Central Banks Remain Cautious on Digital Currencies: BIS

A survey of central banks by the Bank for International Settlements (BIS) finds that while a majority are collaboratively looking at the implications of issuing a central bank digital currency (CBDC), indeed many have reached the stage of considering practical issues, they are proceeding cautiously with few reporting plans to actually issue a digital currency in the short or medium term. 

The survey had 63 respondents, which the BIS says represents around 80% of the world’s population, and asked about central banks’ current work on CBDCs, what motivates that work, and how likely their issuance of a CBDC is. 

In addition to questions about CBDC, the survey also asked about “private digital tokens” and their use for payments. Private digital tokens encompass the wide variety of digital tokens not issued by central banks. The survey differentiated between cryptocurrencies and other private digital tokens, with cryptocurrencies defined as decentralised tokens without an issuer or representing an underlying asset or liability. 

The survey finds that around 70% of respondents are currently (or will soon be) engaged in CBDC work, a slight increase compared to a 2017 survey carried out by the BIS. Central banks currently not looking at CBDC are typically from smaller jurisdictions and/or face more pressing priorities. 

Some central banks indicate that they rely on research conducted by international organisations (in particular the BIS) or regional networks, but of those that aredirectly engaged in work, over half cover both general purpose and wholesale CBDCs, with about a third focusing only on general purpose and an eighth only on wholesale.

All central banks have begun their CBDC work with theoretical and conceptual research and are generally sharing their studies, with a view to developing a common understanding of this new field of study. At this point, the BIS says that half have moved on to experiments or more “hands-on” proof-of-concept activities to test new technologies. This represents a 15% increase from the 2017 survey. Additionally the BIS notes that “many” central banks in both advanced economies and EMEs are attempting to replicate wholesale payment systems using distributed ledger technology. Just five central banks have progressed to running pilot projects. 

The survey asked central banks about their motivations for potentially issuing a wholesale or a general purpose CBDC. Respondents chose from the same set of predefined factors for each type of CBDC, concerning payment safety and efficiency as well as other aspects of central banks’ mandates. 

Looking across all respondents for both types of CBDC, payments safety and domestic efficiency are the most important motivating factors to central banks. Least important are, predictably, financial inclusion for wholesale CBDCs and, less- predictably, cross-border payments efficiency, for general purpose CBDCs. “To note, however, all rankings remain in a rather narrow range which suggest at this “investigative” stage the main motivation is to learn,” the BIS says. “However, as central banks progress, more differentiation in terms of motives might emerge.” 

Outside the predefined choices, many central banks consider a range of other factors important as well. For general purpose CBDC, this broadly relates to issues around cash, either responding to dwindling use or discouraging it through supporting electronic innovations and payments. For wholesale CBDC, the other factors are more diverse and overall, considered less important. They include better monitoring of transactions as well as safety and efficiency benefits for end users.

Breaking respondents down by stage of economic development shows that, for general purpose CBDC, EMEs value domestic payments efficiency and financial inclusion most. On the other hand, cross-border payments efficiency is the least important. In contrast, for advanced economies, payments safety and financial stability are the primary motivators for potential issuance. Financial inclusion is clearly the least important factor. 

In qualitative commentary, the BIS says that EME central banks also note that supporting digitalisation, incorporating the informal economy and fighting financial crime, are key motivators for potentially issuing a CBDC. Some advanced economies are motivated by the prospect of a “less-cash” or even “cash-less” society, for instance Sweden, where the central bank is progressing a study into an ‘e-krona’.

The survey asked central banks to describe the likelihood of their issuing each type of CBDC over the short (up to three years) and medium (up to six years) term. They could choose from “very likely” to “very unlikely” on a five-point scale. 

In the short term, over 85% of central banks see themselves as either somewhat unlikely or very unlikely to issue any type of CBDC, while no central banks are very likely to issue a wholesale CBDC in the short term, but two EME central banks are considering issuing a general purpose CBDC over the same horizon.

Beyond the short term, an increased proportion of central banks consider the issuance of both types of CBDC to be possible. Nevertheless, the survey finds that a majority still consider this move at least somewhat or very unlikely. In the medium term, only one central bank reported that it sees itself as very likely to issue a wholesale CBDC. Overall, the likelihood of issuing both types of CBDC is somewhat similar, despite the perceived greater operational complexity and larger impact on the financial system of a general purpose CBDC.

One potential barrier to the issuance of CBDCs is that the central bank would have to have the legal authority to do so, and the survey finds that only a quarter of respondents have, or soon will have, the authority, while about a third do not and the remainder are uncertain. 

“The high level of uncertainty is unsurprising, given that most central bank mandates predate not only cryptocurrencies but also many forms of electronic money,” the BIS says. “However, as central banks are studying all aspects of CBDC, the level of uncertainty has fallen compared with the 2017 survey. The uncertainty does not differ materially by geography or a jurisdiction’s economic development.”

Colin_lambert@profit-loss.com

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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