Sunday, August 30, 2020

BIS Working Paper on Central Bank Digital Currencies

The Bank for International Settlements has published this new work paper on central bank digital currencies. Below is an excerpt from the Conclusion section of the paper and then a few added comments. I added underlines for additional emphasis.


"This paper has examined the rise of central bank digital currencies, a new payment technology that may soon be available in a number of countries around the world. We have presented a novel CBDC project index (CBDCPI). We have shown that this index is higher in jurisdictions with higher mobile phone usage and higher innovation capacity. Especially retail CBDCs are more likely where there is a larger informal economy, and wholesale CBDCs are more advanced in economies that have higher financial development. We have also noted that CBDC projects differ starkly across countries, both in their motivations and their economic and technical design. Many central banks are pursuing models where a CBDC is a direct claim on the central bank, but with private intermediaries. To better understand these differences, we have zoomed in on three advanced cases, namely those of the People’s Bank of China, Sweden’s Riksbank and the Bank of Canada."

My added comments: Readers will note that this new paper appears to imply that we may be closer to seeing a central bank or banks try to implement some version of a central bank digital currency than has been the case up to now. They specifically mention three "advanced cases" in China, Sweden, and Canada. We do continue to note however, that we still do not see any indication that there is any widespread plan for implementation of some kind of central bank currency very quickly. We see this in the final paragraph of the conclusion section:

"Going forward, events such as the Covid-19 pandemic highlight the value of access to diverse means of payments, and the need for any payment method to be both inclusive and resilient against a broad range of threats, just as cash is (see Auer et al (2020)). While it is difficult to anticipate the range of challenges ahead, central banks will continue to take a long-term view and carefully consider the role of CBDCs in a range of potential future scenarios."

Another point to note in this paper (which we see over and over again in similar papers on this topic) is the statement that none of these central bank digital currencies are intended to replace cash. Here is that statement from the conclusion:

"Yet our overview has also shown some key common features. In particular, none of the designs we survey is intended to replace cash; all are intended to complement it."

There is no doubt that many are suspicious that central banks do want to create a "cashless society" and it is true that a cashless society would make it easier for central banks and governments to track financial  transactions and would be a potential threat to financial privacy for the individual. However, no study I have seen on this topic has ever included a stated goal of the elimination of the use of cash and many studies done by central banks specifically state the it is not possible to eliminate cash nor desirable for a variety of reasons. Most studies talk about a central bank digital currency as a complement to cash just as this paper does.

Overall, we still do not see any indications that there is a broad movement underway by central banks to quickly implement central bank digital currencies. A few may be closer to trying something. The Federal Reserve in the US has announced plans to enter in a multi year study on central bank digital currencies with no decision made yet on how it might be implemented or even if it would be implemented. Central banks consistently mention a number of significant potential problems and obstacles to implementation including the impact on commercial banks, the impact on personal financial privacy, and various potential cyber security issues. In addition, problems trying to use blockchain in any system that needs to process millions of transactions quickly is also a problem. 

In summary, there is nothing in this new BIS work paper that would suggest anything is different than we just reported in this recent article on this topic. If and when any major western central bank actually moves to implement some kind of central bank digital currency, it does not appear they will making any kind of major change to the existing monetary system. These currencies would just be another version of their existing national currencies which are mostly "digital" now anyway rather than actual physical notes. 

It would be a significant change in our view here if central banks allowed individual citizens to hold bank accounts directly with the central bank to hold their national currency in whatever form it might take (CBDC or otherwise). We will watch for any change like that over time. 

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