Fnality is a blockchain payments system, formed of a consortium of 14 banks, including UBS, Barclays, Santander and BNY Mellon, along with the stock exchange, Nasdaq, aiming is to create the means of payment on-chain for financial markets by use of its Utility Settlement Coin (USC), similar to JPMorgan’s JPM Coin.

Drawing from this experience, Ransome speaks to Finextra Research about the current state of play regarding central banks launching their own digital currencies, with a particular focus on the possibility of a digital euro considering some of the recent statements of intent from national European central banks to lead the way themselves.

Would wholesale fail?

A wholesale CBDC, according to Ransome, would require core elements which are not the specialisms of central banks.

“There are three core ingredients is the basic technology to issue and redeem or mint and burn, whichever you prefer, some tokens.” he says.

“Central banks could very easily do that, but that brings us to next part: administering all the people that want to hold those tokens or that asset.”

Central banks deal with a very narrow client base. In order for tokenised markets to work, they need to be peer-to-peer, which exposes the weakness in the current financial market infrastructure of relying on intermediaries, custodians and correspondence.

“This creates an awful lot of pain and an awful lot of costs,” Ransome sums up.

To provide access to banks and other financial institutions, central banks would need to deal with the many legal entities that exist within each organisation.

“For example, in Fnality, we’ve got 15 shareholders, 14 of which are banks,” Ransome says. “Those banks have got oodles and oodles of different legal entities, many of which will want an account in dollars, pounds and euros.

“Central banks, he claims, are not set up to deal with that wide range of a customer base and setting themselves up to do so is “not in their DNA”.

The third ingredient would be convincing commercial banks that they need to migrate their tokenised widget trading capability to the central banks’ platform.

“Central banks would have to do a lot of business development, which is also not in their DNA as they don’t do all that commercial stuff,” Ransome says.

“Just look at the delays with T2S and how much that cost. This is not stuff that the public sector is good at.”

Central banks could then create a wholesale CBDC, but that would only be the start of the work, given the task of ensuring its technology is viable and that it provides a flexible enough solution that financial institutions would actually want to use it.

Pushing the envelope

Ransome describes the suggestion that the Banque de France is looking to lead the development of a digital euro for wholesale use as a “complete misnomer”, given any such initiative would have to be led by the ECB.

“Of the different central banks, the French are certainly making the effort to push the envelope a little and look to the future and their recent experiments are a sign of that appetite,” Ransome says.

The Dutch National Bank has also been vocal in lobbying the ECB regarding developing a digital euro. Ransome however points out the bureaucratic minefield that any institution would have to cross in order to bring something akin to this to fruition.

Fnality is currently seeking approval from central banks, including the Federal Reserve, the Bank of England and the European Central Bank (ECB), with the intentions to receive its first green light in Q3 of 2020. Ransome cites Fnality experience in describing the challenges in attaining ECB-level approval for the rollout of a stablecoin or other digital currency.

“As Fnality found out during our application process, you start with the ECB, which, rather like the EU, has to get approvals from various voting members.

“A bit like the UN Security Council, there are permanent voting members and there are important market infrastructure bodies and payments’ committees and so on, as well as certain other central banks having a standing vote, including the Dutch, the French, the Spanish and the German.”

Individual central banks will nonetheless not be deterred in trying to take the initiative themselves, so that they might shape the agenda for the complicated journey that lies ahead.