The Bank of International Settlements (BIS) says central bank digital currencies (CBDCs) are moving from concept to design and possess the potential to reshape the institution of money.
There are several key takeaways that could move the needle further along the thread of global CBDC implementation, according to the bank’s Annual Economic Report 2021 on Wednesday.
Firstly, the bank says, digital cash should be designed with the public interest in mind, ensuring an “open payment platform” beneath the shadow of a competitive level playing field.
“[CBDCs] offer in digital form the unique advantages of central bank money: settlement finality, liquidity and integrity,” says BIS.
Secondly, benefits from a CBDC depend on the competitive structure of the underlying payment system and data governance arrangements.
The very technology encouraging a “virtuous circle” of greater access, lowered costs and improved services may also be used to induce a vicious circle of data silos, market power and anti-competitive behavior, per the report.
“CBDCs and open platforms are the most conducive to a virtuous circle,” the bank says.
Thirdly, CBDCs built on digital identification could improve cross-border payments, thereby limiting the risks of currency substitution.
BIS argues CBDCs would function optimally if they are based on a “two-tier” system where the majority of customer-facing activity is taken on by commercial banks and other payment providers.
Its latest research comes three months after the bank released a detail-heavy research note outlining the importance of countries collaborating to eliminate traditional banking frictions for CBDCs.
The bank also noted the most “promising design” for everyday use of CBDCs is if they were built atop an identity scheme, whereby data privacy would be safeguarded while staving off illicit activity. While not entirely new concepts, the discussion shows CBDCs, in the eyes of the bank for central banks, are still firmly on their radar.
“CBDCs could form the backbone of a new digital payment system by enabling broad access and providing strong data governance and privacy standards,” says Benoit Coeure, head of the bank’s Innovation Hub in a press statement on Wednesday. “They are the best way to promote the public interest case for digital money.”
See also: BIS Researchers Grapple With Implications of Interoperable CBDCs
