BIS releases report on central bank digital currencies

Ahead of the G20 meeting next week, a report by the Bank of International Settlements analyses the implications of wholesale and general central bank digital currencies on payments, monetary policy implementation and financial stability

What has happened?

The Bank of International Settlements (BIS) has said that general purpose central bank digital currencies (CBDC) could "revolutionise" the way money is provided and the role of central banks in the financial system, while cautioning that "these are unchartered waters with potential risks".

What does this mean?

A joint report by the Committee on Payments and Market Infrastructure and the Markets Committee of the Basel-based organisation stated that CBDCs - commonly referred to as cryptocurrencies - are worth considering as the underlying technology might hold promise for wholesale payments, clearing and settlements.

In an accompanying op-ed published in the Financial Times, Benoît Cœuré and Jacqueline Loh, Chairs of the two committees behind the report, also said that "a consumer-oriented CBDC could have far-reaching ramifications for the role of money, the financial system and the economy".

The BIS report analysed two main CBDC variants, a wholesale currency limited to select financial institutions and a general purpose one that would be widely accessible to the public, as well as the implications of both types on payments, monetary policy implementation and financial stability.

On wholesale CBDCs, the report states that, in combination with blockchain, wholesale CBDCs "may enhance settlement efficiency for transactions involving securities and derivatives".

CBDCs could also bring benefits and be a "safe, central bank instrument" in jurisdictions where paper money is on the decline, such as in some of the Nordic countries.

However, the report tempered this by saying that banks considering this course of action should first establish whether this could be achieved by other means, as "currently proposed implementations for wholesale payments… look broadly similar to, and [are] not clearly superior to, existing infrastructures".

"The benefits of a widely accessible CBDC may be limited if fast (even instant) and efficient private retail payment products are already in place or in development", the report added.

The report also stressed that CBDCs should be able to fulfil anti-money laundering (AML) and combatting the financing of terrorism (CFT) standards, as well as satisfy the public policy requirements of other supervisory and tax regimes.

However, "ensuring the robust design and operation of [a CBDC] could prove to be challenging," the report noted, but "a non-anonymous CBDC could allow for digital records and traces," which would improve the application of AML/CFT rules.

Banks seeking to introduce a CBDC should also consider cross-border issues, as the introduction of a CBDC in one jurisdiction "could adversely affect others".

On general CBDCs, the report said that one potential risk is that "in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations".

Such a turn of events could result in "a greater role for central banks in allocating economic resources, which could entail overall economic losses should such entities be less efficient than the private sector in allocating resources".

This, in turn, could move central banks into uncharted territory and could also lead to greater political interference.

In spite of some of the more positive notes, both the report and the op-ed called for further research and urged caution.

"Central banks should continue to monitor developments in digital innovations, as well as analyse the possible implications of central bank digital currencies for areas that are core to the central banking mandate," Loh said.

The op-ed even said that "the jury is still out" as to whether CBDCs for consumers and businesses are even necessary or desirable.

The report was released ahead of next week's meeting of the G20 central bank governors and finance ministers in Argentina.

Mark Carney, Chair of the BIS Global Economy Meeting and Chair of the Financial Stability Board, said the report will contribute to the G20 discussions.

"Technological developments have raised questions about the feasibility and desirability of combining distributed ledger technology with the trust inherent in fiat currencies to create a central bank digital currency available to all. As set out in this report, the policy issues that this would raise, for central banks and society more generally, need careful consideration. A more immediate priority is how to use these new technologies to meet the current demand for fully reliable, real-time payments," Carney said.

Next steps

If you want to take advantage of blockchain's huge potential and disruptive impact, while avoiding falling foul of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.

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