The World Federation of Exchanges (WFE) has published a paper exploring the potential impact of central bank digital currency (CBDC) on the adoption of tokenization. The WFE is an industry body representing the world’s largest stock exchanges and clearing houses, including central counterparties (CCPs). These are amongst the organizations that will be most heavily affected by a shift to tokenization. One of its members, Switzerland’s SIX Digital Exchange (SDX), already supports a pilot wCBDC.
“The Swiss experience demonstrates the utility of efficient CBDCs to the success of tokenisation, due to the enhanced trust, liquidity, financial inclusion and diversification associated with CBDCs,” said Richard Metcalfe, Head of Regulatory Affairs at the World Federation of Exchanges. “Other central banks and policymakers should take heed of this example to generate the economic growth associated with tokenisation.”
A WFE report last year on tokenization seemed less than keen on the topic, although this one is more balanced.
Benefits of a wholesale CBDC include the ability to use central bank money as collateral and facilitate cross border payment. The authors note that while CBDCs support delivery versus payment (DvP), so do real time gross settlement (RTGS) systems, although transactions can take from seconds to half an hour.
CBDC challenges
Regarding challenges, it highlighted the inability of a DLT to keep up with the settlement of microsecond transactions. It has been widely noted that instant settlement is not ideal for transactions that can benefit most from netting. We’d observe that CBDC can support netting and settlement on a far more regular basis, including intraday. The key point being that these settlements are atomic or delivery versus payment (DvP).
Given CCPs are key WFE members, the authors noted that CCPs also address counterparty risks while supporting netting. That’s not up for debate. The question is whether a piece of code can fulfil a similar purpose in a future tokenized world.
With RTGS systems available and integrated today, the authors ask whether CBDCs will mainly be used when the RTGS system is closed. So they wonder whether it’s worthwhile for that purpose, or whether extending RTGS operating hours would work.
While extending RTGS hours is a valid point, we’d observe that CBDCs will most likely be used for the settlement of tokenized assets at any time of day. So it’s more about the tokenization adoption curve. CBDC is an important and necessary element, but tokenization is still in the early stages. For SDX, wCBDC trials encouraged half a dozen bond issuances during a six month period. However, since extending the wCBDC pilot in mid 2024, there has only been one SDX bond issuance.
The WFE paper also highlights some of the tricky areas regarding CBDC adoption such as legacy system integration, interoperability and the need for a supportive regulatory environment.
wCBDC initiatives grow globally
For wCBDC, matters are moving in the right direction in many major jurisdictions. Switzerland is the first. But the EU recently announced an interim RTGS – DLT payment solution, to be followed by plans for a more comprehensive wCBDC. That was in response to regulators being pleasantly surprised by the appetite from industry during last year’s Eurosystem trials.
In the UK there’s the private wholesale settlement institution, Fnality, whose token is a synthetic CBDC, although it doesn’t like that label. Fnality is also planning to launch in the United States.
And there are numerous other jurisdictions such as Brazil, Hong Kong and the UAE working on pilots or planning launches.