As part of its annual economic report, the Bank for International Settlements (BIS) has laid out several recommendations on how central banks should implement central bank digital currencies (CBDC).
They include requirements for a digital identity as a prerequisite for holding digital currencies, keeping the system open and maintaining the two-tier banking system.
“From a practical perspective, the most promising CBDC design would be one tied to a digital identity,” said Benoît Coeuré, head of the BIS innovation hub. He added the design would need to be carefully implemented, balancing the need to protect personal data and protecting the wider financial system from money laundering or financial crime.
A digital ID however, doesn’t mean creating a national ID system. Hyun Song Shin, economic advisor and head of research at the BIS said they could be designed to be similar to those of a Google or Apple ID.
“The account-based system that has a real name attached to the account, that does not necessarily mean that you have to adopt a government ID system.”
“It’s compatible as long as we can actually have a good sense of who the individuals are so that we can ensure the integrity of the system in terms of the KYC and anti-money laundering principles.”
CBDCs are quickly gaining traction with the central banks of the world. According to a BIS survey, 86 percent of central banks are actively researching them while 60 percent were experimenting with the technology.
The international dimension of CBDCs is one building block the G20 has identified in their efforts to “enhance” cross-border payments. As the BIS report noted, “CBDCs could pave the way for innovations that improve international payments.”
Coeuré said one of the goals of a CBDC is to keep the financial system competitive and open, especially as big techs enter the financial services market.
“It’s not about comparing a world with CBDC, with the payment world as it is today… It’s about comparing a world with CBDCs, with possible scenarios [in a world] without CBDCs, where payments and money will be dominated by very big players with market power.”
Addressing concerns
There are concerns that internationalising CBDCs could lead to “dollarisation” (de facto use of another sovereign currency) in some jurisdictions, but the BIS has judged this risk to be limited and could be further diminished through central bank cooperation.
“The cross-border use of CBDCs can be undertaken through monetary cooperation,” said Shin. “The unwanted spread of a foreign CBDC in one’s own jurisdiction is less of a danger when the CBDC itself is based on a digital ID design.”
The report also noted that CBDCs should and can be designed to have limited impact on the financial system. It recommended central banks lay the foundation of the system while the private sector would be responsible for consumer-facing responsibilities.
“The goal here would be to have a digital form of cash that preserves the fairly small footprint of cash itself in the financial system,” Shin said. “The design should try and aim for the appropriate division of labour between the central bank and the commercial banks and other private sector institutions.”
The BIS’s full annual economic report will be released on June 29.