Noise around central bank digital currencies (CBDCs) has intensified over the past few months. Despite universal progress, enthusiasm among regulators remains mixed - with some jurisdictions pushing ahead and others following more reluctantly.
In late September, the Bank of International Settlements (BIS), working with a group of seven central banks, published a new set of reports, with the Head of its Innovation Hub emphasising the ability of CBDCs to “foster innovation and preserve the best elements of the current system.” The reports turn from foundational principles towards tackling practical implementation issues. The key finding is that for CBDCs to work effectively, public and private institutions need:
- to cooperate to ensure integration with existing payments systems,
- to anticipate customers' future needs, and
- to support innovation while preserving public trust, privacy, and stability in the broader financial system.
The G7 also released its Principles for Retail CBDCs (PDF 563 KB), setting out a common set of considerations for public policy implications.
Although moving forward, both bodies have cautioned against too much speed. The BIS stresses that the financial system must be given sufficient time to adjust, while the G7 reiterates (PDF 163 KB) that no global CBDC should launch without the relevant regulatory and oversight requirements in place.
The BIS also published supplementary research highlighting the sheer volume of questions that remain unanswered on the cross-border dimension, the interoperability between existing and new infrastructures, accessibility and the distinction between wholesale and retail CBDCs.
In the UK, the Bank of England (BoE) held its first CBDC Technology Forum in September, with the aim of helping the Bank to understand the technological challenges of designing, implementing and operating a CBDC. The Forum was technology-agnostic (i.e. not wedded to the use of distributed ledger technology) and championed simplicity of the core ledger infrastructure to enable better performance, security and extensibility with more complex functions being added as overlay. The group also expressed a preference for a platform model (while remaining open to alternatives), where the central bank's core ledger is made available to users via private sector payment interface providers.
More recently, the BoE announced that it will issue a formal CBDC consultation in 2022. Deputy Governor Jon Cunliffe described this as a “crucial step in policy development”, the outcome of which will determine whether the BoE enters the next phase - the 'development phase' - of a digital pound.
In Europe, individual central banks (most notably France and Sweden) are progressing pilot experiments with wholesale technological solutions. At the same time, the European Central Bank's (ECB's) 24 month 'investigation phase' into a digital euro continues, with the recent appointment of its Market Advisory Group members.
This phase involves experimenting with design features including whether the currency can be used offline via Bluetooth technology and how to incorporate limits to payment confidentiality. The task force has indicated that work on a prototype will begin in early 2023, with expectations for it to be developed and tested in 2024.
ECB President Christine Lagarde has repeatedly reaffirmed her support for the digital euro project. She emphasises that “central banks have a responsibility to ensure citizens have access to the safest form of money - central bank money - in the digital age”. However, for now, she posits that any digital euro would be available as a complement to cash and commercial bank money, not as a replacement.
Like many regulators, Lagarde does not believe that crypto technology should be left entirely in the hands of the private sector. She has noted (81.5 KB) that, unlike other crypto-assets (which are not fit alternatives in terms of basic monetary functions), a digital euro would offer the same confidence as cash. It would therefore preserve the central bank's role as “an anchor of stability for the financial system”.
The ECB has also highlighted the international implications of CBDCs and the dangers of being left behind. Any country too slow to adopt its own digital currency could suffer from substitution effects ('dollarisation') and be left dependent on an alternative digital currency issued and controlled from abroad. Such an outcome could undermine domestic financial stability and monetary sovereignty. European regulators are already acutely aware that non-European payment providers currently handle around 70% of European card payment transactions.
One particular concern is drawing attention across the board — the potential disintermediation of commercial banks. Regulators are trying to pin down how best to strike the balance of a CBDC being 'successful enough' (so as to appeal sufficiently as a means of exchange), but not 'too successful' (so as to be used as a form of investment and thus eliminate the role of commercial banks). Some are more optimistic than others, theorising that a solution can be achieved through limiting the retail holdings of CBDC, for example through a direct cap or less favourable interest rate.
As regulators and central banks continue to develop CBDC initiatives, albeit at different paces, the advantages and disadvantages of being a 'first mover' will no doubt become clearer. The future impacts on financial firms are uncertain and they should therefore ensure that they keep abreast of development and debate in this space.