A recent survey of central banks by BIS has reignited discussion around the benefits that central bank-issued digital currencies could bring to domestic and cross-border transactions, as well as the future role of stablecoins.

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The debate over central bank digital currencies (CBDCs) has heated up again, fuelled by the recent Bank for International Settlements’ (BIS’s) report ‘Ready, steady, go? Results of the third BIS survey on central bank digital currency’, as well as discussions during the World Economic Forum.  

The BIS survey, carried out among 65 central banks in late 2020 ­­— with two-thirds of respondents from emerging market and developing economies (EMDEs) — found that the vast majority (86%) are actively experimenting with the CBDC concept. Six out of 10 are running experiments or proofs of concept, while 14% are in development and pilot arrangements. Seven out of eight central banks in advanced stages of CBDC work are in EMDEs.

For example, the People’s Bank of China is performing large-scale pilots across China and began testing its digital yuan on ecommerce platforms in December — we will take a closer look at this in the March issue. Last year also saw the first live deployment of a retail CBDC: in October the Bahamas launched the ‘sand dollar’, which is currently being incorporated into authorised financial institutions’ mobile wallets.  

While financial inclusion is seen as the main driver of retail CBDC development in EMDEs, cross-border payments is a strong motivator for wholesale CBDCs, according to the report. Other reasons for issuing the latter include capital markets development, cyber resilience and improvements in securities trading and settlement, with the report highlighting Project Helvetia run by the BIS Innovation Hub, the Swiss National Bank and infrastructure provider SIX.

Two thirds of central banks are studying the impact of stablecoins on monetary and financial stability

Unsurprisingly, central bankers are not bewitched by retail cryptocurrencies, such as Bitcoin and Ethereum. In September, Bank of England governor Andrew Bailey stated that such crypto-assets like Bitcoin “have no connection at all to money”.

Yet stablecoins aren’t dismissed quite so quickly. According to the BIS survey, two thirds of central banks are studying the impact of stablecoins on monetary and financial stability. Mr Bailey conceded that stablecoins could offer some useful benefits, such as reducing frictions in payments, but warned that standards need to be put in place to ensure that they are “safe and resilient and that consumers can use them with confidence”.

There has already been some development in this space. At the beginning of this year, the US Office of the Comptroller of the Currency announced that banks can participate in stablecoin networks by operating validator nodes and can process stablecoin-based payments. The Monetary Authority of Singapore, on the other hand, has been working on Project Ubin for the last few years and the recent Phase 5 of the project included JPMorgan’s digital currency, the JPM Coin.

However, there are still concerns to be addressed. For example, in September 2020  the European Central Bank Crypto-assets Task Force paper warned of a possibility that a stablecoin that reached scale in payments could induce risks to the financial system.

This is certainly the concern surrounding Diem, formerly known as Libra, which is expected to launch later this year with a potential billion-strong community from the get-go. Diem has evolved from being pegged to a basket of leading currencies to being denominated in individual sovereign currencies.

While Agustín Carstens, general manager of BIS, reiterated concerns around a private entity issuing its own currency in late January, he also indicated that this latest incarnation was “more credible” than Bitcoin. Additionally, he made the point that the work on CBDCs does not necessarily imply replacing private sector initiatives. “Of course, we need to take advantage of private sector innovation, and in many research projects and pilots the private sector is a key partner. The CBDC work shows that while disruptive innovation can be a threat, it can also be an opportunity,” he said.

Speaking on a Davos panel entitled ‘Resetting Digital Currencies’, Tharman Shanmugaratnam, senior minister in the Singapore government, also stressed the importance of private sector innovation. “Central banks should not crowd out the private sector players, such as digital wallets, tokens or stablecoins, because they are the source of great innovation,” said Mr Shanmugaratnam. “But they can’t be left on their own. The payment system is a public good, and it needs to be regulated, interoperable, safe, with the necessary transparency to counter illicit finance and money laundering.”

While it’s not a foregone conclusion that central banks will issue CBDCs, momentum is building and to stay on the sidelines during this debate and time of exploration will make it that much harder to catch up when the old world of cash is disintermediated. According to the BIS survey, central banks collectively representing a fifth of the world’s population are likely to issue a general purpose CBDC in the next three years.

Joy Macknight is managing editor of The Banker. Follow her on Twitter @joymacknight

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