Switzerland's central bank will expand digital currency trials to include commercial banks

The Swiss National Bank is still not ready to issue a digital currency — but it seems a lot more comfortable with the idea after a recent demonstration of how the technology would work in practice.

Now the central bank is looking for commercial banks to participate in the next round of testing, according to Thomas Moser, alternate member of the governing board of the Swiss National Bank (SNB).

Earlier this month, the SNB published a recap of its so-called Project Helvetia, during which it collaborated with the Bank of International Settlements (BIS) to test several applications of a digital currency that would be used to settle large bank-to-bank transactions.

The primary impetus for the project is the digital asset exchange that Six Group, the Swiss stock exchange operator, is developing. The SIX Digital Exchange, or SDX, is expected to launch sometime next year. The goal of Helvetia was to test digital central bank money in the context of this new infrastructure.

The proof-of-concept “showed, in a realistic near-live setting, that it is possible to provide central bank money to settle securities transactions using new technologies." But it also left several questions unanswered, according to the report.

The next step is to involve local commercial banks in SDX, to ensure it is “fully end-to-end constructed,” said Moser. The goal is to ensure that a CBDC, if issued, can be properly reconciled with commercial banks’ accounting systems.

“We are now looking for local banks that are willing to participate, because it involves some costs for them. They have to adjust their own systems to participate,” Moser told The Block.

No rush to issue CBDC

The BIS, often called the central bank for central banks, has developed a set of international standards it calls the Principles for Financial Market Infrastructures. One of those principles is that financial market infrastructures should settle transactions in central bank money “wherever practical and available.” 

The purpose of Helvetia was to test whether central bank money could function in the distributed ledger-based infrastructure developed by SDX.

Helvetia entailed two proofs-of-concept. The first investigated four use cases: issuance (“tokenization”) of CBDC, redemption (“de-tokenization”), delivery versus payment settlement of a tokenized asset against the CBDC, and CBDC payments. 

The second proof-of-concept tested how well the blockchain infrastructure of SDX could work together with Switzerland’s existing real-time gross settlement system.

The new report called Project Helvetia “a success," but also cautioned that “just because a central bank can do something does not mean it should.” 

"Project Helvetia is a first step towards this broader understanding of the wider implications for the financial system,” the report concluded. “More work needs to be done in establishing a clear view on a central bank’s role in any future system.”

For several years, the SNB has worked closely with Six Group to develop SDX. Last year, Six Group asked SNB to issue a digital currency that could be used to settle payments on the digital asset exchange.  

Helvetia’s success apparently wasn’t enough to convince the central bank to do so — at least not yet. The SNB has not made a final decision on whether to issue its own digital currency, according to Moser. The additional testing the central bank plans to do involving commercial banks is part of that decision-making process. 

Moser said SDX will therefore go live next year using its own stablecoin in the place of a fully-fledged CBDC. SDX will still hold an account with the central bank — a rarity among stablecoin issuers — but will use its own reserves to back up the token used for transactions on the exchange.

The central banker said there are clear upsides to using a CBDC instead, both for SDX and generally speaking. “(Six Group) wouldn’t have to put up the money, first of all, so it’s cheaper for them,” said Moser. 

Perhaps more importantly, a CBDC would also reduce credit risk effectively to zero, Moser said, since unlike a commercial entity the central bank can’t go bust. 

Six Group declined to comment when reached.