Central bank digital currencies’ (CBDCs) potential to help governments in the delivery of fiscal policies has been highlighted in a speech by the head of the Bank for International Settlements (BIS) Innovation Hub.
In a wide-ranging address entitled ‘Finance Disrupted’ delivered at a conference in Geneva, Benoît Cœuré outlined how a CBDC would be an “easier” way for governments to make, for example, Covid-19 relief payments than relying on traditional cheques.
Cœuré’s remarks come during a period when a growing number of central banks have started experimenting with retail CBDCs (also known as ‘general purpose’ CBDCs – CBDCs that would be available to the general population) albeit that most have yet to commit to actually launching a CBDC.
“A great deal is being written about the effect that a retail CBDC could have on monetary policy,” Cœuré said. “I believe, in fact, that CBDC could have a greater impact on fiscal policy.”
The Covid-19 era has seen many governments, including some of the poorest nations in the developing world, using mobile-money solutions for solidarity payments.
“Think of the extraordinary support that some governments provided to the population during the pandemic,” Cœuré told the audience on 7 October. “Some countries showed great ingenuity in using digital technology to reach those most in need. Others mailed cheques to people while bank branches were closed because of lockdowns and people were told to stay home. Imagine how much easier it would have been to transfer digital money to people’s e-wallets in real time.”
Functionality possibilities coming into focus
Most central bankers’ speeches on CBDC, including Coeuré’s, have tended to focus on technical challenges and design considerations.
Indeed Coeuré himself just last month urged central bankers worldwide to ‘roll up their sleeves’ and ‘accelerate work on the nitty-gritty’ of CBDC design. In a speech entitled ‘Central bank digital currency: the future starts today’ delivered in Slovenia’s capital Ljubljana, the Frenchman said that ‘CBDCs will take years to be rolled out, while stablecoins and cryptoassets are already here’, making it ‘even more urgent to start’.
Most research announcements have also tended to be focused on technical explorations. Just last week, for example, the Hong Kong Monetary Authority (HKMA) released a 50-page whitepaper exploring potential technical design options for issuing and distributing a retail CBDC. The authority said it aimed to ‘come up with an initial view’ by mid-2022.
But as central bank teams become more deeply engaged in technical matters, so fiscal and functionality possibilities can come into focus for governments and policymakers.
So-called ‘programmability’ of a CBDC, for example, would allow fiscal operations to be integrated into payments to facilitate new approaches to welfare distribution or tax. At a more granular level, CBDC specialists have described how government-to-citizen digital money payments could be programmed to be redeemable only for certain items, for example schoolbooks; or given an expiry date or locality where funds need to be spent.
Fed decision ‘within a couple of years’
In other significant CBDC developments, US Federal Reserve chair Jerome Powell said on 29 September that the Fed was “going to publish a paper in the not-too-distant future” in which it would “lay out [its] preliminary thinking and seek comment from elected representatives and various interested parties.”
Speaking during panel session at the European Central Bank (ECB) Forum on Central Banking, Powell said the Fed was “doing quite a lot of work on the policy issues, which are quite significant, and also the technological issues, which are quite significant.”
“We want to be in a position to make a well-informed decision on this within a couple of years and I would have thought that that’s timely,” Powell said. “It’s better to do this right rather than try to do it fast, as the [US dollar is the] world’s reserve currency. But nevertheless it’s an urgent matter because digital innovation is moving very quickly.”
Central banks’ multifarious challenges
Cœuré’s speech at the ICMB Geneva Conference – a gathering hosted by the International Center for Monetary and Banking Studies (ICMB) – stretched well beyond the opportunities presented by CBDCs, taking in topics ranging from how ‘Big Data’ and algorithms are disrupting banking supervision to the “intense” digitalisation of financial markets.
BIS projects receiving namechecks included ‘Project Ellipse’, a prototype that is investigating the feasibility of an integrated regulatory data and analytics platform (this project is being led by the BIS Innovation Hub Singapore Centre working alongside the Bank of England, Monetary Authority of Singapore and International Swaps and Derivatives Association); and ‘Project Rio’, a central bank-specific cloud-based platform to monitor trading in foreign exchange markets in real-time (this is being led by the BIS Innovation Hub Swiss Centre).
Cœuré also used the opportunity to highlight a consultation paper published the previous day by the BIS-housed Committee on Payments and Market Infrastructures (CPMI) and Madrid-headquartered International Organisation of Securities Commissions (IOSCO) entitled ‘Application of the Principles for Financial Market Infrastructures to Stablecoin Arrangements’.
“Stablecoins may also pose risks for financial stability,” Cœuré said. “As clarified yesterday by the [consultation paper], stablecoin arrangements should observe international standards for payment, clearing and settlement systems to safeguard financial stability, if they perform a payment function and are found to be systemically important.”
The Financial Stability Board (FSB), whose secretariat is also housed by BIS, published its own 30-page progress report on the regulation, supervision and oversight of global stablecoins also on 7 October.
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