Retail CBDCs pose a risk of financial instability, warns Swiss central bank

The Swiss National Bank holds the view that the potential drawbacks of implementing a retail central bank digital currency (CBDC) likely outweigh any advantages, warning that their introduction could lead to "significant consequences" for financial stability.

Chairman Thomas Jordan stated that the central bank sees no necessity to issue a CBDC for public use, despite recognizing the benefits of a wholesale version. He argued that the current private sector offers a diverse range of efficient payment methods, rendering a retail CBDC redundant.

Jordan highlighted the potential risks associated with retail CBDCs, emphasizing that they could disrupt the established monetary system and the symbiotic relationship between central banks and commercial banks. He cautioned that introducing retail CBDCs could have "far-reaching consequences" on financial stability.

The skepticism from the Swiss central bank comes amidst increasing interest in digital currencies and blockchain technology globally. While acknowledging this trend, Jordan underscored the recent upgrade of the Swiss Interbank Clearing (SIC) system in November 2023, enabling major banks to offer instant payments to retail clients by summer. Additionally, SIC serves as a platform for new payment instruments and programmable payments.

In contrast to the reservations about retail CBDCs, the SNB has shown a more favorable stance towards wholesale CBDCs designed for transactions between commercial banks using central bank funds. The SNB has initiated a trial, known as Project Helvetia III, to explore the benefits of wholesale CBDCs in financial transactions, involving major financial institutions such as UBS and Zuercher Kantonal Bank. Jordan highlighted the efficiency and security advantages of settling transactions with central bank money through Project Helvetia III.

However, Jordan also stressed the need to address several questions before making a broader decision on implementing wholesale CBDCs in Switzerland. These questions include issues related to overnight holding of digital central bank money, its remuneration, and access privileges for financial institutions.

Furthermore, Jordan contextualized CBDCs within broader tokenization trends, suggesting that they could help settle various tokenized assets. The central bank is considering using the Swiss franc wholesale CBDC to settle monetary policy operations, such as repos or SNB Bills.