In adopting CBDCs, central banks should engage the private and public sectors and consider private digital money innovations, BIS CBDC report

The Bank for International Settlements (BIS) together with a group of central banks (the group) have published a report on CBDC adoption. In the report, the group recommended that central banks considering the adoption of central bank digital currencies (CBDCs) [efn_note]Central Bank Digital Currency (CBDC) is the virtual format of a fiat currency for a particular nation or region. It is an electronic record or digital token of the official currency and is issued and is regulated by its monetary authority. The main advantages of CBDCs are that they can simplify the implementation of monetary and fiscal policy and promote financial inclusion in an economy by bringing the unbanked into the financial system. The main disadvantages of CBDCs are that they are a centralized form of currency and can erode the privacy of citizens. (Credit: Investopedia)[/efn_note] should:

• engage both the private and public sectors, 
• ensure public trust in their adopted CBDC systems, 
• consider the risk of financial disintermediation and private digital money innovations such as stablecoins, and 
• keep their CBDC systems flexible for any necessary changes as things evolve.

This is contained in the Central bank digital currencies: executive summary, published September 2021. Alongside the executive report are three reports bordering on CBDC system design and interoperability; user needs and adoption; and financial stability implications. The report is put together by the group comprising the participating banks below:

• Bank of Canada
• European Central Bank
• Bank of Japan
• Sveriges Riksbank
• Swiss National Bank
• Bank of England
• Board of Governors Federal Reserve System
• Bank for International Settlements

The BIS hosts nine international organizations that sets standards and pursues financial stability through the Basel Process. It does this by supporting central banks through international cooperation while also acting as a bank for central banks.

Motivations for CBDCs

The report highlighted the following motivations for CBDCs:

• The centrality of central bank money in a monetary system anchors public trust in money and supports public welfare;
• A CBDC robustly meeting the foundational principles envisaged by the group could be an important instrument for central banks in such a future to enhance financial stability, harness new technologies and continue serving the public;
• International cooperation on CBDC could provide an avenue for improving cross-border payments; and
• CBDCs would be likely to have wide-ranging impacts on public policy issues beyond a central bank’s traditional remit.

Key Messages

The BIS report identified key ways central banks could make CBDCs effective:

The CBDC system needs to involve both public and private actors in order to ensure interoperability and coexistence with the broader payment system. 

First, central banks should ensure that the CBDC system adopted helps to achieve policy outcome and enable innovation that meets users’ evolving payment needs. Here, domestic interoperability is specifically identified in the report as vital. In other words, the CBDC system adopted should coexists with other national payment systems. 

Second, central banks should carefully manage the design, development, and running of the CBDC system they may decide to adopt in a manner that ensures public trust in the CBDC system.

Third, central banks should consider the privacy of CBDC users, ensuring that both access and treatment of payment data—however critical they are to the CBDC design and its interoperability—are done in a manner that safeguards personal data.

Central banks should involve both public and private actors in the CBDC project in order to anticipate the needs of future users and incorporate related innovations.

First, the future usefulness to users and acceptance by merchants will likely be the key drivers of CBDC adoption. Therefore, central banks should ensure that the CBDCs they adopt do not only assure the security of central bank money but also deliver other valuable features, including “lower cost to consumers and merchants, offline payments, a higher level of privacy in comparison to commercial options, and multiple accessibility feature”.

Second, CBDCs must fulfil unmet user needs, achieve network effects, and are implemented with the use of existing, accessible technology and infrastructure (eg at the point of sale). The idea of public sector leading CBDC adoption was also suggested in the report, subject to the desires of each jurisdiction. And CBDCs should be able to support future payments.

Third, CBDCs should balance the needs of different users by considering this in the CBDC system design.

To help maintain safety and stability, a CBDC would need careful design and implementation, allowing time for the existing financial system to adjust and flexibility to use safeguards.

First, central banks should carefully consider how they would manage the impacts the adoption of CBDCs may have on the financial system, including financial intermediation and lending.

Second, in paving the way for CBDC adoption, central banks should avoid making abrupt changes to the existing financial system. 

Third, central banks should consider adopting measures that would help them control or influence CBDC adoption or use. As suggested in the BIS report, such measures may include “access criteria for permitted users, limits on individuals’ CBDC holdings or transactions, and particular choices around CBDC remuneration”. 

Next Steps

According to the report, the group will continue to collaborate on exploring how CBDCs could enhance any future system by specifically taking the following steps:

1. Continue exploring the intersections between CBDC system design and interoperability, user needs and adoption, and financial stability implications and common areas of interest in CBDC research;
2. Continue contributing to other complementary international work on CBDCs and the future of payments; and
3. Strengthen outreach and dialogue, domestically and internationally by fostering an open and informed dialogue on CBDC in the group’s jurisdictions and by sharing insights from the group’s work with other central banks, including in developing economies respectively.

Will central banks adopt the recommendations made in the BIS CBDC report?

The report is not a statement of policy, neither by the BIS nor the participatiing central banks.

The recommendations in the report are therefore frameworks. These frameworks are subject to the work and goals of the central bank of each sovereign country considering the adoption of CBDC. Considering the nonpolicy status of the report, will central banks consider and adopt these recommendations or proceed with their own understanding and design of CBDC? 

Time will tell.

Meanwhile, while it is expected that CBDCs will vary based on various factors across jurisdictions, players and stakeholders will expect that—as also recommended in the BIS CDBC report—some foundational principles should be uniformly adopted by central banks in order to avoid fragmenting the payment ecosystem.

What could the Chainalysis report mean for the crypto asset buyer?

First, considering that each sovereign nation’s central bank will determine the design features, operation, scope, and limits of the CBDC it decides to adopt—if such a central bank eventually adopts a CBDC at all—it is expected that the potential and actual effects of CBDCs would be largely limited to the circumstances in each jurisdiction. Second, providers of virtual-currency providers are expected to continue “developing and expanding their service offerings” in the interim as central banks continue to explore (possible) CBDC adoption. Third, if or when central banks of each country decide to regulate virtual currencies, stablecoins are expected to be roped in first. Considering the increasing use of stablecoins to enable cross-border transactions, remittances, crypto trading and other use cases in the crypto market—it is expected that such stablecoin regulation Will impact on the stablecoin market specifically and the crypto market generally. The most daring of CBDCs—perhaps such as China’s Digital Yuan for example—may have the most disruptive effect on virtual currencies, not only because of the design features of the Digital Yuan but more importantly the global-economy-domination goal of the communist country. So expect central bank regulation or restrictions that may not be particularly friendly to virtual currencies. For stablecoins, it is expected that the growing mainstream interest in stablecoins particularly by both banks and nonbank financial institutions, central banks may come under pressure to issue less restrictive stablecoin regulation so they are not seen as stifling financial-technology innovation.

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