A report issued by the Bank for International Settlements (BIS) says that state-issued cryptocurrencies, which BIS refers to as central bank digital currencies (CBDCs), are worth thinking about because of their potential impact, even though few countries are likely to issue them anytime soon. In an accompanying op-ed, the European Central Bank's Benoît Cœuré and the Monetary Authority of Singapore's Jacqueline Loh, who chair the two BIS committees behind the report, argue that such an instrument "could have far-reaching ramifications for the role of money, the financial system and the economy."
Based on research by BIS's Committee on Payments and Market Infrastructures and its Markets Committee, the March 12 paper divides CBDCs into two categories: general (for the public) and wholesale (for a predefined group of financial institutions).
One potential risk of introducing a general CBDC would be the possibility of reducing the inclination to deposit money with commercial banks, the attractiveness of making deposits with a commercial bank. Particularly in times of economic stress, "a flight towards the central bank [and away from commercial banks] may occur on a fast and large scale." This flight is possible today, as people have the option of hoarding cash, but it could happen at an unprecedented speed when enabled by digital technology. These runs could even take place across national borders.
In the event of a digital run toward a central bank, the institution could end up with a greater role "in allocating economic resources, which could entail overall economic losses should such entities be less efficient than the private sector in allocating resources." This, in turn, "could move central banks into uncharted territory and could also lead to greater political interference."
A CBDC could also hurt commercial banks by incentivizing them to raise their deposit rates and transaction fees on retail customers to compensate for falling profits, which would likely do more to drive such customers away. Additionally, it could erode the role of commercial banks as stewards of payments, further reducing their income.
Finally, in issuing CBDCs, central banks might run the risk of biting off more than they can chew by taking on the task of creating "the required infrastructure and governance [to] manage this new form of money."
On the other hand, the report suggests that a CBDC could act as a "safe, central bank instrument" in jurisdictions where paper money is on the decline, such as Sweden, where the central bank is already considering introducing an "e-krona".
The BIS paper states emphatically that any CBDC must be capable of meeting its country's anti-money laundering (AML) and combatting the financing of terrorism (CFT) standards, and that depending on the privacy features built into the virtual currency in question, this might be difficult.
Ensuring "the robust design and operation of [a CBDC] could prove to be challenging," it notes, but if executed properly, a "non-anonymous CBDC could allow for digital records and traces," simplifying the procedures that must be followed to maintain AML/CFT compliance.
While the report, as well as Loh and Cœuré, repeatedly called for further research and urged caution over action, the document also suggested that the ship could sail on CBDCs if central banks delay too long.
As the paper relates, "The benefits of a widely accessible CBDC may be limited if fast (even instant) and efficient private retail payment products are already in place or in development." One possible consequence of not issuing a CBDC, it says, is that individuals "could face more credit and liquidity risks, relative to central bank liabilities, from exposure to either private issuers of digital tokens or from a lack of issuer."
Ultimately, should any country decide to introduce a general CBDC, it must do so with a careful eye to the facts on the ground, because there is "no one-size-fits-all solution."
As for wholesale CBDCs, the report concludes that "proposed implementations for wholesale payments … look broadly similar to, and not clearly superior to, existing infrastructures." All the same, Loh and Cœuré contend that a CBDC "could potentially help streamline many of the cumbersome clearing and settlement processes that are currently needed to complete securities and foreign exchange trades."
Of extant digital assets, the duo leading the committees behind the report believe that "bitcoin and other … cryptocurrencies are poor imitations of money … Policymakers are rightly worried about consumer and investor abuses," but all the same, while these tokens "are something of a mirage, they might be an early sign of change."
"Despite its many faults," they write, "bitcoin has put the spotlight on an old failing of our current system: cross-border retail payments."
In September 2017, BIS released a preliminary report exploring the concept of state-issued cryptocurrencies.