Adoption of central bank digital currencies (CBDCs) would carry a risk of undermining financial stability, according to the Bank for International Settlements (BIS).
BIS, which is owned by 62 central banks, has issued a report in conjunction with seven of the heavyweight central banks identifying the foundational principles necessary for any publicly available CBDCs to help central banks meet their public policy objectives.
Further work is going to be continued on the subject.
Our Reserve Bank, which is a member of BIS (though was not one of the banks involved in this report), has been doing its own work on the future of cash and has looked at the question of digital currency.
And the subject is given extra impetus at the moment by the announced intention of new Auckland-based private company P^werFinance to begin next year its own version of a digital currency.
In its highlighting of some of the risks, the report says that depending on the design and adoption of a CBDC, there may be broad market structure effects.
"There is a risk of disintermediating banks or enabling destabilising runs into central bank money, thereby undermining financial stability.
"Today, the public can (and have in the past) run into central bank money by holding more cash, but such runs are very rare, given the existence of deposit insurance and bank resolution frameworks that protect retail depositors," the report says.
"There is, however, a concern that a widely available CBDC could make such events more frequent and severe, by enabling 'digital runs' towards the central bank with unprecedented speed and scale.
"More generally, if banks begin to lose deposits to CBDC over time they may come to rely more on wholesale funding, and possibly restrict credit supply in the economy with potential impacts on economic growth."
The report says there has been a great deal of academic research on the risks of disintermediation, runs into central bank money and potential mitigants.
"Given designs and systems will differ by jurisdiction, so will the risk, which will require significant research by a central bank to understand.
"A central bank should have robust means to mitigate any risks to financial stability before any CBDC is issued," the report warns.
The report was compiled by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, Sveriges Riksbank, the Swiss National Bank and the BIS
It highlights three key principles for a CBDC:
- Coexistence with cash and other types of money in a flexible and innovative payment system.
- Any introduction should support wider policy objectives and do no harm to monetary and financial stability.
- Features should promote innovation and efficiency.
Based on these principles, the group has identified the core features of any future CBDC system, which must be:
- Resilient and secure to maintain operational integrity.
- Convenient and available at very low or no cost to end users.
- Underpinned by appropriate standards and a clear legal framework.
- Have an appropriate role for the private sector, as well as promoting competition and innovation.
BIS says the group of central banks will continue to work together on CBDCs, without prejudging any decision on whether or not to introduce CBDCs in their jurisdictions.
The report says further development of CBDCs requires a commitment to practical policy analysis and applied technical experimentation. While this has already started, the speed of innovation in payments and money-related technologies requires the prioritisation of collaborative experimentation.
Future activities will include exploring other open questions around CBDCs and the challenges of cross-border payments, as well as continuing outreach domestically and with other central banks to foster informed dialogue on key issues. Work by the BIS Innovation Hub, which serves the broader central banking community, will contribute to this objective.
The report identified 14 core features a potential CBDC would need and these are in the below table:
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