Part 2 of "A Digital Franc for Switzerland; Is there a reason to worry?": A CBDC, its benefits and threads

This is the second of a three part blog written by Markus Hammer about a digital Franc for Switzerland. In the first part, it was described why states and their central banks are currently pushing their CBDC plans with great momentum, its relation to private cryptocurrencies like Bitcoin, and why the latter are not like money.

This part 2 explains what a CBDC as a digital state currency is and what its benefits and threads could be based on its design. The last part will then introduce the Swiss e-Franc as proposed by SNB in March 2021 and whether its nature is rather preserving or disruptive.




CBDC is either Account-based money (i.e. Wholesale CBDC) or Value-based money (i.e. Retail CBDC)


After having described the basic concept of cryptocurrency and the characteristics of traditional money we can actually describe CBDC. In short, a CBDC is money issued by the central bank as an actor of the state (unlike Bitcoin which is issued privately, hence private money) carrying a specific value in it as a legal tender and expressed through its attributed trust by the public for its price stability, an effect of a properly and independently job done by the central bank as the central network authority. Traditional central bank money is differentiated into account-based and value-based money, both understood as a liability of the central bank. The account-based system refers to the deposits granted by the central banks to specific financial institutions, i.e. the central bank's reserves. In the digital context, such account-based money is also referred to as wholesale CBDC due to its limited access to the public. In contrast, the value-based system describes the currency to the public, generally understood as notes/bills and coins, in sum, the cash. In its digital context, it is therefore also referred to as retail CBDC. The differentiation relates also to the payment process itself. Account-based money is transferred from a payer to a payee by charging the payer's account and crediting the payee's account, ultimately transferring the money by shifting it via an electronic or digital ledger. This aspect also explains why Bitcoin corresponds to an account-based and not a value-based system; it is held on a digital ledger, even though its term suggests the use of a token. In contrast, value-based money is transferred by the value itself in form of the cash bills or coins in the traditional world or a token in the digital space, and both having the characteristics as a bearer instrument. Another important difference in this context is that account-based money is traceable, whereas value-based - at least in the traditional world - is not.


So far, there is no obvious difference between central bank traditional money and CBDC. A difference, however, arises when looking at the following two aspects:

(1) Should CBDC include account-based money as wholesale CBDC and replace the existing 2-tier architecture with the commercial banks maintaining the customer accounts?

(2) Should retail CBDC complement or replace cash by digital tokens and should it also abandon the existing benefits of anonymous payment?


Both questions and its aspects can be answered in diametrically opposite ways and are therefore subject of great uncertainty and speculation as to the direction in which a central bank will develop its CBDC design, i.e. how disruptive such architecture will be, and what position the state and its citizens will want to take in this regard. In order to assess the benefits of a CBDC, these questions must first be clarified and each country must ultimately make its own call. In the following, I outline the concepts underlying the two questions in general, and then in the next section I describe the proposed e-Franc use case as an expression of e-government in Switzerland with its advantages and disadvantages


(1) 2-tier financial system versus disintermediation


Our current financial system operates with a 2-tier architecture, the central banks creating and distributing state-money to the commercial banks via account-based system, which in turn distribute it to the end-users. Within such governance, it is the commercial banks which provide accounts to the public customers for their deposits and all related servicing and maintenance. Hence, it is also the commercial banks being responsible for conducting KYC checks throughout the entire client-lifecycle to comply to the AML/CFT regulation (Anti-Money Laundering/Combating the Financing of Terrorism), including customer authentication and fraud-prevention. It could be a simple solution for the central bank itself to offer deposit accounts also for the public, instead, and thereby create a 1-tier system. The outlined services and duties of the commercial banks would then have to be carried out by the central bank themselves, of course. As this would not make a lot of sense due to missing proximity of the central banks to the end-customer and their lacking respective knowledge and capacities, responsibilities could also be outsourced to third-parties or the commercial banks could be mandated to open and manage central bank accounts on their behalf to the customers. Thereby, the state would by-pass the current players and insofar disintermediate the existing banking-sector (a full disintermediation - as it was envisaged originally for Bitcoin - would never be achieved with a CBDC, though, as the central bank remains the in the system as the central authority).


Abandoning a 2-tier system would offer different advantages over the existing system. By avoiding the go-between of a commercial bank or the credit-card network, settlement for vendors would happen almost immediately and without worry about fraud. Further, and for the users the existing counterparty risk could be eliminated as the central bank, unlike commercial banks, are always solvent and liquid.


