As more governments consider issuing their own central bank digital currencies, what are the benefits and challenges to this change in global fiscal and monetary policy?
The policy and political debate about central bank digital currencies (CBDCs) is gaining traction and consultations are multiplying. The Bank for International Settlements (BIS) has published a roundup of motives, economic implications, and the research frontier together with suggested areas for further work for those central banks considering issuing digital currencies.
According to a survey from late 2020, 86% of global central banks are conducting research into CBDCs, and as of July 2021, 56 central banks have publicly communicated their research or development efforts. As of November 2021, however, only two central banks have launched CBDCs while several more are conducting pilots.
Public policy principles
At its most basic, a retail CBDC would be a digital form of central bank money, denominated in the national unit of account, distinct from both electronic reserves (which cannot currently be accessed by individuals), and physical cash. As a direct liability of a country’s central bank, CBDCs would also be distinct from commercial bank money. If issued, CBDCs, as a form of central bank money, could act as both a liquid, safe settlement asset and as an anchor for the payments system.
The definition is the easy part of the CBDC debate. The design of any CBDC will involve complex decisions, including a need to find a balance among a myriad of the public policy objectives for CBDCs.
In October, the G7 stepped into the debate, publishing a set of public policy principles for retail CBDCs. That said, the G7 reiterated that the decision on whether to launch a CBDC is for each country to make, and no G7 jurisdiction has yet made this choice.
There are 13 public policy principles divided into two parts. Principles 1-8 cover foundational issues and principles 9-13 cover the opportunities in issuing CBDCs. The ‘foundational issues’ are those that any CBDC must demonstrate, if it is to command the confidence and trust of users. These include the preservation of monetary and financial stability, protection of users’ privacy, strong standards of operational and cyber resilience, the avoidance of financial crime and sanctions evasion, and environmental sustainability. CBDCs also have the potential to offer a number of opportunities, including in regard to innovation and digital economy, financial inclusion, and reducing frictions in cross-border payments.
The potential for CBDCs to support safe and efficient transactions as part of a thriving economy is huge and harnessing the opportunities and addressing the risks (regarding monetary and financial stability together with trust in the financial system) are a political priority.
Around the world
The G7’s public policy principles are an overlay to developments around the world.
Asia, for example, has a number of central banks delving into the potential for CBDCs. The People’s Bank of China is seen to have taken the lead when it began development of a CBDC, the e-CNY, in 2014. Already the bank has conducted 10 pilots in retail settings. The e-CNY is meant to replace cash as legal tender and adopts a two-tier system under which the central bank issues e-CNYs to commercial banks, which then distribute them to the public.
In October, the Hong Kong Monetary Authority released a technical white paper on the development and issue of its retail CBDC, the e-HKD. And in Thailand, regulators are expected to focus on research and development for a publicly accessible retail CBDC in 2022.
In November, the Monetary Authority of Singapore (MAS) published a paper assessing the economic considerations in the Singapore context for retail CBDCs. Although being crystal clear that it is not committing to the issuance of CBDCs, the MAS paper concludes that: “The world is coming to a crossroads in the evolution of money and payments. Like many central banks around the world today, MAS is considering how best to respond to the emergence of new forms of money delivered by potentially dominant payment service providers, alongside the decline in the use of cash.”
In the Middle East, the Central Bank of the United Arab Emirates successfully completed Project Aber, a CBDC proof-of-concept study, in 2019 and has explored the feasibility of a distributed ledger technology solution for cross-border fund transfers with the Saudi Central Bank.
In November the Bank of England (BoE) and HM Treasury issued a joint statement announcing the next steps in the exploration of a UK CBDC. Specifically, in 2022, HMT and the BoE intend to launch a consultation on the case for a UK CBDC that will evaluate the main issues at hand, consider the high-level design features, possible benefits and implications for users and businesses, and considerations for further work.
In the US, the potential for a CBDC is under consideration, but as guardian of the world’s most widely used currency, the Federal Reserve is moving cautiously. It is working with the Massachusetts Institute of Technology to build a technology platform for a hypothetical digital dollar; however, Federal Reserve Chair Jerome Powell has said getting the digital dollar right was “far more important” than speed.
The US non-profit Digital Dollar Project announced in May it will launch five private-sector pilot programs over the next 12 months to test the potential uses of a US central bank digital currency, the first effort of its kind in the United States.
Complex future decisions
While the approach to CBDC design may well differ among countries, it is key that consistent high-level approaches are adopted to help navigate the inherent dependencies and trade-offs. No G7 member jurisdictions have, as yet, taken the decision to implement retail CBDCs. That said, it’s only be a matter of time before one does, given the rapid and widespread adoption of digital payments which was further accelerated by the pandemic. The fundamental shift that would be part of the adoption of any CBDC means that jurisdictions are treading cautiously given the important questions raised about the way in which people interact with money and payments.
Financial firms will need to continue engaging with their central banks in order to contribute to the continuing research and analysis, both domestically and collaboratively with international peers. As the G7 put it, “through international collaboration, there is a chance to share insights and lessons learned in order to make meaningful progress and realize the potential range of powerful benefits a CBDC may have, particularly the opportunity to harness innovation to deliver resilient, efficient, and inclusive payments.”