The Risks Outweigh the Benefits of a Swiss CBDC, Says SNB Governing Board Member

The prospect of a central bank digital currency (CBDC) has sparked considerable debate globally, with nations exploring the potential benefits and pitfalls of introducing a digital form of their national currency. Switzerland, known for its robust financial system and cautious approach to innovation, is no exception. However, according to Andrea Maechler, a governing board member of the Swiss National Bank (SNB), the risks associated with a Swiss CBDC for public use currently outweigh the potential advantages. This statement reflects a shift in perspective and raises important questions about the future of digital currency in Switzerland. While the SNB acknowledges the importance of staying abreast of technological advancements and exploring wholesale CBDCs for interbank settlements, the idea of a digital franc accessible to the general public is viewed with skepticism. This article delves into the SNB's reasoning, exploring the potential risks and benefits of a Swiss CBDC and examining the implications for the Swiss financial landscape.

Swiss National Bank (SNB) Chairman Thomas Jordan said Monday (April 8) that the risks of a central bank digital currency (CBDC) issued to the general public would outweigh any potential

Understanding the SNB's Stance on a Retail CBDC

The Swiss National Bank's (SNB) cautious approach to a retail CBDC stems from a thorough evaluation of the potential impact on the Swiss financial system. While the SNB recognizes the potential of digital currencies, it believes that a CBDC accessible to the general public could introduce significant risks, including potential bank runs, increased operational burdens on the central bank, and challenges to monetary policy implementation.

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What is a Retail CBDC?

A retail CBDC is a digital form of central bank money that is available to the general public. It would be a direct liability of the central bank, similar to physical cash, but in digital form. This contrasts with commercial bank money, which is held in accounts at commercial banks and is a liability of those banks.

Central banks around the world are investigating how to harness the potential of new technologies while maintaining monetary and financial stability. We recently launched Helvetia III, a pilot project featuring the issuance of Swiss franc digital central bank money for financial institutions.

Why the SNB is Hesitant

Maechler's statement highlights the SNB's primary concerns regarding a retail CBDC. These concerns include:

• Bank Runs: A readily available and easily accessible CBDC could facilitate rapid and large-scale withdrawals from commercial banks during times of economic uncertainty, potentially triggering bank runs.
• Increased Operational Burden: Managing a retail CBDC system would significantly increase the operational responsibilities of the SNB, requiring the central bank to handle a large volume of transactions and customer accounts.
• Monetary Policy Challenges: The introduction of a CBDC could alter the way monetary policy is transmitted through the economy, potentially making it more difficult for the SNB to control inflation and maintain financial stability.

Exploring the Potential Benefits of a Swiss CBDC

Despite the SNB's reservations, it's crucial to acknowledge the potential benefits that a Swiss CBDC could offer. While the SNB doesn't believe these benefits currently outweigh the risks, they are still worth considering.

Financial Inclusion

One of the frequently cited benefits of CBDCs is increased financial inclusion. A digital franc could potentially provide access to financial services for individuals who are currently unbanked or underbanked. However, the SNB argues that this is not a significant issue in Switzerland, where access to banking services is already widespread. As Maechler stated, having the public use a digital franc would likely not significantly promote financial inclusion in Switzerland.

Payment Efficiency

A CBDC could potentially streamline payment processes and reduce transaction costs. Digital transactions can be faster and more efficient than traditional payment methods. For example, cross-border payments, which can often be slow and expensive, could be significantly improved with a CBDC.

Innovation and Competition

The introduction of a CBDC could foster innovation in the financial sector and increase competition among payment service providers. A digital franc could serve as a platform for new financial products and services, potentially benefiting consumers and businesses alike.

The SNB's Focus on Wholesale CBDCs

While the SNB is hesitant about a retail CBDC, it remains interested in the potential of wholesale CBDCs. A wholesale CBDC is a digital form of central bank money that is used by financial institutions for interbank settlements and other wholesale transactions.

What is a Wholesale CBDC?

Unlike a retail CBDC, a wholesale CBDC is not intended for use by the general public. Instead, it is designed to improve the efficiency and security of large-value payments between financial institutions.

Helvetia III and Other Pilot Projects

The SNB has been actively exploring wholesale CBDCs through pilot projects like Helvetia III. This project involved the issuance of Swiss franc digital central bank money for financial institutions and its integration into the banking systems of five commercial banks in Switzerland. These projects aim to assess the technical feasibility and potential benefits of wholesale CBDCs in a real-world setting.

Advantages of Wholesale CBDCs

The SNB believes that wholesale CBDCs could offer several advantages, including:

• Improved Efficiency: Wholesale CBDCs can streamline interbank settlements and reduce transaction costs.
• Enhanced Security: Digital central bank money can be more secure than traditional payment methods.
• Greater Transparency: CBDC transactions can be easily tracked and monitored, improving transparency in the financial system.

