CBDCs are Coming…Eventually

Although a large number of central banks have publicly stated their intention to at least investigate the possibility of digital currencies, the latest (third) survey from the Bank for International Settlements (BIS) finds that many of those waiting for CBDCs are going to have to be patient.

The BIS surveyed 65 central banks about their engagement in CBDC work, the motivations for this work, and their intentions on issuance. Respondents also provided their views on legal frameworks for CBDCs as well as their assessment of the use of cryptocurrencies and stablecoins in their jurisdictions.

The number one takeaway, and this continues a trend in recent years, is that central banks in emerging and developing nations are leading the charge. This is unsurprising given those jurisdictions are less likely to have bulky domestic payment systems involving legacy technology.

In all, 56 of those central banks surveyed are now “exploring” digital currencies significant higher than just two years ago, and while some are expected to follow the Central Bank of the Bahamas which launched its digital “sand dollar” in 2020, the survey finds that the majority are unlikely to launch a digital currency in the next three years. It is not all bad news, however, for the BIS says that those central banks that will launch in that window, represent around 20% of the world’s population.

“Some central banks with advanced CBDC projects are becoming more cautious about issuance timeframes while assessing their work,” the BIS says. “Meanwhile, a growing awareness of the cross-border implications that CBDCs can have for the financial system has spurred international collaboration between central banks to find common ground on policy.”

The survey asked about the motivations driving a lot of the work at central banks, based around a predefined list – including financial stability, monetary policy implementation and financial inclusion as well as payments efficiency and safety. In order to differentiate the relative importance of these motivations, central banks ranked these predefined potential factors from “not so important” to “very important” for issuing retail and wholesale CBDCs.

Unsurprisingly, all of the above factors contribute to respondents’ interest in CBDC to some degree., but the BIS says this masks differences between advanced and emerging economies, as well as certain jurisdictions’ specific motivations. The BIS adds that the weight given to different motivations depends on factors such as the national payment system’s state of development and structure and the degree of financial inclusion in the jurisdiction. Motives for wholesale and general purpose CBDCs also differ.

A stronger perceived need for CBDCs in emerging and developing market economies also means they are more likely to have advanced to a pilot or implementation phase. The survey shows that seven out of eight central banks in advanced stages of CBDC work are in this category. In these jurisdictions, the BIS says, the focus is generally on CBDC for domestic payments, however, larger emerging economies with ongoing pilots do also consider cross-border payments efficiency as important.

The central banks in the survey can be split into three groups according to the stage of work they are in: those only conducting research, those working additionally on proofs of concept and those that are in very advanced stages of development. The survey finds that motivations vary across these groups for both general purpose and wholesale CBDC. While payments efficiency and safety are prime motivations regardless of work phase, those in more advanced stages take additional factors such as financial stability into serious consideration.

Crypto Still Seen as “Niche”

An ongoing challenge for central banks is, according to the BIS, a “robust and unambiguous” legal framework in which to work. As in the previous two surveys, about a quarter of central banks have, or will soon have, the legal authority to issue a CBDC and since the first survey on this question in 2017, there has been a slow but steady trend of more and more central banks either obtaining legal authority or clarifying that they do not have it.

Some 26% of central banks do not have the authority to issue a CBDC and about 48% remain unsure. The continued high share of central banks who have not yet sought clarification on their mandates in this respect reflects the finding that most central banks have not advanced to development and pilot arrangements.

Interestingly, the survey finds that most central banks sees cryptocurrencies as “niche” products. Specifically, the survey asked central banks about current and anticipated use of cryptocurrencies and the majority indicated only trivial use or use by niche groups at both domestic and cross-border level, in line with previous years. This suggests that the huge rise in the value of many cryptocurrencies over the past year has had little or no effect on the majority of the population, although the BIS does note there are a few exceptions. The paradigm of cryptocurrencies which strive to maintain trust in the stability of their value through the use of technology was seen as holding promise in extraordinary situations where trust in public institutions is low, leading to a more widespread or significant use for domestic payments.

Meanwhile, stablecoins are being analysed by most monetary authorities. According to the survey, two thirds of central banks are studying the impact of stablecoins on monetary and financial stability. Notably, in comparison with a year ago, more emerging and developing market central banks have started investigating stablecoins, possibly reflecting a growing awareness of the cross-border implications of widely adopted stablecoins. Those jurisdictions not actively assessing stablecoins are mostly smaller emerging economies with active CBDC research.

Despite the broad attention paid to stablecoins, concerns about their emergence as an alternative payment method are not a widespread motivation for work on CBDC – only a handful of central banks included them in their rationales for possible CBDC issuance. Still, the subject of stablecoins has attracted considerable attention from public authorities and standard setters, as witnessed by internationally coordinated work by the FSB and others, the BIS notes.