A trio of the world’s most influential central bankers have urged against rushing the rollout of central bank digital currencies (CBDCs).
Most central banks worldwide are researching or experimenting with CBDCs but few have made definite commitments to introduce them.
US Federal Reserve chairman Jerome Powell, Deutsche Bundesbank president Jens Weidmann and Bank for International Settlements (BIS) general manager Agustín Carstens all adopted a cautious tone on the high-profile topic during the opening session of the virtual BIS Innovation Summit 2021. More than half the ‘How can central banks innovate in the digital age?’ session was dedicated to CBDC.
The Bahamas launched the first fully deployed digital version of a fiat currency six months ago and central banks collectively representing a fifth of the world’s population are likely to issue a general purpose CBDC in the next three years, according to BIS research published in January. But the same research said that the majority of central banks were unlikely to issue CBDC in the foreseeable future.
Despite the Bahamas’ move, and bullish announcements by other countries – Jamaica, for example, is looking to launch a CBDC next year – Powell, Weidmann and Carstens indicated a preference for restraint.
‘We don’t need to rush’: Powell
“Because we are the world’s principal reserve currency, we don’t need to rush this project, we don’t need to be first to market,” Powell told the online audience. “A dollar CBDC would have potentially large implications here [in the US] and around the world and we’ll be sure to think carefully about all that and engage very broadly with the public around the world, and particularly in the United States, before we even approach a decision.”
Powell cited potential benefits of a CBDC as being a more efficient and inclusive payment system; and referenced “significant” risks including cyber risk, the potential for money laundering and terrorist financing, as well as financial stability risks. He added: “We don’t want to compete with [commercial] banks for funding. We also, in a time of severe stress, don’t want to create the basis for a [bank] ‘run’.”
Powell said that was a “tremendous amount of thinking going on” about “how we can capture the potential benefits while also managing those potential risks”, adding that “the real threshold question for us [the Fed] is, does the public want or need a new digital form of central bank money to complement what is already a highly efficient, reliable and innovative payments arena and system.”
The Federal Reserve Board’s TechLab has a multi-year partnership with the MIT (Massachusetts Institute of Technology) Digital Currency Initiative to build and test a hypothetical CBDC.
“We are doing a broad programme of experimentation and investigation about whether to issue a CBDC and, if so, how would we resolve the many design choices to be made in light of [the] potential benefits and risks,” said Powell, adding that “way more than half” of the Fed’s 12 regional banks currently have “active work” on CBDC.
Let’s focus on the tech: Weidmann
The discussion was moderated by Financial Times editor-at-large (USA) Gillian Tett, who asked Carstens how quickly CBDCs are likely to be introduced.
“Most central banks are approaching this not as a race,” responded Carstens, a former governor of the Bank of Mexico. “This is a huge step forward. CBDC has tremendous complexity. And there is one particular issue – it cannot fail. It cannot fail at any particular point in time. This is the type of problem where it’s better to go slow because we are in a hurry.”
Weidmann trod the same line, describing “no rush or urgency to introduce CBDC”, asserting that the topic was “something that we should reflect on quite carefully”.
The Bundesbank is part of the Eurosystem, along with all other central banks of countries that have adopted the euro. A European Central Bank (ECB) consultation on a potential digital euro received more responses than any previous ECB public consultation and a ‘detailed analysis’ is set to be published this spring.
Weidmann said the CBDC discussion should be “disentangled” into two components. “One is the currency part, where I think we should be quite self-confident. What we have to offer is a stable currency and a lot of the more successful modern means of payments are linked to our legal tender,” he said. “Then there is the technological part, which is interesting – and we should focus on that part.”
Bundesbank looks at ‘trigger solution’
Central banks’ CBDC explorations are widely seen as a reaction to so-called stablecoins being developed by the private sector. But Weidmann said that central banks should not try to “crowd out” the private sector but instead “should enable the private sector to offer the services that the consumer needs”.
Some benefits cited for CBDCs could also be achieved through tokenised commercial bank money, Weidmann said.
“If we are talking about automated payment programmable money, that need not necessarily be a CBDC,” he said, adding that the Bundesbank is investigating what he called a “so-called trigger solution” with “private blockchain that triggers payments in our TARGET2 system in central bank money”. TARGET2 is the real-time gross settlement (RTGS) system owned and operated by the Eurosystem.
“At the moment we [Bundesbank] distribute our central bank money to the commercial banks and don’t engage directly with retail customers. With that trigger solution we could preserve that two-tier system,” he explained. “I think we should explore those solutions as well, which are less invasive, in a sense, and less disruptive than CBDC before we take that step to introduce CBDC.”
As well as technical questions, there are also political challenges facing central banks. “To move forward on this [CBDC], we would need buy-in from Congress, from the administration, from broad elements of the public,” said Powell. He said a legal way forward would “ideally come in the form of an authorising law rather than us trying to interpret our law to enable this” while, on the latter point, he said the Fed was yet to “really begin” public engagement.
ATTEND ‘Delivering Central Bank Digital Currencies (CBDCs): Exploring the Technology Challenge’– upcoming Global Government Fintech webinar, supported by our knowledge partner Amazon Web Services, on 22 April 2021