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.

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"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."

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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. 

OMFIF Launches the Digital Monetary Institute

I received an email from the Official Monetary and Financial Institutions Forum (OMFIF) alerting me to this news that relates to the ongoing question for central banks as to whether to move forward with central bank digital currencies. Below I have posted in the summary of the news announcement and the video discussing the news. This will provide those interested in this issue with somewhat of an update on current thinkng at central banks.

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"OMFIF, the global central banking think tank, announces the launch of the Digital Monetary Institute. This creates a high-level group which convenes policy-makers, technologists, financiers and regulators to explore the challenges and opportunities of digital finance. The principal focus will be on payments instruments in wholesale and retail markets, with central bank digital currency being of particular interest. This builds on OMFIF research in the field, including a major survey on trust in monetary institutions which found that central banks were the most trusted institutions to issue digital currency."

"In the wake of private sector challenges to fiat currency, and as governments and central banks consider helicopter money to alleviate the economic crisis, the CBDC agenda is now close to the top of the policy-maker in-tray. Cash is losing its relative convenience. CBDC may transform the extra-territorial weight of leading currencies and become a significant factor in geopolitics. Discussions on how CBDC, blockchain and distributed ledger technologies will potentially change society and financial services have been central to OMFIF’s recent research and off-the-record meetings."

Please click here to visit the OMFIF web site announcement of this new Project

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Here is a quote extracted from  the video above:

"We will undoubtedly see a central bank digital fiat retail currency at some point in the next three years. And it will most likely be from a smaller rather than large country."

My added comment: This update is completely in sync with what we have been reporting here for years. Significant change at central banks tends to move very gradually over time and it is reasonable to expect new ideas to be tested out first in smaller jurisdictions. 

We have been able to accurately project this scenario related to central bank digital currencies over time here on this blog due to some excellent input received from a variety to experts around the world, including one who works directly at the forefront of these kinds of issues all around the world.

OMFIF Report - Central Bank Currencies - A Question of Trust

I got an email from the OMFIF (Official Monetary and Financial Institutions Forum) based in London alerting me to new report they have issued. The report is a look at global public confidence in monetary, financial, and payment institutions as it relates to the potential issuance of central bank digital currencies. It is based on a global public opinion survey poll.

Below I have pasted in the Executive Summary for this new report. I believe readers can access the full report here by providing an email address. I was able to do so by providing one. This is an interesting new look at who the public might most trust in the future for the issuance of "digital currencies". I would encourage readers to download the full report.
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Executive Summary

Central Banks in Pole Position to Issue Digital Currency

"DIGITAL payments are proliferating worldwide and are proving increasingly popular. In China, the mobile payments market is worth $5.7tn and is dominated by two behemoths, Alipay and WeChat Pay. Facebook wants to launch Libra, a global digital currency, later this year, a move which has prompted wider discussion about central bank digital currencies. 

While the rise in digital payments is global, different regions have disparate needs. In advanced economies, services such as FedNow in the US and Faster Payments in the UK are evolving to meet the need for faster back-end payment solutions which can underpin retail payments. In emerging markets, the surge in mobile payments makes it much easier for workers to send remittances home to their families.

These changes in consumer behaviour and the surrounding policy debate make this the ideal time to present this OMFIF report, which centres on the findings of a global opinion poll on public trust in monetary institutions, payment characteristics and digital currency. The poll was conducted by Ipsos MORI across 13 advanced and emerging countries.

Our findings suggest that central banks are well-positioned to issue digital currency. In almost all countries, respondents indicated that they would feel most confident in digital money issued by the domestic monetary authority. Respondents globally expressed a lack of confidence in digital money issued by a tech or credit card company, particularly respondents from advanced economies.

The survey reveals significant differences in attitudes depending on levels of income and education, age and nationality. High-income and young respondents express the most confidence in current and future digital money, and consider speed to be part of the appeal.

The results indicate that openness to digital offerings rises with income and education levels, but declines with age. When respondents are asked about their preferred ideal characteristics for a payment method, they are unanimous in citing safety from fraud and theft as the most important feature, across all countries. Speed is the least important characteristic, suggesting that digital money will have to improve its safety features if it is to be to adopted widely.

The findings suggest that cash remains king: it has the highest average score across all different payment characteristics posed to respondents, across most different income, education and age groups. Cash is particularly popular in some advanced markets, such as the US and Britain. Respondents in emerging markets show the greatest level of willingness to embrace digital currency in the future and are open to the question of who should issue it.

These findings should prove informative and useful for monetary policymakers and private sector practitioners alike. They provide the first clear, quantitative indication of which groups and markets are most amenable to digital currency, and can serve as guidelines for regulators, central bankers and those working in the private sector who want to market their digital offerings to a broader audience.

Please click here to find access to the full report on the OMFIF web site

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Added comment: Once again I would call your attention to the next to last paragraph posted above from the Executive Summary. While we continue to see predictions of a future "cashless society" in various media articles, every study or report I see from any kind of official organization always includes a comment about how important cash remains as a payment system. They also usually note that there is no expectation that cash will be removed from the system any time soon and most studies even point out a number of hardships that would result from total elimination of cash used for payments. I think it is important to emphasize that for readers here.

Word Economic Forum - Central Bank Digital Currency Policy Toolkit

A thank you to a reader for passing along the link below to a report from the recent World Economic Forum that discusses policy tools for central banks considering using either a wholesale or retail version of a central bank digital currency.

We continue to see very little change in that arena so far and continue to expect any changes we do see to be slow and gradual in nature.

