A group of central banks have identified what they describe as the ‘foundational principles’ required for any publicly available central bank digital currency (CBDC).
Experts from the Bank of England, Bank of Canada, Bank of Japan, US Federal Reserve, Sveriges Riksbank (Sweden) and Swiss National Bank, as well as the European Central Bank and Basel-headquartered Bank for International Settlements (BIS) – which is often referred to as the ‘central bank for central banks’ – have published a report, Central bank digital currencies: foundational principles and core features, highlighting three ‘key principles’ for a CBDC.
The 26-page publication names these principles as that a CBDC should have: co-existence with cash and other types of money in a ‘flexible and innovative’ payment system; any introduction should support wider policy objectives and ‘do no harm’ to monetary and financial stability; and its features should promote innovation and efficiency.
Based on these principles, the group has identified the core features of any future CBDC system, which must be: resilient and secure to maintain operational integrity; convenient and available at ‘very low or no cost’ to end-users; underpinned by appropriate standards and a clear legal framework; have an ‘appropriate’ role for the private sector; and promote competition and innovation.
“A design that delivers these features can promote more resilient, efficient, inclusive and innovative payments. Although there will be no ‘one size fits all’ CBDC due to national priorities and circumstances, our report provides a springboard for further development of workable CBDCs,” said Benoît Cœuré, the relevant working group’s co-chair and head of the BIS Innovation Hub.
‘Collaborative experimentation’ should be prioritised
The central banks, which announced they were pooling their brainpower on CBDCs earlier this year, will continue to work together on the topic, without prejudging any decision on whether or not to introduce CBDCs in their own jurisdictions.
The other co-chair of the working group, Bank of England deputy governor Sir Jon Cunliffe, described the report as “a real step forward” in agreeing the common principles and “identifying the key features we believe would be needed for a workable CBDC system”. Cunliffe is also chair of the Committee on Payments and Market Infrastructures, which is housed within BIS.
Further development of CBDCs requires a commitment to practical policy analysis and ‘applied technical experimentation’, the group said, adding that although this has already started, the speed of innovation in payments and money-related technologies ‘requires the prioritisation of collaborative experimentation’.
Next steps will include ‘exploring other open questions’ around CBDCs and the challenges of cross-border payments, as well as ‘continuing outreach domestically and with other central banks to foster informed dialogue on key issues’.
‘It’s not an international race’
The ECB presented its own research on a potential digital euro just 10 days ago, saying that it will decide whether to progress a potential ‘digital euro project’ by mid-2021. A public consultation kicked off this week.
In further recent CBDC developments, the Bank of Korea (BOK) confirmed plans to test a CBDC ‘in the virtual world’ next year, according to the Korea Herald. The English-language journal reported a BOK official as saying that the Seoul-based central bank would “create a virtual environment by using blockchain technology and test whether our CBDC can be used for real-world transactions.”
Meanwhile, an update has been provided on trials of a state-backed digital currency in China, which is seen as frontrunner among major economies to launch a CBDC. Fan Yifei, deputy governor at the People’s Bank of China, told the audience at Sibos, an annual global trade show for banking (held ‘virtually’ this year), that the bank had processed more than three million transactions since it began piloting its so-called ‘digital yuan’ “until late August”.
Presenting the BIS/seven central banks’ report to the media, Cœuré was asked whether there was ‘first-mover advantage’ in respect of CBDCs. He said: “It’s not an international race. But there is an advantage to moving quickly because the private sector is moving quickly. The private sector is ahead of us in many aspects of digitalising payments and the COVID-19 crisis has accelerated this change. It’s very important that central banks can be part of the evolution so they can continue to do what citizens expect them to do.”
Answering a different but similarly themed question, Cunliffe said: “Clearly, developments in the private sector spill across and affect our thinking. To see this as a competition between [private] ‘stablecoin’ and central banks, I think, is wrong. I can certainly envisage a world in which the two [co-]exist perfectly well.”
The BIS Innovation Hub was established in 2019 to encourage central banks to work more closely together on fintech-related topics. It expanded to multiple locations earlier this year.