Considering such advantages, it remains to be seriously challenged if they justify a switch from a well established and more or less effectively - and to the widest extent already electronically i.e. digitally - working current system towards a DLT-led CBDC system given its undisputed required huge efforts. Otherwise, a digital national currency would just be a costly solution in search of a non-existent problem.


If one observes the trend in recent years of states continuously inflating their balance sheets as a result of quantitative easing and thus losing the confidence of the population in their own currency, one could also argue that central banks are preparing for a worst case scenario with a CBDC. More on this further down.


(2) Anonymity of payments versus full control by the government


The biggest advantage for a CBDC at least from a government's perspective is to keep up with the market development - or at least not fall behind - and establish a CBDC as competitive digital state currency against the private cryptocurrencies, which are about to roll up the market from behind, and also to put the basis to interoperate with other CBDCs. In contrast to the 1-tier scenario in the preceding paragraph, a state could introduce a CBDC also as a retail CBDC only and as a potentially also less invasive form of disintermediation. The equivalent of retail CBDC in the traditional world is cash and cash has the big advantage to be used as exchange anonymously, hence is a form of bearer instrument. This is in contrast to the account-based process where customers withdraw (account-based) money from the commercial banks, or where merchants and payees receive (account-based) money whilst  commercial banks need to authenticate their customers, i.e. perform KYC controls. When using traditional cash, there is no need for neither party to identify themselves at any time of the transaction, neither is it required to record payments or track it. Pure possession of the cash is sufficient and its authenticity, secured by the high-tech features of bank-notes. Now, how would that current system translate into the digital world? Simply said, if you want to maintain the anonymity of the value-based payment system, you have to stick to this differentiation and just expand its terminology to token-based. Thereby, the distinction related to the information carried by the information asset would be sustained: Whereas account-based payments would further include all of the credit and debit operations involving the accounts, token-based payments would further carry information about the value and the token-issuing entity only. Also authentication and KYC checks would be maintained and applied only for account-based payments, not for token-based ones, which in contrast require payment authorization only. Hence, the token-based system would offer the same benefit like the value-based today, the anonymity of the transaction parties. Without going into details let me add that such definition might not be supported by rather autocratically led countries as they tend to utilize all technically possible features to control their citizens and stakeholders of the network, China in the first place.




A CBDC could be the biggest disruption for decades to the financial services industry and all of us using it, if designed to maximize government's control over the financial market and their users. Particularly the following three stakeholder groups could be impacted, depending on the CBDC design (1) traditional financial service actors (2) emerging digital currency platforms like Bitcoin or Big Tech Diem and (3) all of us, as the users of the financial service framework, be it as individuals or businesses.


(1) Traditional intermediaries like the banks, credit card companies and digital payments processors could be affected by the introduction of a CBDC, if not entirely be cut out of the market as the middleman. The financial system as we know it today could be turned upside down from one day to the next with unforeseeable consequences. The central bank would step into the market as direct competitor to commercial banks with causing different side-effects as a result to such partial or full disintermediation of the banking sector. We have already described the shift of the KYC- and customer authentication duties from the commercial banks to the central bank as one effect. Beyond, e.g. the system-relevant function of commercial banks providing credits to the private sector could be jeopardized and negatively affecting productivity and economic growth. The introduction of a CBDC could also incentivize shifts of deposits into the safe haven of the central banks in times of financial crises and trigger bank runs. Beyond, such disintermediation would raise the general question about the state structure and how liberal versus interventionist its citizens want it to be. For Switzerland, this question might be answered rather in a liberal sense.


Even though, a government would have the power to bypass the traditional intermediaries, this scenario seems to be quite unrealistic and it is rather likely that public and private sector would somehow interact as they do today. It remains to be seen what CBDC designs will further solidify.


(2) For Bitcoin and co. as a means of exchange, the introduction of a CBDC could even mark its final death blow; the outlined benefits would have no competitive value anymore. This effect has presumably already been priced into Bitcoin as believers are increasingly considering crypto as an alternative investment and value carrier (see above). Otherwise, the high Bitcoin price would make no sense at all, even taking into account contributing speculative mechanisms as price drivers.


(3) CBDC like an e-Frank, could also affect the users of the system, actually in 2 ways.


First, transaction privacy could be affected. It would be technically easy to track the citizens' spending, eliminating the anonymity physical cash enjoys today as a big advantage. Over-ambitious government scrutiny could lead to surveillance abuses (even in democracies such examples exist), mass surveillance or payment exploitation. The state could easily control private consumption and as a concrete, though rather harmless, example track down (and prevent transaction or simply fine) both, the merchant for selling and the youngster below 16 for buying alcohol. Examples could go far beyond, if a government would decide to combine all possible sources of data, e.g. mobile GPS data with personal and transaction data to generate full control over its population. Alan Huxley's Brave New World novel is about to become reality e.g. in China.


