finance.swiss: The Swiss National Bank was involved in an experiment called “Project Helvetia,” where two “proof of concepts” for CBDCs were successfully examined. What exactly were you trying to test?
Andrea Maechler: Let me just take one step back before delving into that question. Technological innovation is moving very fast. For the SNB, it’s very important to understand, to monitor, but also to anticipate what this innovation means for the functioning of the financial system. One of these novelties is the DLT, the distributed ledger technology, also often called blockchain. And it’s not yet clear to what extent, and in what areas, this technology is going to be more efficient than the existing technology. But if it is in some areas, it’s going to be very important to understand how you bring money on a DLT platform. How do you settle transactions? And it’s exactly to answer these kinds of really innovative questions that the community of central banks have decided to create an innovation hub at the BIS, Bank of International Settlements. And the SNB is very proud to have one of the first of three centers here in Switzerland and that is where we are doing Project Helvetia. So what are we doing in this Project Helvetia? In Switzerland, one of our main infrastructure providers, the SIX, is actually going to launch the first fully regulated digital platform. They’re going to issue and trade digital assets. How do you settle them? How do you bring what is called the cash leg on that platform? They’re going to have the base case, which is a stable coin, i.e. that’s a digital form of private money fully backed by central bank money. What Project Helvetia is doing is to look at two alternatives to bring in central bank money on the exchange. One is to a wholesale CBDC, central bank digital currency, the other one is not to bring money on the platform but to do a simple connection between a DLT platform and the existing system where the money is being transacted.
And what were the key findings and takeaways from Project Helvetia?
So the key findings are very exciting! Both approaches work. We have the legal framework for it, and they can also be done in a secure way. There are, of course, differences. The big difference is if you use a wholesale CBDC, you get to use the full potential of this new technology. What do I mean by that? You get to use smart coins or smart contracts on the coins. So that opens a whole new way, but it also opens a lot of new questions on what it means for the system. The other one—which is a simple connection—it works, it’s simple, and can be done very easily. Of course, you don’t get to use the same synergies. So it depends what the needs are, and it’s something that we continue to explore.
You mentioned it worked. What are the next steps?
We need to go deeper. What does it really mean from an operational perspective? We are looking at two main questions. One of them is—so a DLT platform, what is really new about it—it works 24 hours, it is instantaneous, it is real-time, so how do you link a real-time platform with the existing IT systems of banks? So this is something that we need to look at. What does it really mean to put these two worlds together? The other thing we need to look at is what the implications are for financial stability and for the implementation of monetary policy. Those are all issues we’re looking into.
Now, the SNB recently announced another project called “Jura” in collaboration with the Central Bank of France. What are the differences to Project Helvetia and what exactly are you looking at there?
That’s a great question. So Project Helvetia is about trying to understand how you bring money onto a DLT platform, and Project Jura is really an extension of that. It’s going one step further in a slightly different direction. This is not deepening our understanding, this is broadening in a sense. It’s a cross-border transaction. Improving the cross-border payment system is a key priority at the international level. It’s a priority of the G20. And this project really contributes to these efforts. It’s trying to understand how the DLT technology can be used to improve cross-border settlements, and this is work, as you mentioned, that we’re doing with the Banque de France within the BIS Innovation Hub as well as with a consortium of banks. It’s exciting work.
Let’s talk about CBDCs in general. The European Central Bank and the national central banks of the European Union are also examining a digital euro and starting a pilot project, while China recently announced a digital renminbi. Are we going to see a digital Swiss franc soon?
What you just mentioned here is a very different area. It’s also about a CBDC but for the general public, also called retail CBDC. This is a very different animal from what we’ve been looking at Project Helvetia, where we’ve been looking at what we call a “wholesale CBDC,” which is really restricted for the use of regulated financial institutions. So you’re absolutely right, retail CBDC is really the talk of the town and we have been looking at it. We clearly participate in the discussion, and we look at what our counterparts are doing. At this juncture, we’ve come to the conclusion that the risks of issuing a retail CDBC clearly outweighs the benefits for Switzerland. The risks are that there is a potential that it changes the two-tier, the architecture of the current financial system, in changing the role of the central bank. Today, a central bank is the bank of the banks, and the banks interact with the public sector. And a retail CBDC could really jeopardize the inter-mediation role of commercial banks. So this is something we have to look at very closely. Another risk is a risk on financial stability. A retail CBDC could really encourage bank runs much simpler and much faster, so this is clearly also something we need to look into very carefully. The bottom line is we have to remain very cautious. But there are many things you can do, and we have to do, for the payment system the way it exists. It needs to be technological, it needs to accommodate the new technologies and new preferences, and one of them is instant payments. People want to be able to pay just as easily as they send a WhatsApp. And that is work that is under way.
So you mentioned a lot of risks for retail CBDCs. Are there other open questions that need to be looked at when thinking about launching one?
The bottom line is there are many questions that are open. There is a lot of work that is under way. Ultimately, as a central bank, we have one responsibility: it is to maintain trust in the money, this is our price stability mandate. But trust in money also requires trust in the payment system, because you need to be able to use your money whenever you want to use it. So this is why we have to proceed very cautiously, we don’t want to do anything that jeopardizes this overarching mandate, but in the end there’s a lot of exciting work happening, and the landscape in the payment system is really in a rapid evolution, and we are very proud to be able to contribute to these efforts to improve the payment system in Switzerland as well as on a cross-border basis.