Lofty Ways to Leave your Fiver: Big Thoughts About Central Bank Digital Currencies
Seven central banks and the BIS have released a report proposing a framework for domestic central bank digital currencies that complement existing forms of legal tender and support public policy objectives. Any decision to issue a CBDC (and on what basis) will be taken by each central bank individually, but the framework is intended to develop a common understanding in relation to design principles, from a technical and policy perspective. Meanwhile, the European Central Bank has launched a public consultation on a digital euro.
A new joint report
With the increasing popularity of non-cash payments and efforts made by private entities such as Facebook in connection with stablecoins, questions around the desirability and feasibility of central bank digital currencies (CBDC) are becoming increasingly pertinent.
A group consisting of the Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, Board of Governors of the Federal Reserve and Bank for International Settlements has issued a report setting out guiding principles for and core features of CBDCs.
The report emphasizes the role of a digital fiat as a complement to, rather than a substitute for, cash and the need for informed judgment balancing the need for innovation and efficiency in the relevant country’s payment system with broader public policy objectives, such as monetary or financial stability.
This comes just as the European Central Bank has launched a consultation on a digital euro.
Three guiding principles
A CBDC is a digital payment instrument, denominated in the national unit of account, that is a direct liability of the central bank. CBDCs may improve payments diversity, foster financial inclusion and support public privacy. At the same time, they may introduce certain risks, such as counterfeiting and cyber risk, fragmentation of payment systems and the risk of disintermediating banks or enabling destabilizing runs into central bank money.
In order to balance the potential benefits of CBDCs against their risks, the group highlighted the following as key principles:
- Do no harm to monetary and financial stability
- Coexistence with cash and other types of money in a flexible and innovative payment system
- The promotion of broader innovation and efficiency.
Four core features
Based on these key principles, the group broadly agrees that any future CBDC system should be:
- Resilient and secure to maintain operational integrity
- Convenient and available at very low or no cost to end users
- Underpinned by appropriate standards and a clear legal framework
- Have an appropriate role for the private sector and promote competition and innovation.
The report also outlines more specific design features (for example, in relation to monetary controls, technical design, incentives, and trade-offs) requiring further consideration by each central bank.
No one-size-fits-all approach
The group highlighted that the design and issuance of a CBDC will need to be sovereign decisions based on an informed calculus of how certain risks, such as the potential for destabilizing runs into central bank money, may be managed through a combination of safeguards both in the design of the CBDC and general throughout the jurisdiction’s financial system policies.
The design of domestic CBDCs will need to be driven by each jurisdiction’s circumstances, such as its stage of economic development, its motivations and others, but would also have international implications requiring cooperation and coordination to prevent any negative spillovers and ensure any improvements necessary for seamless cross-border payments.
At this stage, the focus is very much on exploring domestic use cases rather than improving cross-border payments. The Financial Stability Board is spearheading a separate initiative to consider the latter, which this group will contribute to.
The report’s guidelines are intentionally broad and the group notes that they may be incorporated in some fashion by an array of CBDC designs. While not simple, the report suggests that each jurisdiction’s design approach should take into account both the differences between jurisdictions and the need for harmonization and compatibility for cross-border transfers.
The group aims to continue exploring questions around CBDCs and its challenges, and continue domestic outreach to foster informed dialogue. Any decision to introduce a CBDC will be taken by each jurisdiction on its own timing.