CBDC Work Accelerating: BIS Survey

The latest Bank for International Settlements (BIS) survey on central bank digital currencies (CBDCs) finds that nine out 10 central banks are exploring the concept and more than half the 81 surveyed are developing CBDCs or running concrete experiments. It also finds that the pandemic and general growth in cryptocurrencies has accelerated the work, especially in advanced economies.

The BIS says that central banks in advanced economies say that financial stability has increased in importance as a motivation for their CBDC involvement. Globally, more than two-thirds of central banks consider that they are likely to or might possibly issue a retail CBDC in either the short or medium term.

Work on wholesale CBDCs, meanwhile, is increasingly driven by reasons related to cross-border payments efficiency. Central banks consider CBDCs as capable of alleviating key pain points such as the limited operating hours of current payment systems and the length of current transaction chains.

What is the fifth BIS survey on CBDCs retained questions from previous years to ensure consistency, however new questions were asked around issues such as inter-operability with existing payments infrastructures and the role of the private sector on a CBDC ecosystem. A new area of the survey finds that work on retail CBDCs is more advanced generally than on wholesale – while many central banks are working on both, no bank is studying a wholesale CBDC only.

Most of the retail work is expected to involve private sector players in the architecture, more than 70% of respondents, expect to follow a two-tier system to distribute CBDCs with the private sector. The latter’s work is largely seen as relating to client onboarding, KYC and AML checks as well as the handling of payments.

Similar to previous years, motivations for wholesale and retail CBDCs differ. First, financial inclusion is a less important driver for wholesale than for retail CBDCs, and secondly, cross-border payments efficiency remains a key motivation for wholesale CBDCs. In fact, the BIS says, it has become a greater motivation over the past year, surpassing all other motivations, noting that various wholesale CBDC projects specifically focus on cross-border payments.

The survey also finds that central banks consider the limited operating hours of current payment systems and the length of existing transaction chains as the most important pain points that could be alleviated with CBDCs. Interestingly, BIS says advanced economies’ (AEs) central banks generally deem retail CBDCs able to address limited operating hours, whereas emerging and developing economy (EMDEs) central banks think this friction could be reduced with wholesale CBDCs. By contrast, AEs mention long transaction chains as the key friction that could be alleviated with wholesale CBDCs, while for EMDEs, this potential is most often mentioned for retail CBDCs. “These distinct views might reflect jurisdictional differences in payment infrastructures and the types of cross-border payment service currently available,” the paper states.

The survey suggests that work will continue to accelerate – 26% of central banks now have legal authority of issue a CDBC, up from 18% in 2020, while around 10% of jurisdictions are currently changing their law to allow such a move.

While the cryptocurrency market capital continues to soar, the survey finds that most central banks perceive the use of cryptocurrencies and stablecoins for payments to be “trivial” or “limited to niche groups”. That said, only a quarter of respondents actually conduct research in this area, and those that did tended, the BIS says, to have a higher perception of crypto and stablecoin use. The paper says that an analysis of the clarifying comments from the respondents shows that the perceived potential of stablecoins and other cryptocurrencies for payments depends on more than just their price volatility and backing mechanism. Also highlighted as additional factors determining their potential are the issuer’s reputation, the vulnerabilities of the cryptocurrency’s protocols, the regulatory and supervisory environment and the coexistence of other reliable payment solutions.