The central banks‘ CBDC ideal

In a new report, seven members of the BIS investigate which properties a CBDC should have in order to combine the advantages of a digital currency with the common goal of maintaining financial market stability.

The Bank for International Settlements (BIS) is an association of central banks from 62 jurisdictions. Its members include the Deutsche Bundesbank, the European Central Bank (ECB), the Chinese Volksbank and the US Federal Reserve System. Also known as the “central bank of the central banks”, the aim of the BIS is to coordinate the monetary policy of its member banks. Central Bank Digital Currencies – in short: CBDC – are among the topics that have been of concern to international central bankers, at least since the Chinese central bank went it alone.

How does a „CBDC“ have to be designed?

The authors of the report published on Friday October 9th – in addition to the ECB, the central banks of England, Sweden, Japan, Canada, Switzerland and the USA – first shed light on three principles that are essential when creating or issuing a CBDC pay attention to.

First and foremost is the principle that a CBDC should not negatively affect the core business of a central bank, which is to guarantee a stable financial market. Instead of competing with a national currency, a CBDC should complement or support this. This should be guaranteed, for example, by a fixed exchange rate of 1: 1 to the respective fiat currency.

This goes hand in hand with the second principle that the authors of the report want to see implemented at a CBDC: the coexistence of different forms of money. The introduction of a CBDC should not mark the end of cash. CBDC, cash and book money should exist in parallel and the central banks should continue to produce cash “as long as there is demand”.

As the third cornerstone, the ECB and Co. outline the topic of “innovation and efficiency”. In it, the authors describe the necessity of a CBDC in view of the growing number of alternative payment options that consumers are facing. If not explicitly mentioned, it can be assumed that the authors had Facebook’s planned stable coin Libra and cryptocurrencies in mind when they write:

Without continued innovation and competition to make a jurisdiction’s payment system more efficient, users can use other, less secure instruments or currencies. Ultimately, this could lead to damage to the economy and consumers, potentially affecting monetary and financial stability.

Libra’s wake-up call reverberates in the BIS to this day

Fears that can be heard from the BIS and its members since 2018, when Facebook presented its ambitious stable coin project. A “wake-up call” for the central banks, so the much-quoted reaction of the ECB board member at the time, Benoît Cœuré. Since this year he has been head of the “Innovation Hub” at the BIZ.

The thesis that the advance from the private sector in the form of Libra was needed for the central banks to seriously deal with the development of purely digital national currencies is supported by a graphic from the BIS report. This shows a significant increase in CBDC research at central banks in 2018. So far, however, very few have got beyond theory and have launched a pilot.

Characteristics of a „good“ CBDC

The report describesfurther 14 core properties that a digital national currency must meet in order to do justice to the principles described above. For example, there should be no or only low costs for the end user when using a CBDC; this also applies to any hardware acquisition costs. Acceptance and availability should also be ensured as far as possible. A CBDC should ideally be able to be used anywhere that cash is also accepted. This also includes the option of performing offline transactions.

In addition, a CBDC should be immune from both cyber attacks and external influences such as environmental disasters.