Tom Curry

A little over one year ago, global central banks generally panned the launch of the Libra Association stablecoin sponsored by Facebook and other payment providers.  

What a difference a year can make: On Oct. 9, the Bank for International Settlements (BIS) – the central bank for central banks – issued a joint report together with the Bank of Canada, the European Central Bank, the Bank of Japan, the Sveriges Riksbankthe Swiss National Bank, the Bank of England, the Board of Governors of the Federal Reserve outlining foundational principals and core features for central bank digital currencies.  

An earlier March 2018 BIS report had a much more negative view on the potential of central bank digital currencies, or “CBDC.  

The 2018 BIS report looked at two forms of CBDC: “wholesale CBDC,” for use in financial markets, and a “general purpose CBDC,” for use by the general public. It considered the potential effects of these two types of CBDC on three core central banking functions: payments, monetary policy and financial stability. It viewed wholesale CBDC as being potentially useful for banktobank payments but cited concerns over its implications for monetary policy and financial stability.  

A general purpose CBDC generated greater concerns around financial stability because of its potential implications for commercial banks. The fear was that general purpose CBDC would compete with commercial bank deposits, making commercial banks less stable in times of stress if customers fled from commercial banks to the greater safety of general purpose CBDC. In such an event, financial stability and financial intermediation could be adversely affected.  

What Attitudes Changed? 

The 2020 BIS report is significant because it lays out the leading central banks’ most recent policy framework for offering to the public a general purpose CBDC. Work on the 2020 BIS report began in January with the goal of assessing the pros and cons of general purpose CBDC and how this potential innovation could affect the monetary policy and financial stability mission of central banks.  

The 2020 report sets out common foundational principles and core features of a general purpose CBDC for jurisdictions to weigh in deciding whether to issue digital currency.  

Blake C. Tyler

According to the 2020 BIS report, central banks are motivated by their mission to facilitate day-to-day payments and their goal of protecting monetary sovereignty. Central banks address both objectives by providing access to “trusted money.” A convenient and accessible general purpose CBDC could facilitate payments and serve as an alternative to potentially unsafe forms of private money, like cryptocurrency, in addition to offering users privacy, reducing illegal activity and facilitating fiscal transfers. In the United States, the need for faster means of effecting fiscal transfers was made evident by delays in delivering stimulus payments under the CARES Act. 

The report’s stated goal was to promote innovation by setting out principles that would permit a CBDC to coexist with and complement existing forms of money without disrupting monetary policy or weakening financial stability. Ultimately, it is up to each central bank to weigh the 2020 BIS report’s recommendations and decide whether to proceed, although the report disclaims that the group’s member central banks are actively seeking to issue CBDC. 

Foundational Principles 

The 2020 BIS report set out agreedupon foundational principles to guide CBDC exploration. A CBDC should: “do no harm” to monetary and financial stability; coexist with cash and other types of money in a flexible and innovative payment ecosystem; and promote broader innovation and efficiency. 

The report also identified design, system, and institutional features needed to fulfill the three core principles covering the CBDC, the underlying system and the broader institutional framework in which they exist. 

The design features are:  

Convertible: CBDC should exchange at par with cash and private money. 

Convenient: CBDC payments should be as easy as using cash and card or mobile payment systems. 

Accepted and available: CBDC should be available to the same extent as cash and point of sale and person-to-person transactions.  

Low cost: CBDC should be at very low or no cost to end users.  

System Features 

The 2020 BIS report also identified system features that include:  

Secure: CBDC infrastructure and participants should prevent cyber-attacks and counterfeiting. 

Instant: CBDC final settlement should be instant or near instant. 

Resilient: A CBDC system should be extremely resilient to operational failure and disruptions, including natural disasters and utility outages. 

Available: Payments should be available 24/7/365. 

Throughput: CBDC system should be capable to process high transaction volumes.  

Scalable: CBDC system should be able accommodate large future volumes. 

Interoperable: The system needs to be able to interact with private sector digital payment systems and arrangements to allow easy flow of funds between systems. 

Flexible and adaptable: A CBDC system should be flexible and adaptable to changing conditions and policy imperatives. 

Institutional Features 

The 2020 BIS report also identified necessary institutional features that include: 

Robust legal framework: A central bank should have clear authority to issue CBDC.  

Standards: CBDC system infrastructure and participating entities need to meet appropriate regulatory and prudential standards that are equivalent to those governing entities offering similar cash or existing digital money services. 

The 2020 BIS report is a clear recognition that the speed of innovation in payments and financial technology requires ongoing collaboration among leading central banks as they assess whether and how to introduce CBDC in their jurisdictions. Doing nothing is not an option as private digital currencies are in advanced development.  

If a general purpose CBDC developed under the 2020 BIS report’s framework is successfully launched, a CBDC may appear in your wallet sooner than you might expect. 

Thomas J. Curry is a partner in Nutter’s corporate and transactions department. Kate Henry and Blake C. Tyler are associates in Nutter’s corporate and transactions department. Curry is former U.S. comptroller of the currency and all are members of the firm’s banking and financial services group. 

Is a Central Bank Digital Currency Coming to Your Wallet Soon?

by Banker & Tradesman time to read: 4 min