BCBS – Central bank digital currency: the future starts today

September 10, 2021 – The world’s central banks are stepping up efforts to prepare ground for digital cash.They need to deliver price and financial stability and must retain their ability to do it.Central bank money has unique advantages – safety, finality, liquidity, and integrity. As our economies go digital, they must continue to benefit from these advantages. Money is at the heart of the system, and it must continue to be issued and controlled by trusted and accountable institutions which have public policy objectives instead of profit. Banks are worried about the implications of Central Bank Digital Currencies (CBDC) for customer deposits and central banks are working on answers to address concerns.

Regulatory Challenges: Central banks see banks as part of future CBDC systems but global stablecoins, DeFi platforms and big tech firms will undoubtedly challenge banks’ models regardless. Stablecoins may develop as closed ecosystems which creates fragmentation. Growing footprint of big techs in finance raises market power and privacy issues. Challenges of regulatory approaches and the impact on commercial banks is not yet clear. Need to consider whether central banks should open accounts to the new players. Also need to consider which kind of financial intermediation is needed to fund investment and the green transformation and how public and private money coexist. Central banks need to know where they want to go as they embark on CBDC journey. A well-designed CBDC will be safe, neutral means of payment and settlement asset, serving as common interoperable platform around which new ecosystem can organize. It will enable an open finance architecture that is integrated while welcoming competition and innovation and it will preserve democratic control of the currency. Emphasized that central banks need to accelerate work on CBDC design as CBDCs will take years to be rolled out, while stablecoins and cryptoassets are already here.

Design: In the design thinking methodologies used in BIS Innovation Hub, the ideal product stands in a sweet spot at the intersection of desirability, viability, and feasibility. With CBDCs, 3 dimensions: consumer use cases, public policy objectives, and technology. Need to ask why consumers would want a CBDC and what would they want it to do.Recent ECB consultation showed they value privacy, security, and usability. To meet consumers’ expectations, CBDCs need to be made to work most conveniently. Payment data must be protected and, in addition, digital functions that are not available with cash can be developed, such as programmability, and micro-payments. CBDCs should meet public policy objectives through enhancing safety and neutrality in digital payments, financial inclusion and access, innovation, and openness. System design will be complex, involving operational, oversight role for central banks. Public-private partnerships to develop the core features of the CBDC instrument. These features are: ease of use, low cost, convertibility, instant settlement, continuous availability and a high degree of security, resilience, flexibility, and safety.

Concluding Remarks: To build a CBDC for the public, a central bank needs to understand what they need, and work with other authorities, noting BIS Innovation Hub is helping central banks. EU is uniquely placed to face the future as can build on fast payment system, on the strong protections provided by GDPR and on the open philosophy of PSD2.

For more information, visit https://www.bis.org.

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