BIS Pitches for CBDCs

There has been a sense in recent months that central bankers have become slightly more assertive in their message on digital currencies – a sense that was reinforced this week by the central banks’ central bank, the Bank for International Settlements (BIS) in its Annual Economic Report.

The BIS writes that central bank digital currencies (CBDCs) “open a new chapter for money grounded on trust in the central bank”. It adds that as a technologically advanced representation of money, a CBDC can further the public interest.

“CBDCs are a concept whose time has come,” says Hyun Song Shin, economic advisor and head of research at the BIS. “They open a new chapter for the monetary system by providing a technologically advanced representation of central bank money. In doing so, they preserve the core features of money that only the central bank can provide, anchored in the foundation of trust in the central bank.”

The report is very much a call for the status quo to remain, the BIS argues that CBDCs will function best as part of a two-tier system, with the bulk of the customer-facing activities taken on by banks and other payment service providers. Under such a system the central bank would operate the core of the system and ensure its safety and efficiency, while the private sector, such as banks and payment service providers, would use its innovative capacity to serve customers.

From a practical perspective, and in a passage that could be seen as having a swipe at certain cryptocurrencies, the BIS says the most promising CBDC design would be one tied to a digital identity, requiring users to identify themselves to access funds. “A careful design would balance protecting users against the abuse of personal data with protecting the payment system against money laundering and financial crime,” it writes.

The report notes how CDBCs are moving from concept to practical design, it also lays out the design choices for CBDCs, and offers an economic analysis of their implications for consumers, financial institutions and the central bank itself.

CBDCs would build on the central bank’s traditional roles in the payment system, BIS says, to ensure that payments are final and certain; that there is enough liquidity for the payment system to function; and that the playing field is level, by making central bank money available on an equal basis to all parties.

International cooperation on the design of CBDCs will be “vital” the BIS says, if central banks are to harness the full benefits, as well as improve cross-border payments, while countering foreign currency substitution.

“CBDCs could form the backbone of a new digital payment system by enabling broad access and providing strong data governance and privacy standards,” says Benoît Cœuré, head of the BIS Innovation Hub. “They are the best way to promote the public interest case for digital money.”