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Digital fiat currencies reality a step closer

In general, crypto currencies tend not to gain traction with corporates due to their unregulated nature and very volatile markets. However, the prospect of central bank digital currencies is far more intriguing. While that prospect may seem a very long way from becoming a reality, the drive towards seeing an actual digital fiat currency has gained additional traction over the past couple of weeks thanks to a number of interesting developments.

Firstly, on 14 May, Societe Generale SFH, the covered bond vehicle of Societe Generale, issued €40m of covered bonds (“obligations de financement de l’habitat” or “OFH”)) as security tokens directly registered on a public blockchain. Rated Aaa by Moody's and AAA by Fitch, these OFH Tokens were fully subscribed by Societe Generale which simultaneously paid the issuer in a digital form of euros issued by Banque de France through a blockchain platform.

This experimentation was performed end-to-end using blockchain infrastructures, in accordance with best market practices. SocGen said it demonstrates the feasibility of financial securities being digitally settled and delivered in Central Bank Digital Currency (CBDC) for interbank settlements. 

The challenge of this experimentation is to identify how innovative technologies could improve the efficiency and fluidity of payment systems and financial infrastructures, allowing a better financial sector to ensure the smooth financing of the economy. It paves the way for the automation and shortening of payment processes, with simplified market infrastructures and strengthened security.

This transaction follows in the footsteps of an initial issue worth €100m in security tokens by Societe Generale SFH on 18 April 2019, which was settled in the traditional manner in euros. The bank says it seals a new stage in the development of Societe Generale Forge platform, aimed at promoting new blockchain-based market activities.

In the SocGen press release, it noted that it has been involved for several years in numerous initiatives based on blockchain and distributed ledger technologies, which could pave the way for the automation and shortening of payment processes, with simplified market infrastructures and strengthened security. This test transaction carried out with the Banque de France is a new step in Societe Generale scaling up in its transformation, using the most innovative technologies, with the aim of better serving its clients.

An ecosystem for central bank digital currencies

The SocGen and Banque de France experiment is one of a number of individual exploratory moves by central banks to assess the viability of a digital fiat currency. For example, earlier this year we reported on CTMfile about Sweden’s Riksbank plan to test a technical solution for the e-krona. Also, in April, the prospect of a digital dollar was raised in the US as part of a congressional stimulus bill. The question then arises, how would various digital fiat currencies coexist?

One possible answer to that question came in news out of the US Patent & Trademark Office last week. They revealed that in November last year, Visa filed a patent for what amounts to a central bank digital currency ecosystem.

The elements of the Visa patent (or 'embodiments', in patent-ese) provide a digital fiat currency system for managing digital fiat currency generated based on physical currency. Embodiments provide a private permissioned distributed ledger platform for managing the digital currency. The digital currency may be recorded to a blockchain in association with data such as a serial number of a corresponding physical currency, allowing a central entity to manage the volume and value of the digital currency. 

In some embodiments, a computer-implemented method may include receiving, by a central entity computer, a request for digital currency, the request comprising a serial number and a denomination of a physical currency; generating, by the central entity computer, the digital currency for the denomination and linked to the serial number, wherein the generating comprises recording the digital currency on a blockchain; transmitting, by the central entity computer, a notification of the generation of the digital currency; and causing, by the central entity computer, removal of the physical currency from circulation in a fiat currency system. 

The full and very detailed nature of the patent application can be found here. Some of the interesting points to note are that the digital fiat currency an exact complement to physical cash, down to the denomination and even the serial number, with the central authority having the power to remove the physical fiat currency out of circulation. 

Of course, filing the patent does not guarantee that Visa will be building this digital fiat currency ecosystem any time soon, but it is interesting to track the moves that successful electronic payments providers are making in the space, as we try to see what the payments rails of the future may look like.

Pilot for digitised national currency transfers

Elsewhere this week, Billon and Raiffeisen Bank International successfully tested an end-to-end digitised national currency transfers proof of concept as part of the Elevator Lab acceleration programme. The Polish-British fintech and the Austrian bank are developing initial phases of an RBI Tokenization Platform, and will pilot this platform for selected use cases, like real-time tokenised money transfers or improving the cut-off time for custody customers. The pilot aims to demonstrate how companies can improve their liquidity management, speed and availability of cross country funds transfers and facilitate new business processes.

The tokenisation platform, initially called RBI Coin, was developed by Billon during the Elevator Lab program concluded on March 5th. The system enables banks to choose a transfer method that provides increased speed, more certainty of payment status, reduced exception handling, and the ability to substantially reduce customer inquiries.  With the system, e-money transactions can be supplemented with additional documents or data, such as invoices and confirmation of source of funds, for full transparency and audit trail. 

Clearly this is a space to keep monitoring. While the corporate use of a digital dollar or a digital euro is still many years off, the past couple of weeks have shown it is closer to becoming a reality. 

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