HSBCNoel Quinn, HSBC Group Chief Executive, recently wrote about how forms of digital money could spur economic growth. After some reflection, ET has decided to quote his piece in full – because it is one of the first executive and open acknowledgements from the finance sector of how digital money, and CBDCs in particular, could become a norm for customers, both business and individual.

What Mr Quinn wrote …

“For over 150 years, HSBC has been at the forefront of financial innovation, constantly looking for ways to make banking easier and better for our clients.

“Today, in the context of the digital revolution, we are fundamentally improving the way we operate – particularly how we interact with customers, process payments and facilitate investment, all over the world.

“One banking innovation being developed is a new form of digital money known as Central Bank Digital Currencies (CBDCs). These are legal tender backed by a central bank or government authority, which means they are transparent and stable – avoiding many of the risks associated with some other forms of digital money, particularly cryptocurrencies and some stablecoins. They are already operating in certain countries and a number of major central banks are actively developing and piloting their own versions.

“CBDCs could help to spur further economic growth by making payments and settlements more efficient and cheaper. They could also fuel innovation across the financial sector. The near instant nature of CBDC payments is likely to lower the cost of issuing and trading bonds and other securities – and may also help with fiscal and monetary policy objectives by providing a means of making direct transfers to consumers to stimulate demand.

“As with all innovation, there are potential risks to mitigate. We must ensure that new products and services are safe, efficient, and genuinely transformative. For example, central banks and public authorities will need to consider the impact CBDCs could have on the supply of credit, market activity and financial stability. They will need to meet customer expectations for data privacy and protection, while enabling the mitigation of financial crime risks and withstanding cyber-attacks.

“The model used for CBDCs is important. Like many other stakeholders, HSBC believes a hybrid model – sometimes called a two-tier model because the CBDC itself is a claim against the central bank but commercial banks provide the payment services and account management activity – is by far the best design option. This approach works because it avoids the need for central banks to set up new account management infrastructure, while ensuring commercial banks can continue to play their vital role lending to the economy.

“A recent report by the Bank for International Settlements and a group of leading central banks offers some principles that can guide us as we embark on this journey. CBDCs should do no harm to monetary and financial stability; must be able to co-exist with cash and other money in a flexible and innovative payments ecosystem; and should promote broader innovation and efficiency in the financial system.

“Interoperability, not uniformity, will also be key. For example, the common standards for infrastructure and data, developed within the G20’s existing work on cross-border payments, will help ensure that CBDCs can be used internationally, maximising the benefits they might bring to customers.

“CBDCs are one new form of digital money. The critical difference between CBDCs and other types of digital money, such as stablecoins and cryptocurrencies, is that the latter are both forms of private money. Private money itself is nothing new. Current commercial bank money is privately created and widely used. But commercial bank money is anchored by central bank money and closely regulated, reflecting its systemic importance.

“If stablecoins and cryptocurrencies are to become relied upon in the same way, they will also require regulation that is commensurate with the risks they create. Even then, only designs that are sufficiently well anchored to achieve price stability, and correspond with current approaches to financial crime prevention, are likely to be useful as a reliable and safe means of payment.

“As one of the world’s largest financial institutions, with deep experience of cross-border payments and foreign exchange markets, HSBC will continue to be involved in discussing and developing CBDCs. We are already working in partnership with many central banks, including those in the UK, France, Canada, Singapore, mainland China, Hong Kong, Thailand and the UAE, as they each consider how CBDCs can best work for them.

“If CBDCs can meet the high standards of safety and efficiency that banks always look for from new products and services, then they can bring about positive change for the financial sector and the real economy. HSBC looks forward to helping our customers benefit from this next wave of financial innovation – just as we have done for the past 150 years.”

Enterprise Times: what does this mean

Once you have stripped out the marketing platitudes (for example, “HSBC looks forward to helping our customers benefit from this next wave of financial innovation – just as we have done for the past 150 years” or “As one of the world’s largest financial institutions, with deep experience of cross-border payments and foreign exchange markets, HSBC will continue to be involved in discussing and developing CBDCs.”), what prima facie is interesting is the open recognition that traditional financial services firms must, and most will, live in a digital money world. The implication is that, if they do not, they (traditional financial service firms) will decline in relevance.

Equally, emphasising the difference between public and private money is valuable (even if it disappoints promoters of stablecoins and other cryptocurrencies). On the other hand, Mr Quinn, through mentioning the BIS, does not seem to pick up on its emphasis that CDBCs should be a small part of any overall financial system.

For Enterprise Times, no admirer of HSBC at the best of times, Mr Quinn’s writing about digital money and CDBCs has value – because it shows HSBC recognises they are coming.

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Charles Brett is a business/technology analyst consultant. His specialist areas include enterprise software, blockchain and enterprise mobility tech (including metering). Specific industry sectors of interest and experience include finance (especially systems supporting wholesale finance), telecommunications and energy. Charles has spoken at multiple industry conferences, has written for numerous publications (including the London Times and the Financial Times). He was the General Chair of the bi-annual High Performance Systems Workshop, 2005. In addition he is an author and novelist. His Technology books include: Making the Most of Mobility Vol I (eBook, 2012); Explaining iTunes, iPhones and iPads for Windows Users (eBook, 2011); 5 Axes of Business Application Integration (2004). His published novels, in the Corruption Series, include: The HolyPhone Confessional Crisis, Corruption’s Price: A Spanish Deceit and Virginity Despoiled. The fourth in The Corruption Series - Resurrection - has is now available. Charles has a B.A. and M.A in Modern History from the University of Oxford. He has lived or worked in Italy, Abu Dhabi, South Africa, California and New York, Spain, Israel, Estonia and Cyprus.

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