The Global CBDC Landscape

Switzerland is not alone in its exploration of CBDCs. Central banks around the world are investigating the potential of digital currencies, each taking a different approach based on their specific economic and financial circumstances.

Different Approaches to CBDCs

Some countries are actively pursuing the development of retail CBDCs, while others are focusing on wholesale CBDCs or a hybrid approach. The Bahamas, for example, has already launched a retail CBDC called the Sand Dollar. China is also piloting a digital yuan, while the European Central Bank is exploring the possibility of a digital euro.

Factors Influencing CBDC Adoption

The decision to adopt a CBDC depends on several factors, including:

• Economic Structure: The structure of a country's economy and financial system plays a crucial role in determining the potential benefits and risks of a CBDC.
• Technological Infrastructure: The availability of reliable and secure technological infrastructure is essential for the successful implementation of a CBDC.
• Regulatory Environment: A clear and well-defined regulatory framework is necessary to ensure the stability and integrity of a CBDC system.

Potential Risks Associated with CBDCs Globally

While the Swiss National Bank focuses on its specific risks, many are universal and globally relevant, and include:

Cybersecurity Risks

CBDCs, being digital, are susceptible to cyberattacks. A successful attack could compromise the integrity of the system and lead to significant financial losses. Strong cybersecurity measures are therefore essential.

Privacy Concerns

The use of CBDCs could raise privacy concerns, as the central bank would have access to detailed information about individuals' spending habits. Striking a balance between privacy and transparency is a key challenge in the design of a CBDC system.

Disintermediation of Banks

If individuals and businesses hold a significant portion of their funds in a CBDC, it could reduce the amount of deposits held in commercial banks, potentially weakening the banking sector. This disintermediation could lead to reduced lending and economic activity.

Addressing Financial Inclusion in Switzerland Without a CBDC

Since the SNB does not see financial inclusion as a strong enough reason to issue a retail CBDC, alternative methods to improve financial access in Switzerland remain a key topic.

Existing Initiatives

Switzerland already has a well-developed banking system and a high level of financial literacy. Existing initiatives to promote financial inclusion include:

• Basic Banking Services: Banks are required to offer basic banking services to all residents, ensuring access to essential financial services.
• Financial Literacy Programs: The government and various organizations offer financial literacy programs to help individuals manage their finances effectively.

Alternative Solutions

Other potential solutions to improve financial inclusion without a CBDC include:

• Improving Digital Literacy: Enhancing digital literacy among vulnerable populations can help them access and use existing digital financial services.
• Lowering Banking Fees: Reducing banking fees can make financial services more affordable for low-income individuals.
• Promoting Fintech Innovation: Supporting the development of innovative fintech solutions can provide alternative financial services to underserved populations.

The Future of Digital Currency in Switzerland

While the SNB currently believes that the risks outweigh the benefits of a retail CBDC, the future of digital currency in Switzerland is far from certain. Technological advancements, evolving economic conditions, and changes in consumer preferences could all influence the SNB's future decisions.

Monitoring Technological Developments

The SNB will continue to monitor technological developments in the digital currency space and assess their potential implications for the Swiss financial system. Staying informed about new innovations is crucial for making informed decisions about the future of digital currency.

Adapting to Changing Economic Conditions

Changes in economic conditions, such as a decline in cash usage or an increase in the adoption of cryptocurrencies, could prompt the SNB to reconsider its stance on a retail CBDC. The SNB must be prepared to adapt its policies as the economic landscape evolves.

Engaging with Stakeholders

The SNB will continue to engage with stakeholders, including financial institutions, technology companies, and the public, to gather input and perspectives on the potential of digital currency in Switzerland. Collaboration and open dialogue are essential for developing a sound and sustainable digital currency policy.

Conclusion: Weighing the Risks and Rewards

The Swiss National Bank's current stance on a retail CBDC underscores the importance of carefully considering the potential risks and benefits of digital currencies. While the potential advantages of increased financial inclusion, payment efficiency, and innovation are appealing, the SNB believes that the risks of bank runs, increased operational burden, and challenges to monetary policy implementation currently outweigh these benefits. The SNB's focus on wholesale CBDCs reflects a pragmatic approach, prioritizing the improvement of interbank settlements and large-value payments while mitigating the risks associated with a retail CBDC. As the digital currency landscape continues to evolve, the SNB will need to remain vigilant, adapting its policies as necessary to ensure the stability and integrity of the Swiss financial system. Key takeaways include:

• The SNB currently believes the risks outweigh the benefits of a retail Swiss CBDC.
• The main concerns include potential bank runs and increased operational burden.
• The SNB is focusing on the potential of wholesale CBDCs for interbank settlements.
• The SNB will continue to monitor technological developments and adapt its policies as needed.

Ultimately, the decision of whether or not to adopt a retail CBDC is a complex one with far-reaching implications. A thorough and ongoing assessment of the risks and benefits is essential to ensure that any decision is in the best interests of the Swiss economy and its citizens.