COVID-19 is accelerating the pace towards a functioning central bank digital currency (CBDC), the co-chair of a central banks’ working group has said. “There is little evidence that cash transmits the virus, but COVID-19 has caused an unprecedented experiment in digitalisation across our lives,” Benoît Cœuré said last week. “COVID-19 will be remembered by economic historians as the event that pushed CBDC development into top gear.”
Cœuré, a member of the Bank for International Settlements’ (BIS) executive committee and head of the BIS Innovation Hub, is co-chair – with the Bank of England’s (BoE) deputy governor Jon Cunliffe – of a group of central banks exploring CBDCs’ potential. Speaking at an online event organised by the London School of Economics (LSE) and London’s Centre for Economic Policy Research (CEPR), he explained that the group is exploring topics “such as how to bring central bank money into a tokenised environment; how to build a digital payments stack, including a public identity rail, which is so important; and how we support cross-border inter-operability of CBDC”. They plan to report to governors by October on “how, and based on which principles, CBDCs might be developed”, he added.
Central banks worldwide have been exploring how they could establish their own digital currency, with efforts intensifying since social media giant Facebook revealed plans one year ago for its Libra ‘stablecoin’. China is among the countries leading the race, but no major central bank digital currency has yet launched.
Cœuré said the potential introduction of a CBDC “has to be a political discussion” as “money is at the heart of sovereignty”. And while he emphasised the need to prioritise international inter-operability in CBDCs, he warnedthat coronavirus-related contact-tracing could “harden attitudes to privacy” in society and “in turn could make building digital architecture more difficult, especially across borders”.
He described the challenges posed by “huge” fragmentation within Europe’s payment landscape – “even within the European Union, where we have a common body of law” – and said it was important that “if we build anything new [such as CBDCs], we should not repeat the same mistake”. He added that “common standards and inter-operability from the start will help” and that “we don’t want CBDCs to be an additional source of fragmentation in the international monetary system.”
Bank of England “very much in exploratory phase”
Christina Segal-Knowles, executive director for financial markets infrastructure at the BoE, was also a speaker at the event – and used her speech to explain how the pandemic has accentuated an existing migration away from cash.
During the Q&A, she said the BoE is “still very much in the exploratory phase” on CBDCs and has not announced “any timeframes” towards the “technically challenging” task of creating a digital currency. A deadline for responses to a 57-page BoE paper aimed at ‘beginning a dialogue on the appropriate design of CBDC and an evaluation of whether the benefits of CBDC outweigh the risks’ closed last week.
The event was chaired by the LSE’s Professor Erik Berglof, who spoke of “an arms race of sorts” between private initiatives such as Facebook’s Libra and CBDCs. He noted that “much of the central banking community had tried to clamp down on private initiatives as they see these initiatives as potentially undermining the authority of central banks and opening up possibilities for tax evasion and illicit transactions”.
Question marks over stablecoins’ protections
In her speech, Segal-Knowles raised the issue of how people using stablecoins could be assured their money was protected. “While some stablecoin proposals are designed as investment products, most seek stability in pursuit of becoming a new way to pay for goods and services or make peer-to-peer transactions. Many propose to integrate into popular social media or online technology platforms. With this backdrop and an estimated three billion social media users worldwide, it’s not hard to imagine that some of these proposals could quickly reach significant scale,” she said.
“With the right regulation, stablecoins may be safe for use in systemic payments chains. But the protections these stablecoins would offer are currently big question marks. Some major stablecoin proposals offer no legal claim for holders – none.”
Like Cœuré, she also emphasised the issue’s international dimensions. “Stablecoins’ borderless nature means that international regulators’ co-ordination is necessary, and work is indeed underway,” she said, citing a Financial Stability Board consultation launched in April.
Separately, South Korea’s central bank has this week announced the creation of a legal advisory group to explore digital currency. The six-member group comprises internal and external legal experts, who will advise the Bank of Korea on legal matters related to CBDC, according to Coin Telegraph.