The even bigger thread to individual and business users, though, could be the central banks' immediate reach into their pockets, or rather, their digital wallets. Such a scenario quite likely has the potential to challenge the public peace in the country and provoke wide-scale riots. Hence, let me call this aspect "the doom scenario" and outline how far this could go. A government with full-scale CBDC could implement monetary and fiscal policy directly to the users. Tax and interest rates could be set in full discretion, even randomly. From limiting user's spending amount, subsidizing or sanctioning of purchasing specific products, controlling all forms of income directly at the source and subsequent taxation and more would be possible. The most excessive intervention in this context, though, might be the debt cut or an entire currency reform to tackle the effects of the quantitative easing (interesting read on the CBDC doom scenario also the Primer of Patrick Schüffel in MoreThanDigital).


Such access, coupled with the ability for mass surveillance of all digitally available user data, would give the state unprecedented control, indeed. Nevertheless, just the fact that a CBDC could technically enable central banks to direct access into the user's pockets whilst bypassing the traditional intermediaries doesn't mean that it would be feasible from a policy point of view - for whatever purpose. A legal basis is required, next to an overriding public interest and proportionality of the applied means for the concrete situation in order to reflect just the basic constitutional and legal principles of any liberal democracy relevant for all areas of state's sovereign activity. These principles would naturally also include the central bank as an actor of the state. And at least for the more expansive of the examples listed (if not all), such legal foundations are not in place to date in the Western world, hence they would first have to be created as part of a democratic process.


CBDC global development:


As outlined, there are many countries pushing for an own CBDC across the globe, considering, testing and some even deploying frameworks of different designs. These initiatives are driven rather by the central banks themselves as by the lawmakers, which makes perfectly sense to be prepared for the moment when this discussion gains wider public attention. At that time answers would be expected from the named responsible actors, ideally based on solidly tested and robust findings, for the public and lawmakers to make an educated decision throughout the policy debate. What designs will ultimately applied country by country is to a wide range still opaque but its defining key criteria will revolve around following questions:

  • Should CBDC include account-based money as wholesale CBDC in general, and
    • Complement (as a competitor) or replace the existing 2-tier architecture?
    • Collaborate with the current financial service industry to leverage their infrastructure and knowledge or fully cut them out?
    • Prepare for the worst case and allow doom scenarios (see above)?
  • Should CBDC encompass value-based money as retail CBDC in general, and
    • Complement as an alternative or entirely replace cash by digital tokens?
    • Abandon the existing benefits of anonymous payment?
  • What would be the underlying technology, e.g. utilizing a DLT-based technology or other like a simple centralized database structure?
  • What would be the ultimate benefits of the new digital state currency, considering a widely efficient and effective current system compared to tremendous change efforts required for a CBDC


An overview of digitizing national currencies developments globally can be found here:

Digital Ambitions Central banks are at varying stages of developing digital currencies O CBDC already being issued Plans to issue CBDC O Actively exploring CBDC feasibility Conducting research and/or experiments Source: Bloomberg



End of part 2 of the series "Digital Franc for Switzerland; is there reason to worry?". In part 3, Markus Hammer writes about the design for a Swiss e-Franc proposed by SNB in March 2021 and whether its character is rather preserving or disruptive.

Write a comment

Comments: 2
  • #1

    Naveed Minhas (Thursday, 08 April 2021 11:09)

    Great Article Markus ... brilliantly researched and relevant to the policies of many regions as they face upto the sharp edge of what you rightly called the " greatest threat to the workings of the current financial system".

    Personally , would want to explore how MO supply is the main focus of CBDC's as they evolve beyond discussion papers; though again as you rightly frame , considerations for protecting the anonymity of payments versus full control by the government, remains key to how this dialogue becomes policy for us all .

    Once again , thanks for sharing your insights and research into a very relevant subject for equity in financial inclusion.

  • #2

    Markus Hammer / Author (Thursday, 08 April 2021 18:58)

    ... answering comment #1
    Spot on, Naveed; grey is the theory and appetite comes while eating. So far no reality check on M0 supply mechanics in the digital age in reality. At least for Switzerland there is a smart proposal for a Swiss e-Franc as a pure bearer instrument at the table - and currently been tested - which is subject to my blog part 3/3 of "A Digital Franc for Switzerland; Is there a reason to worry?"