that operates based on distributed ledger technology (DLT), where encryption technologies are used to manage the generation of units as well as their verification and transfer. The underlying systems are outside of governments’ and the banking system’s control. The move from centralised to decentralised systems that achieve seamless payment transactions across the globe is hailed as a financial revolution. At the same time, cryptocurrencies have the potential to challenge the role of commercial and central banks when it comes to the provision of retail payment services.


In this broader context, one of the key questions that arose was whether physical cash will start to disappear and if so, whether the issuance of a new form of central bank-issued Digital Fiat Currency should be contemplated. And indeed, many central banks are pondering to experiment, analyse and potentially issue Central Bank Digital Currencies, or CBDCs, with some being ahead of others.


Let’s start with China, which has been exploring the topic of CBDC since 2014 and is currently running trials in a number of selected provinces. China’s CBDC is focusing on replicating M0 - i.e. cash in digital form - maintaining the three key pillars of money; transactional/medium of exchange, store of value and unit of account. The Digital Yuan is 100% backed by central bank deposits from commercial banks and other institutions operated via a two-tier system. The People’s Bank of China has no interest in becoming consumer facing, but broader than it has traditionally been in other jurisdictions. China’s largest banks, as well as key conglomerates such as AliPay and Tencent, have been identified for secondary issuance of CBDC. The CBDC is seen as a tool that helps pass on zero or negative interest rates faster than traditional monetary policy mechanisms. 


China has been clear that it has no intention to impair the commercial banking sector, hence the two-tier system. The Digital Yuan is also seen as a means to reduce the demand for cryptocurrencies and help consolidate the national currency’s sovereignty. A slew of patents for the end-to-end value chain are being issued and implemented. They reveal that the solution will operate with “controlled anonymity”, where anonymity is maintained between the sender and receiver, but transactional information is held by the operator. At the same time a selection of different types of Digital Yuan wallets, where the Yuan is depicted in digital bank note format, is being proposed based on users’ behavioural data and the identity data provided. 


Another CBDC example is Sweden, primarily motivated due to their significantly low percentage of cash usage which only continues to decrease. The project started in 2017 and in February 2020 the Swedish central bank announced a general public technical trial for the e-krona. The CBDC DLT will run separately to the country’s central payment system, the latter only used by node operators (primarily banks) to swap part of their central bank deposits into e-krona. The separate nature of the CBDC ledger is seen as a contributor to resilience, particularly in times of crisis of cyberattacks. Wallets will be activated by participants of the DLT and users can make retail, P2P and transfers between wallets and bank accounts. Different interfaces for smartwatches and cards are also available whilst the option of enabling offline usage is still being explored. The Riksbank emphasises that this is only a test that is designed to learn about the technology and functioning of the e-krona and that no decision to truly launch a CBDC has been made. 


From the perspective of monetary policy stability, right now there is little to worry about the parallel cryptocurrency ecosystem (including Stable Coins) as monetary policy is no longer effective these days anyway. What is more important to contemplate is the question as to which new monetary policy tools might be needed for the future and whether more effective transmission of monetary policy could be achieved with the creation of a CBDC.



Dr. Ruth Wandhöfer is an expert in the field of banking and one of the foremost authorities on transaction banking regulatory and innovation in financial technology matters. After a distinguished career of over a decade with Citi, Ruth is now an independent Non-Executive Director on the boards of Permanent TSB and Digital Identity Net as well as a Partner at Gauss Ventures. She is also a Strategic Adviser of the European Third Party Provider Association (ETPA) and Adviser at Coinfirm. Until recently she has served as independent Non-Executive Director on the Board of the London Stock Exchange Group and Pendo Systems Inc. She continues to focus her passion on bringing the financial industry and the emerging financial digital ecosystem together.


Ruth was named as one of 2010s ‘Rising Stars’ by Financial News; named in Management Today’s 2011 ‘35 Women under 35’ list of women to watch and identified as one of the 100 Most Influential People in Finance 2012 by the Treasury Risk Magazine. She received the ‘Women in Banking and Finance Award for Achievement’ in 2015 and in 2016, 2017 and 2018 she was named on the global ‘Women in Fintech Powerlist’ of Innovate Finance. She is a 2018, 2019 and 2020 Top 10 Global Fintech Influencer (Fintech Power 50). She speaks five languages, has completed studies in Financial Economics (MA, UK), International Politics (MA, FR), an LLM in International Economic Law (UK) and a PhD in Finance (UK/NL). She published two books: “EU Payments Integration” (2010) and “Transaction Banking and the Impact of Regulatory Change” (2014), is a Fellow of CASS Business School City University London, a Visiting Professor at the London Institute of Banking and Finance and also lectures at Queen Mary London School of Law.

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