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WEF - Central Bank Digital Curreny Policy-Maker Tookkit

Executive summary

"In recent years, central bank digital currency (CBDC), a new form of digitized sovereign currency, has risen to prominence as a policy and operational consideration for many central banks, ministries of finance and other institutions. The intricacies of implementing CBDC are complex and the implications are wide‑reaching. As a result, policy‑makers may find themselves in uncharted waters when attempting to evaluate the potential benefits and trade‑offs associated with CBDC.

 The World Economic Forum’s CBDC Policy‑Maker Toolkit seeks to address the need for a concise CBDC decision guide that provides comprehensive and risk‑aware information to policy‑makers. This document serves as a possible framework to ensure that any CBDC deployment fully considers the costs as well as the potential benefits, appraising a multitude of risks and evaluating deployment and governance strategies, alternative solutions and other salient factors. Notably, it is not exhaustive, and instead intends to serve as a complement to additional research that any policy‑maker considering CBDC should conduct.

The CBDC Policy‑Maker Toolkit provides high‑level guidance and information for: 

– Retail, wholesale, cross-border CBDC and alternatives in private money such as “hybrid CBDC”
 – Large, small, emerging and developed countries."

. . . . 

"As policy‑makers navigate this process, they should consider how CBDC may introduce new capabilities that support regulatory goals while also introducing new risks or compliance vulnerabilities. CBDC could potentially be used as a tool to achieve policy objectives such as improved safety and resilience in payments systems; increased efficiency, access and competitiveness of payments systems; better data transmission and reporting to central banks; and financial inclusion. The achievement of these goals with CBDC must be evaluated in the full context of the associated trade‑offs and risks that CBDC may entail." 

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My added comment: I noticed this note from page 19 of the report linked above regarding the future of cash. I added the bold underline below for additional emphasis:


"Physical cash, particularly small banknotes, guarantees financial inclusion more than any other means of payment. Cash serves as a last‑resort means of payment and store of value in the event of payment‑system shocks and failures. For many, it is also their primary means of payment and savings. The central bank should not develop policies that remove small banknotes from retail use until a fully reliable alternative is available to all members of the population, which may not be possible." (see page 19)

Once again, for those expecting cash to disappear any time soon, I see nothing on the immediate horizon that suggests that to be the case for the reasons noted above and others that various central banks have cited including the US Federal Reserve.

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Added note: The Bank for International Settlements (BIS) produces this press release on CBDC news:

Central Bank Group to Assess Potential for CBDC's

"The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank and the Swiss National Bank, together with the Bank for International Settlements (BIS), have created a group to share experiences as they assess the potential cases for central bank digital currency (CBDC) in their home jurisdictions. 

The group will assess CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies. It will closely coordinate with the relevant institutions and forums - in particular, the Financial Stability Board and the Committee on Payments and Market Infrastructures (CPMI). 

The group will be co-chaired by Benoît Cœuré, Head of the BIS Innovation Hub, and Jon Cunliffe, Deputy Governor of the Bank of England and Chair of the CPMI. It will include senior representatives of the participating institutions."

Canada Explores Central Bank Digital Currency

We have covered the concept of central bank digital currencies here on the blog for some time now. While it is clear that the idea is being looked at by many central banks, we are still waiting for the first central bank digital currency to arrive. 

This article on the OMFIF web site explains how The Bank of Canada is researching the idea. It is clear that research is still in progress, that this project will not replace cash any time soon, and that various ideas on how to actually implement a central bank digital currency are being studied. Below are a few excerpts. 

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"Digital currencies aren't new. Most money in advanced economies is already digital: a bank account balance is but a computerised entry in a ledger at a commercial bank. However, the digital money of the future could have very different characteristics from present forms.

. . . . .

It's no wonder that the possibilities of new digital currencies have sparked the interest of the private sector and the central banking community. The questions raised are of fundamental significance to the core functions of central banks because they have implications for monetary policy, financial stability, funds management and currency issuance.

Research-driven decisions: The Bank of Canada is approaching the subject from three angles: research, experimentation and co-operation. The bank has been investigating questions related to private and central bank digital currencies for some years, and is building a set of research papers. It aims to examine the underlying benefits and risks of digital currencies to the functioning of the economy, and for the central bank mandate.

. . . . .

Other research has highlighted the importance of making sure there is a need for the digital currency. If it simply provides another payment mechanism when cash is a viable alternative, there are circumstances under which the wellbeing of people could be reduced by its introduction.

Research on whether a central bank should issue a digital currency is still under way. The Bank of Canada has outlined a framework for analysis that highlights the importance of understanding the types of new economic activity that could be enabled. There are many considerations to be explored, not least who should have direct access to the central bank balance sheet and what this would imply for the transmission of monetary policy and financial stability."

Please click here to read the full article on the OMFIF web site

OMFIF.org

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My added comments: This statement in the article above is one I find interesting:

"Other research has highlighted the importance of making sure there is a need for the digital currency. If it simply provides another payment mechanism when cash is a viable alternative, there are circumstances under which the well being of people could be reduced by its introduction."

It points out the fact that central banks already issue "digital currency" for the most part. Unless there is a compelling reason like significant cost savings or some advantage to the public that does not currently exist, it is fair to ask if just issuing a "central bank digital currency" based on "blockchain" is really needed. They go on to say that in some cases where cash is a viable alternative, the well being of the public could be reduced by introducing a central bank digital currency. This does not sound like a ringing endorsement of replacing cash with a blockchain based "central bank digital currency" to me.