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BIS Researchers Grapple With Implications of Interoperable CBDCs

Central bank digital currencies would largely benefit countries if they work together to eliminate traditional banking frictions, a research note said.

Mar 19, 2021 at 9:11 p.m. UTC
Updated Sep 14, 2021 at 12:29 p.m. UTC

Convertible central bank digital currencies (CBDCs) offer countries a tantalizing chance to improve vital cross-border payment rails, researchers from the Bank for International Settlements (BIS) wrote in a March note.

Authors Raphael Auer, Philipp Haene and Henry Holden charted one road for cross-border CBDC finance in a detail-heavy research note. They offered a handful of potential mechanisms for multi-CBDC and took some pot shots at the public sector's inevitable competitor.

The biggest benefits will come only if countries collaborate to eliminate traditional banking frictions for their new, interoperable form of money, the BIS researchers said.

The paper balked at libra's (now diem's) plans to unite the digital payments world under a private entity's cross-border global stablecoin. Interoperable CBDCs "are preferable" to the Facebook-led Diem project, the authors said, arguing convertible national cryptos "strengthen monetary sovereignty in the digital age" while private cryptos would simply shift the cross-border risks elsewhere.

Nevertheless the paper's authors empathized with Diem's desire to simplify cross-border finances. They said an interoperable, central banker-approved system for switching disparate CBDCs about would do a better job.

First, they would have to convince central bankers that international collaboration on CBDC is worth the trouble. They foresee a long road ahead as few countries have finalized their digital currency plans and competing interests abound.

Central banks would have to coordinate on policy, technical standards, data requirements and regulation to establish a viable, linkable system. The authors pointed out that's easier said than done; establishing the euro payments system took years.

Monetary wonks could opt to build a "common distributed ledger" that houses multiple CBDCs. That's an even harder lift, though. Multi-currency systems, which typically presage currency unions, are historically tricky beasts made no simpler by thorny issues of governance and access that come with DLT (distributed ledger technology), a digital system of recording transactions in which transactions are recorded in multiple places at the same time.

The authors said central banks have an opportunity to collaborate on these issues before launching otherwise walled-off CBDC systems. Indeed, only the Bahamas has issued a CBDC so far, leaving a "blank slate" for the rest of the world.

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