CBDCs Mean Evolution, Not Revolution

Central bank digital currencies can help create a more inclusive financial system, says the innovation chief at the Bank for International Settlements.

By Benoit CoeureLayer 2
Oct 20, 2020 at 2:51 p.m. UTCUpdated Sep 14, 2021 at 10:11 a.m. UTC
By Benoit CoeureLayer 2
Oct 20, 2020 at 2:51 p.m. UTCUpdated Sep 14, 2021 at 10:11 a.m. UTC

Who wants a central bank digital currency (CBDC)?

Plenty of people, apparently; industry groups are advocating digital cash, millions of people have reportedly signed up to a lottery to receive digital renminbi in Shenzhen as part of the Chinese central bank’s pilot project, and the Libra Association wants to “integrate” CBDCs. Technology firms, banks, NGOs and consultancies are now jostling to ride the next wave of innovation.

Benoît Cœuré is head of the Innovation Hub at the Bank for International Settlements and a member of the bank's Executive Committee. Previously, he was a member of the executive board of the European Central Bank. From 2013 to 2019, he chaired the BIS' Committee on Payments and Market Infrastructures.

Earlier this year, 80% of the world’s central banks had already started to conceptualize and research the potential for CBDCs, 40% were building proofs-of-concept and 10% were deploying pilot projects, according to BIS research.

Central bankers believe digital cash could be a useful addition to their toolbox, combining the safety of central bank money with electronic convenience. Safe electronic money is hardly revolutionary. For most people in advanced economies, good banking services with deposit insurance are freely available. Nonetheless, concerns have been raised that a super-safe, super-convenient new kind of money could crowd out bank deposits and starve an economy of credit in normal times, while nascent insecurities could snowball into faster-than-ever bank runs thanks to how easy it could be to move savings into digital cash.

For a start, a CBDC would ensure that, as our economies go digital, the general public would retain access to the safest form of money – held as a claim on a central bank which can never go bust. And, this will be in a form they could use freely in their daily lives.

A CBDC would be a kind of digital banknote and, as such, could satisfy more use cases than paper while the issuer, being a central bank, could support liquidity, settlement finality and trust in the value of the currency. As a result, it could promote payment diversity, help make cross-border payments faster and cheaper, foster financial inclusion and even facilitate fiscal transfers in times of crisis, such as the current COVID-19 pandemic.

They are not a revolution or an end in themselves. Yet, they might be a way of achieving a more inclusive, accessible, safe and convenient form of money.

Balancing these opportunities and risks is a significant practical and technical challenge. A recent report from the Bank for International Settlements (BIS) and the central banks of Canada, the euro area, Japan, Sweden, Switzerland, the United Kingdom and the United States sets out the principles and offers a guide to navigating these uncharted waters.

It also puts forward the equivalent of a monetary Hippocratic oath – pledging that any potential CBDC should “do no harm” to central banks’ monetary and financial stability mandates. In fact, it goes one step further, stating that a CBDC should complement – not replace – cash and safe, private money in a new monetary ecosystem that nurtures innovation and private competition. CBDCs are more than just another way to pay. They could be the evolutionary foundation for new, publicly accessible platforms to encourage diverse ecosystems of banks and fintechs, avoiding the “winner takes all” networks we have seen emerging in our daily digital lives, and making sure innovation benefits the many, not just a few.

The exact design will vary by jurisdiction, as well as the extent to which a CBDC will seek to be a neutral means of payment or a new way to do monetary policy. Answers will vary by central bank, as will many other design choices, and will likely involve extensive consultations with the private sector and the public at large.

But if a CBDC is a matter of national taste, why (and how) should central banks work together across borders? That is where the Bank for International Settlements and its Innovation Hub come in. The BIS is owned by, and run for, more than 60 central banks around the world. We started out in 1930 but we focus on the future.

We are serious about exploring CBDCs because central banks realize that this provides an essential opportunity to pool knowledge and resources as well as build systems that complement each other and help make many cross-border payments faster, more transparent and cheaper.

The Innovation Hub is building technological capacity with its hosts to help central banks design workable solutions to emerging challenges. By the end of this year, we plan to publish our first wholesale CBDC proof-of-concept with the Swiss National Bank.

This will pave the way for experiments on the building blocks of a retail CBDC, which might include interlinkages with existing payment systems, application programming interfaces for distribution, digital identity rails, compliance monitoring, cyber and counterfeiting resilience and offline functionality. To help this, we will grow our own blockchain capacity.

This work is directed towards practical solutions rather than the conceptual research of recent years. CBDCs will not usher in an age of prosperity or solve a raft of societal issues – this is beyond the scope of any currency. They are not a revolution or an end in themselves. Yet, they might be a way of achieving a more inclusive, accessible, safe and convenient form of money. They might support a more diverse payment ecosystem, nationally and internationally and, if developed astutely, provide a new form of global public good.

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