The introduction of central bank digital currencies (CBDCs) could potentially lead to central bank expanding its footprint on the financial system, according to Economic Adviser and Head of Research at the “central bank of central banks,” the Bank for International Settlements (BIS). It is likely that CBDCs will change the relationship between central banks and society.
The bank’s special chapter of the Annual Economic Report discusses the central bank’s role in the payment system, stressing that the ever-evolving technology itself is not enough to have “a fast, efficient, and cost-effective payment system.” Rather, it needs “underlying economics and the nature of competition in the payment system,” BIS’ Hyun Song Shin said in a speech marking the BIS Annual General Meeting in Basel on June 30.
New technology, however, will “help central banks put the pieces more easily,” and enable them to “play the role of the operator of the payment infrastructure.”
“We may also expect CBDCs to have an impact on the functioning of the financial system, potentially leading to a much larger footprint of the central bank on the financial system itself.”
The introduction of CBDCs may bring the society “at the cusp of another important step in the evolution of the relationship of the central bank with society,” and towards providing more accessible, faster, and efficient payment systems.
While wholesale CBDCs may be similar to existing central bank settlement accounts, there’s been more discussion on retail CBDCs that give access to claims on the central bank to ordinary users, in electronic form, Shin said.
And while users have access to cash already, which is a direct claim on the central bank, retail CBDCs are “a more farreaching change in the nature of the relationship between central banks and society.” No matter how the CBDC is designed, he said, some kind of ledger that keeps track of transactions has to be present, “so that the central bank can honour its obligations to the rightful owner of the CBDC. In such a setting, safeguarding personal data would present new challenges.”
Shin also added that central banks’ reports and speeches have generally turned more positive towards both wholesale and retail CBDCs since late 2019.
One of the ways in which the BIS is supporting the discussions on CBDCs is through the activities of the BIS Innovation Hub, said today General Manager Agustín Carstens. And BIS Innovation Hub, established in 2019, has just announced its expansion to new locations in Europe and North America.
Over the next two years, in collaboration with the respective countries’/union’s central banks, it’ll move to London, Frankfurt, Paris, Stockholm, and Toronto, in addition to forming a strategic partnership with the US Federal Reserve System, creating a new location in New York, according to the press release.
This follows the formation of the first three Hub Centres, in Hong Kong, Singapore, and Switzerland.
The Head of the Hub, Benoît Cœuré, said:
“With this expansion, the Innovation Hub will be well placed to advance work on a broad range of issues of importance to the central banking community, including digital currency and digital payments, cyber security, distributed ledger technology and artificial intelligence. […] This expansion is a testament to the central banking community’s commitment to innovation and cooperation.”
As reported last week, in its report from June 24, similarly to what Shin said today, BIS stressed that the COVID-19 pandemic could act as a catalyst, speeding up the creation of CBDCs.
People not wanting to trade cash out of fear of viral transmission, and governments locking businesses down, thus forcing consumers online, could force central banks to speed up the creation of their digital currencies.
New entrants have tried to capitalise on the existing shortcomings in the payment systems, wrote the BIS, particularly: “the rise (and fall) of Bitcoin and its cryptocurrency cousins”; Facebook‘s Libra; and “the foray” of big tech and fintech firms into financial services. The report said that some failed to gain traction, others need to address regulatory and competition issues, and others “are perceived as a threat to jurisdictions’ monetary sovereignty” – but “all have propelled payment issues to the top of the policy agenda.”
“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,” the report said.
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