Collaborating with the Bank of Italy , the Associazione Bancaria Italiana (ABI)  has brought together a group of banks in a pilot program for a central bank digital currency (CBDC). Referred to as Project Leonidas, this initiative involves 18 commercial banks leveraging blockchain technology.

The primary objective is to explore blockchain applications that promote financial stability and protect consumers. As part of this endeavour, commercial banks are utilising a shared ledger for interbank payments, with a preference for private ledgers rather than publicly distributed ones. The aim is to streamline interbank queries and improve efficiency through daily reconciliations.

Interestingly, this study bears a resemblance to Spunta, another blockchain-based project undertaken by Italian financial institutions, which sought to eliminate the need for monthly reconciliations. Italian regulators appear to be leaning towards the implementation of atomic settlement or delivery versus payment (DvP) for wholesale CBDC issuance, as opposed to trigger payments. This choice reflects a desire for a more comprehensive and cohesive approach.

Exploring the options ABI emphasizes the importance of consolidating the asset leg and cash leg into a single leg for seamless operation in a wholesale CBDC based on DvP. However, critics voice concerns that this approach could fragment liquidity, prompting debates on its effectiveness. Proponents of Italy’s stance point to the ‘waterfall feature’ present in the European Union‘s digital euro design.

This feature automatically redistributes excess funds to relevant accounts, demonstrating its potential application in wholesale ledgers. Despite the Bank of Italy’s preference for the current approach, they maintain an open mindset toward exploring alternative solutions. In the past, the central bank effectively employed blockchain technology to tackle fraudulent bank guarantees and sureties, successfully engaging 30 banks in the pilot program.

CBDC is on the rise Central banks are increasingly drawn to wholesale CBDCs due to their relatively straightforward implementation compared to the intricate nature of retail CBDCs. The United States Federal Reserve Board acknowledged the immense potential of wholesale CBDCs but highlighted the formidable challenge of envisioning a retail counterpart. Commercial banks echo these concerns, apprehensive about potential role reduction and the impact on lending in a retail CBDC environment.

The public exhibits scepticism toward retail CBDCs due to apprehensions surrounding privacy and government surveillance. Experts also note the uphill battle retail versions face in competing against established payment systems, as evidenced by the underwhelming adoption rates of CBDCs in Nigeria and Jamaica. Central banks worldwide are grappling with the challenge of promoting CBDC adoption amidst a diverse range of payment alternatives.

In response, some central banks, like the People’s Bank of China (PBoC), have turned to incentives to entice users and compete with established payment platforms such as Alipay and WeChat Pay. To drive the adoption of the digital yuan, the PBoC has taken measures like offering free digital yuan worth USD 21 million to Chinese citizens on accredited platforms. Additionally, they incorporated the popular ‘red envelope’ feature as part of the Chinese New Year celebrations, further incentivising users to engage with the digital currency.

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