The report looks into the implications of a wholesale central
bank digital currency (CBDC), for use in financial markets, and a general
purpose CBDC, for use by the general public, for payments, monetary policy and
The Bank for International Settlements (BIS), an international financial
organisation owned by 60 member central banks, has released a report analysing the
impact of potential central bank digital currencies (CBDCs). The report offers
a high-level overview of the implications of CBDCs for payments, monetary
policy and financial stability.
Several central banks have started exploring the idea of
issuing their own digital currencies. They are motivated by Fintech developments,
the emergence of new entrants into payment services and intermediation, declining
use of cash in a few countries and increasing attention to private digital
The authors note that central banks already provide digital
money in the form of reserves or settlement account balances held by commercial
banks and certain other financial institutions at the central bank. So, a
central bank liability, denominated in an existing unit of account, which
serves both as a medium of exchange and a store of value would be an innovation
for general purpose users but not for wholesale entities. Hence, it would be
easier to define CBDC as a new form of digital central bank money that can be
distinguished from reserves or settlement balances held by commercial banks at
There are various design choices for a CBDC, including: access (widely vs restricted); degree of anonymity (ranging from
complete to none); operational
availability (ranging from current opening hours to 24 hours a day and
seven days a week); and interest-bearing
characteristics (yes or no). Each combination has different implications.
Traditionally, central banks have tended to limit access to
(digital) account-based forms of central bank money to banks and to certain
other financial or public institutions in some instances. This is in contrast
with physical central bank money (cash), which is widely accessible.
This BIS report looks at two variants, a wholesale and a
general purpose one, differentiated by their accessibility, with the former
being limited a pre-defined group of users and the latter being widely accessible.
Impact on payments
While, wholesale CBDCs, combined with the use of distributed
ledger or blockchain technology, may enhance settlement efficiency for
transactions involving securities and derivatives, currently proposed
implementations do not exhibit clear superiority over existing infrastructures.
More experimentation would be required before central banks can usefully and
safely implement new technologies supporting a wholesale CBDC variant.
On the other hand, a general purpose CBDC, widely available
to the general public, could provide a safe, robust and convenient alternative payment
instrument in jurisdictions where the use of cash is declining. However, the
report says that similar benefits could be achieved through fast or even
instant and efficient private retail payment products that are already in place
or in development.
Certain challenges in the issuance of a general purpose CBDC
are also highlighted. A central issuing such a CBDC would have to ensure the
fulfilment of anti-money laundering and counter terrorism financing (AML/CFT)
requirements. An anonymous CBDC could be widely used globally, including for
illegal transactions. A non-anonymous CBDC allowing for digital records and
traces, could improve addressing AML/ CFT requirements. But then such a
traceable CBDC would not necessarily be the main conduit for illicit transactions
and informal economic activities.
In some CBDC designs the “know-your-customer” (KYC) function,
along with its associated costs could fall to the central bank, for which they
might not necessarily be well-equipped. They could also be called upon to
provide information to tax and other authorities. Moreover, central banks would
have to manage privacy and anonymity issues arising from the insights obtained
from private transactions.
Some of the proposed technologies for issuing and managing
CBDC, such as DLT, are still in early stages of testing and questions
surrounding operational risk management and governance have to addressed before
deployment can be envisioned.
There is also the issue of cybersecurity to be considered,
as a general purpose CBDC is open to many participants and hence to many points
Impact on monetary
Since digital central bank money is already available to
monetary counterparties, the report only looks at the implications of a widely
available CBDC for implementation and transmission of monetary policy. This
will be dependent on its accessibility and on whether it is attractively
remunerated through interest. These factors would determine the substitution effects
of CBDC on different types of financial assets.
CBDCs could strengthen pass through of policy rate changes (such
as banks adjusting interest rates in line with movements in benchmark rates by
central bank). However, the authors highlight that the degree to which key
market rates move in conjunction with the policy rate appears to be satisfactory
for most central banks. Furthermore, alternative tools are available which could
meet the same objectives.
Impact on financial
In times of systemic financial stress, households and other
agents shift their deposits towards financial institutions perceived to be
safer and/or into government securities. A CBDC could enable “digital runs” towards the
central bank with unprecedented speed and scale. The benefits of deposit insurance
and the stability of retail funding could be weakened, as because a risk-free CBDC
provides a very safe alternative. Even stronger banks could face withdrawals in
the presence of CBDC.
This effect could be amplified if the CBDC is available
cross-border. Exchanging a CBDC for an international currency could potentially
enable faster deleveraging in capital markets, resulting in tight funding
conditions and sharp movements in foreign exchange markets.
In general, the introduction of CBDC could blue distinctions
between residents and non-residents and domestic and foreign transactions. This
would lead to a variety of complications. For instance, it could be more
difficult to apply AML/CFT requirements because of lack of formal powers over
intermediaries involved in token-based CBDC distribution. Similarly, if foreign
banks were able to purchase, receive or otherwise hold “domestic” CBDC, they
could use the CBDC to provide the functional equivalent of “offshore” accounts
and payment services denominated in the domestic currency.
Cross-border availability of CBDCs could increase
substitution away from the domestic currency, which could make monetary
aggregates unstable and alter the choice of monetary instruments.
The authors note further that the introduction of CBDCs by
jurisdictions with international currencies could reinforce existing costs and
Hence, the authors advise that central banks that have
introduced or are seeking to introduce a CBDC should take due consideration of relevant
cross-border issues. In addition, they advise that central banks and other
authorities should continue monitoring digital innovations, along with their
potential impact on their own operations and continue to engage with each other
Read the complete report here.
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