A collaborative effort between the Associazione Bancaria Italiana (ABI) and the Bank of Italy has brought together a group of banks in a pilot program for a central bank digital currency (CBDC). Referred to as Project Leonidas, this initiative involves 18 commercial banks leveraging blockchain technology. The primary objective is to explore blockchain applications that promote financial stability and protect consumers.

As part of this endeavor, commercial banks are utilizing a shared ledger for interbank payments, with a preference for private ledgers rather than publicly distributed ones. The aim is to streamline interbank queries and improve efficiency through daily reconciliations.

Interestingly, this study bears a resemblance to Spunta, another blockchain-based project undertaken by Italian financial institutions, which sought to eliminate the need for monthly reconciliations.

Italian regulators appear to be leaning towards the implementation of atomic settlement or delivery versus payment (DvP) for wholesale CBDC issuance, as opposed to trigger payments. This choice reflects a desire for a more comprehensive and cohesive approach.

Italy’s Consideration Of Alternatives

Silvia Attanasio, ABI’s Head of Innovation, emphasizes the importance of consolidating the asset leg and cash leg into a single leg for seamless operation in a wholesale CBDC based on DvP. However, critics voice concerns that this approach could fragment liquidity, prompting debates on its effectiveness.

Proponents of Italy’s stance point to the “waterfall feature” present in the European Union‘s digital euro design. This feature automatically redistributes excess funds to relevant accounts, demonstrating its potential application in wholesale ledgers.

Despite the Bank of Italy’s preference for the current approach, they maintain an open mindset toward exploring alternative solutions.

In the past, the central bank effectively employed blockchain technology to tackle fraudulent bank guarantees and sureties, successfully engaging 30 banks in the pilot program.

Growing Popularity Of Wholesale CBDC

Central banks are increasingly drawn to wholesale CBDCs due to their relatively straightforward implementation compared to the intricate nature of retail CBDCs.

Michelle Bowman, Governor of the United States Federal Reserve Board, acknowledges the immense potential of wholesale CBDCs but highlights the formidable challenge of envisioning a retail counterpart.

Commercial banks echo these concerns, apprehensive about potential role reduction and the impact on lending in a retail CBDC environment.

The general public exhibits skepticism toward retail CBDCs due to apprehensions surrounding privacy and government surveillance.

Experts also note the uphill battle retail versions face in competing against established payment systems, as evidenced by the underwhelming adoption rates of CBDCs in Nigeria and Jamaica.

Other Central Banks Are Turning To Incentives

Central banks worldwide are grappling with the challenge of promoting CBDC adoption amidst a diverse range of payment alternatives.

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In response, some central banks, like the People’s Bank of China (PBoC), have turned to incentives to entice users and compete with established payment platforms such as Alipay and WeChat Pay.

To drive the adoption of the digital yuan, the PBoC has taken measures like offering free digital yuan worth $21 million to Chinese citizens on accredited platforms. Additionally, they incorporated the popular “red envelope” feature as part of the Chinese New Year celebrations, further incentivizing users to engage with the digital currency.