BIS on CBDCs and the Need for Change

Benoît Cœuré, Head of the BIS Innovation Hub, recently spoke at The Eurofi Financial Forum.

The focus of his speech was that central banks need to move faster on Central Bank Digital Currencies (CBDCs), with the private sector already on the move.

Need for change

The pandemic has accelerated the move to non-cash payments whether based on cards, contactless or mobile payments.

QR codes and Buy Now Pay Later have become normal. The Beijing Winter Olympics will see payments made in e-yuan using more than cards and wallets, think gloves, badges, Olympic uniforms.

Challenges

His speech then laid out the challenge of delivering CBDCs while maintaining price stability and financial stability. Central bank money has always delivered safety, finality, liquidity and integrity. It is issued to achieve public policy objectives, not profit. To move central bank money into a digital form, central banks need both to know where they are going, and to get on with it.

Until you know where you are going, of course, getting on with it is hard. This is made harder because of changes challenging the traditional financial intermediation – decentralised finance platforms (DeFi), global stablecoins and Big Tech wanting to move into retail payments.

The new players are still evolving – will stablecoins develop as closed ecosystems or ‘walled gardens’, creating fragmentation? Will the underlying assets behind stablecoins create instability and risk? How to manage issues of market power and privacy as Big Tech moves into payments?

How do central banks regulate these and how will, or even should, CBDCs work alongside them? What will happen to today’s commercial banks and how should central banks treat the new players and regard this changing competitive landscape?

All this with the policy goals of ensuring funds for investment and green transformation are available.

Need for action

These questions are no longer on the far horizon but approaching fast. Benoît Cœuré suggested that CBDC will be part of the answer. ‘A well-designed CBDC will be a safe and neutral means of payment and settlement asset, serving as a common interoperable platform around which the new payment ecosystem can organise,’ he said. ‘It will enable an open finance architecture that is integrated while welcoming competition and innovation. And it will preserve democratic control of the currency.’

With that thought, the need to get going is urgent, it is now, given that stablecoins and cryptoassets are here already. The working of the BIS innovation hubs gives guidance on how to move forward. A CBDC needs to be desirable, viable and feasible.

Consumer benefits (desirability).

The European Central Bank’s public consultation showed the public values privacy, security and broad usability, giving an indication of the key question of why consumers would want a CBDC. A CBDC needs to deliver convenience, protect data and to offer functions that cash can’t, for example programmability or to enable micro payments.

Public policy objectives (viability).

To safeguard monetary and financial stability, CBDCs must enhance safety and neutrality in digital payments, financial inclusion and access, innovation and openness. Important questions remain.

Key outstanding questions are how CBDC systems can be interoperable with other payment systems, and should offshore use be discouraged?

Technology (feasibility). 

The speech suggested a hands-on operational and oversight role for central banks, with public-private partnerships developing the core features of the CBDC instrument and the underlying system.

The features are easy to list but will involve hard decisions and trade-offs to deliver. Ease of use, low cost, convertibility, instant settlement, continuous availability and a high degree of security, resilience, flexibility and safety. The trade-offs will include balancing scale, speed and open access with security, and offline functionality with complexity and security.

While calling for central banks to get on with it and to move fast, Benoît Cœuré reminded the audience of the need not to break things. Consultation with stakeholders will be key and has started in many countries.

He finished by saying that ‘a CBDC’s goal is ultimately to preserve the best elements of our current systems while still allowing a safe space for tomorrow’s innovation.

To do so, central banks have to act while the current system is still in place – and to act now’.