Most central banks are exploring the viability of introducing a central bank digital currency (CBDCs), according to the Bank for International Settlements (BIS), which expects there could be as many as 15 retail and nine wholesale CBDCs in circulation by 2030.
The new research, released today, is further indication of the promise that CBDCs pose in spite of concerns about security, privacy, and the scope of any future central bank-linked digital currency.
BIS surveyed 86 central banks in late 2022 about their role in exploring a potential CBDC of their own. More than half say they are conducting “concrete experiments” or working on a trial, while the proportion of central banks who say they are engaged in some form of CBDC work has risen to a staggering 93%.
The recent turmoil in the crypto market does not appear to have dented central banks’ confidence in CBDCs, with nearly 60% of those responding saying that the emergence of crypto assets and stablecoins has accelerated their efforts around CBDCs.
What are CBDCs and are they cause for concern?
CBDCs, or central bank digital currencies, are digital assets linked directly to a country’s central bank – like the Bank of England or the Federal Reserve. On a retail level, CBDCs exist as a type of cashless payment instrument between central banks and consumers; on a wholesale level, they are intended for use in transactions between banks, central banks and other financial institutions.
Predictions from Juniper Research, published earlier this year, show that the value of CBDCs could reach US$213bn a year by 2030 – up from just US$100mn this year – representative of a technology experiencing an unprecedented upward trajectory.
CBDCs are digital pounds or dollars, issued by central banks and pegged to the country’s fiat currency. They come with some inherent rules as to how they can be used – for example, they might have an expiry date or be restricted to certain services or goods. In that respect, they’re more like vouchers than physical cash and could be used to stimulate economic growth. But because CBDCs have the backing of a central bank, they’re seen as more trustworthy than regular DeFi such as bitcoin and ethereum.
Despite the excitement around CBDCs, there are still some concerns about their use. Because of their programmable nature, it has been suggested that CBDCs will be used to control consumer spending – for instance, by only being valid in areas of the economy where the central bank wants to stimulate spending.
And, because CBDCs are a digital currency with transactions recorded on a ledger, anyone with access to that ledger has access to your transactions. That means they could be used by unscrupulous governments for surveillance.
Who has responded to BIS’ latest CBDC research?
Today’s report from the BIS has attracted a range of reaction and comment from industry insiders with an interest in the emergence of CBDCs.
Alisa DiCaprio, Chief Economist at R3, comments: “Today’s financial system continues to face challenges without innovation using the correct technologies – expensive and slow settlement, siloed systems and an overreliance on account-to-account transfer that could heighten credit risks. These are all issues that CBDCs can help overcome by enabling faster and more efficient liquidity management. It’s therefore unsurprising to see central banks continue to ramp up their digital currency exploration.
“Despite the rapid pace of progress, there are still many questions around CBDC issuance that are still being explored – particularly around smart regulation and privacy. Open collaboration between central banks, regulators and technology providers across public and private sectors will be key in ensuring a carefully thought-out and solid design process that delivers resilience, interoperability, and privacy.”
“The BIS survey shows that central banks are more bullish than ever on CBDCs. New use cases abound, and leaders from economies as diverse as Sri Lanka, Singapore and Switzerland are recognising potential benefits. These include more efficient payments, financial inclusion, and faster monetary policy implementation.
“Some in the free market-loving financial sector have eyed CBDCs with suspicion, framing them as a potential threat to the existing banking system – a distortion that continues despite evidence to the contrary. BIS found 87% of central banks engaged in CBDC work are considering using private intermediaries, with the private sector’s role including the execution of KYC and AML procedures, as well as the provision of wallets, user interfaces, and other front-end customer services.
“A well-designed CBDC could actually be a huge catalyst for innovation. Businesses and consumers would be able to automate complex and cumbersome processes and implement logic into money. CBDCs will complement and integrate into the existing faster payments and wholesale systems.”