CBDCs Mean Evolution, Not Revolution

CBDCs Mean Evolution, Not Revolution

Part of the BIS headquarters, the Botta Building in Basel
(Fred Romero/Flickr)

Who wants a central bank digital currency (CBDC)?

Plenty of people, apparently; are advocating digital cash, millions of people have signed up to a lottery to receive digital renminbi in Shenzhen as part of the Chinese central bank’s pilot project, and the Libra Association wants to CBDCs. Technology firms, banks, NGOs and consultancies are now jostling to ride the next wave of innovation.

Earlier this year, 80% of the world’s central banks had already started to conceptualize and research the potential for CBDCs, 40% were building proofs-of-concept and 10% were deploying pilot projects, according to .

Central bankers believe digital cash could be a useful addition to their toolbox, combining the safety of central bank money with electronic convenience. Safe electronic money is hardly revolutionary. For most people in advanced economies, good banking services with deposit insurance are freely available. Nonetheless, concerns have been raised that a super-safe, super-convenient new kind of money could crowd out bank deposits and starve an economy of credit in normal times, while nascent insecurities could snowball into faster-than-ever bank runs thanks to how easy it could be to move savings into digital cash.

For a start, a CBDC would ensure that, as our economies go digital, the general public would retain access to the safest form of money – held as a claim on a central bank which can never go bust. And, this will be in a form they could use freely in their daily lives.

A CBDC would be a kind of digital banknote and, as such, could satisfy more use cases than paper while the issuer, being a central bank, could support liquidity, settlement finality and trust in the value of the currency. As a result, it could promote payment diversity, help make cross-border payments faster and cheaper, foster financial inclusion and even facilitate fiscal transfers in times of crisis, such as the current COVID-19 pandemic.

Balancing these opportunities and risks is a significant practical and technical challenge. A recent from the Bank for International Settlements (BIS) and the central banks of Canada, the euro area, Japan, Sweden, Switzerland, the United Kingdom and the United States sets out the principles and offers a guide to navigating these uncharted waters.

It also puts forward the equivalent of a monetary Hippocratic oath – pledging that any potential CBDC should “do no harm” to central banks’ monetary and financial stability mandates. In fact, it goes one step further, stating that a CBDC should complement – not replace – cash and safe, private money in a new monetary ecosystem that nurtures innovation and private competition. CBDCs are more than just another way to pay. They could be the evolutionary foundation for new, publicly accessible platforms to encourage diverse ecosystems of banks and fintechs, avoiding the “winner takes all” networks we have seen emerging in our daily digital lives, and making sure innovation benefits the many, not just a few.

The exact design will vary by jurisdiction, as well as the extent to which a CBDC will seek to be a neutral means of payment or a new way to do monetary policy. Answers will vary by central bank, as will many other design choices, and will likely involve extensive consultations with the private sector and the public at large.

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