The Bank for International Settlements (BIS) has asked for countries to cooperate at the early stages of central bank digital currency (CBDC) design to make it easier for systems to work across borders.
Each jurisdiction will have its own legal framework, but many design features for CBDCs – which are digital versions of existing sovereign currencies like the U.S. dollar – are still undecided, allowing central banks to start with a “clean slate,” according to a just-released BIS joint report with the International Monetary Fund and the World Bank.
The conclusions are in line with those of Cecilia Skingsley, who is first deputy governor of Sweden's central bank and set to become head of the innovation arm at BIS, which is based in Basel, Switzerland. Two weeks ago, she warned of the potential for countries to not “play nicely” with one another with respect to CBDC design.
“To promote coexistence with other forms of money and payment instruments and a reasonable level of adoption of CBDC, interoperability with non-CBDC systems, both domestically and cross-border, is fundamental,” the report says.
That countries around the globe are looking into establishing a CBDC at least in part in response to the crypto market boom is no secret. The Bahamas was the first to launch a digital currency, named the “sand dollar,” in 2020, and China has pushed forward with its trial of the digital yuan. Nigeria launched its own CBDC, the eNaira, in October.
When constructing a CBDC, central banks would have to decide on some key issues – such as who gets to use CBDCs and whether private payments companies will be able to access their CBDC infrastructure. According to the BIS report, central banks could either agree to a set of common standards or use different "interlinking" systems that still allow people to transact with one another or just have a single access point between systems.
Each of the CBDC access models has different implications around risks, efficiency, resilience and interoperability, the report continues, noting there is no “one size fits all” solution. For example, while compatibility might be the least costly form of interoperability, it may not achieve efficiency benefits similar to interlinking multiple systems or developing a single system, the report says.
Overall, interlinking CBDC systems through a hub and spoke – where a common hub connects two or more separate CBDC systems or a single system model that uses similar infrastructure and a common rule book – might bring more improvement to the cross-border payments market than the other options, according to the report.
The BIS sets out five criteria for central banks to consider when moving along with their CBDC options. Central banks must do no harm, enhance efficiency, increase resilience, assure coexistence and interoperability with other systems, and bolster financial inclusion, the report says.
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