The Bank for International Settlements (BIS) has been at the forefront of the discussion surrounding central bank digital currencies (CBDCs). In this article, we’ll take a closer look at what CBDCs are, why they matter, and what the BIS is doing to advance the conversation.
What is a CBDC?
A CBDC is a digital form of a country’s fiat currency that is issued and backed by its central bank. Unlike cryptocurrencies such as Bitcoin, CBDCs are not decentralized and are subject to the same regulations and oversight as traditional currency.
There are two main types of CBDCs: retail and wholesale. Retail CBDCs are designed for use by the general public, while wholesale CBDCs are designed for use by financial institutions.
Why Do CBDCs Matter?
CBDCs have the potential to revolutionize the way we think about money. They could offer a more efficient, secure, and cost-effective way to make transactions. CBDCs could also help to reduce reliance on cash and improve financial inclusion by making it easier for people to access banking services.
However, CBDCs also raise a number of challenges and concerns. For example, they could have implications for monetary policy, financial stability, and privacy.
What is the BIS Doing About CBDCs?
The BIS has been closely monitoring the development of CBDCs and has been conducting research into their potential benefits and risks. In 2018, the BIS established the “BIS Innovation Hub” to help central banks explore the potential of new technologies, including CBDCs.
The BIS has also been working with other international organizations to develop standards and guidelines for CBDCs. In January 2020, the BIS and seven central banks published a report outlining the key features that CBDCs should have in order to be effective and safe.
What are the Benefits of CBDCs?
There are a number of potential benefits to CBDCs, including:
- Reduced transaction costs
- Increased financial inclusion
- Improved payment efficiency
- Greater security and transparency
- Reduced reliance on cash
What are the Risks of CBDCs?
CBDCs also pose a number of risks and challenges, including:
- Operational and technological risks
- Financial stability risks
- Privacy concerns
- Legal and regulatory challenges
- Implications for monetary policy
What are the Key Features of a CBDC?
The BIS and seven central banks have identified the following key features that CBDCs should have:
- Resilience, reliability, and availability
- Accessibility and inclusivity
- Privacy and security
- Interoperability and portability
- Compliance with applicable laws and regulations
What are the Different Approaches to CBDCs?
There are a number of different approaches that central banks could take when developing CBDCs. Some of the key approaches include:
- Token-based vs account-based
- Retail vs wholesale
- Direct issuance vs intermediated
- Centralized vs decentralized
What are the Next Steps for CBDCs?
The development of CBDCs is still in its early stages, and there are many questions that need to be answered before they can become a reality. The BIS and other international organizations will continue to play a key role in advancing the conversation and helping central banks to navigate the challenges and opportunities presented by CBDCs.
Conclusion
CBDCs have the potential to transform the way we think about money and financial transactions. While there are certainly challenges and risks associated with CBDCs, there are also many potential benefits that could make them a powerful tool for central banks and financial institutions. The BIS will continue to play a key role in shaping the conversation around CBDCs and helping to ensure that they are developed in a safe, effective, and responsible manner.