KEY POINTS

  • The Bank of International Settlements (BIS) recognized the potential of Central Bank Digital Currencies to improve payments
  • BIS said CBDC issuance is not a reaction to Bitcoin and Libra
  • CBDC could have privacy issues because it could create a digital trail of all money, which will undermine one of its most important trait -- fungibility

The Bank of International Settlements (BIS) confirmed in a new paper it has recognized central bank digital currencies’ potential to be a convenient vessel to shape the future of money and payments.

The bank of central banks, BIS is an international financial body that fosters cooperation for central banks around the world. In a paper published in March 2020, “The technology of retail central bank digital currency,” BIS examined the advantages and disadvantages of central bank digital currencies (CBDC) and sketched out proposals for what technological design to consider if a central bank decided to issue one. 

BIS looked at four possible combinations of whether CBDC could be decentralized or centralized or whether access is based on identification or cryptography. BIS conceded should central banks decide to put CBDC in a distributed ledger, they would most likely only consider permissioned distributed ledger technology (DLT). A distributed ledger technology comes in many forms, including blockchain, and could either be permissioned or permissionless. In a permissioned DLT, the network is secured by pre-selected entities to monitor and update the distributed ledger. BIS also said it is possible to use permissionless DLT but the economic cost could be very high.

Throughout the years, BIS leadership has had conflicting statements about CBDCs. But in the “Central banks and Payments in the Digital Era” portion of its Annual Economic Report published June 24, the financial organization concluded digital innovation is now radically shaping payment services. “(CBDCs) can foster competition among private sector intermediaries, set high standards for safety and risk management, and serve as a basis for sound innovation in payments,” it noted.

BIS acknowledged people are increasingly expecting payments to be mobile-first, fully-digital, and near-instant. The central banks’ shortcomings in addressing these needs gave rise to "new entrants" that can solve those problems. BIS cited Bitcoin, cryptocurrencies, and Libra, which, in its original form, is the Facebook-backed initiative for a global stablecoin. 

BIS is firm to state CBDC issuance "is not so much a reaction" to Bitcoin and stablecoin proposals such as Libra. “[CBDC] is rather a focused technological effort by central banks to pursue several public policy objectives at once,” BIS said in the paper.

But a study from the United States Federal Reserve, a member of BIS, concluded basked-backed stable coins (the original Libra) could improve the welfare of citizens in certain economic situations. Yet, regulators around the world, the U.S. in particular, criticized Libra because it could undermine the country’s sovereign currency. Even President Donald Trump said last year he is not a fan of Bitcoin and Libra, whose values, he believes, are created on thin air. Facebook soon abandoned the global stablecoin idea.

While BIS touted CBDC as the next evolution of money, it could also come with a greater price. In an essay at the Financial Times-Alphaville, Claire Jones and Izabella Kaminska argued CBDC could mean that a far greater volume of the money supply would come from the same sources, resting on one ledger. On the surface, that certainly is beneficial if it works and if that money can be trusted to do what it has to do -- be a store of value and be used for transactions. But digital payments contain a data trail. Money is supposed to be fungible, indistinguishable when it changes hands. Thereby, the person’s privacy could be breached because the central banks would have access to money’s “memories.” Also, there are instances where sovereign money fails, such as the case in Venezuela.

This creates a situation wherein central banks around the world, including the Fed, are still studying CBDCs very carefully before launching them domestically, if they will ever launch it all. So far, only China is in the position to launch CBDC with analysts suggesting it could be the first CBDC to launch worldwide.

US dollars Bank analyst wonders about the fate of the US dollar no matter who wins the November election. Photo: AFP / JOSEPH EID