‘Careful consideration’ needed before launching central bank digital currencies: Report
Launching a central bank digital currency could bring “substantial benefits” in some jurisdictions which are finding the use of cash “rapidly disappearing, says an international financial institution owned by central banks. Photo: Reuters
SINGAPORE — As the use of cash is being reduced in some jurisdictions, some countries are considering issuing digital currencies that could be made widely available to the general public. However, a report issued on Tuesday (March 14) by an international grouping of central banks from some of the world’s biggest economies warned of the need to “carefully weigh the implications for financial stability and monetary policy”.
It said that while a central bank digital currency could bring “substantial benefits” in some jurisdictions which are finding the use of cash “rapidly disappearing”, it is better to see if such goals can be achieved through other means first. Any possible launch should be subject to “careful and thorough consideration”.
The report, which is the work of two committees under the Bank for International Settlements — a global financial institution owned by central banks — is published ahead of the meeting of the Group of 20 central bank governors and finance ministers in Buenos Aires, Argentina next week. The Committee on Payments and Market Infrastructures (CPMI) monitors and analyses developments in payment, settlement, and related arrangements, while the Markets Committee is a forum where members monitor developments in financial markets and assess their implications for financial market functioning and central bank operations.
The two committees acknowledged that some central banks are analysing central bank digital currency as an “alternative safe, robust and convenient payment instrument”, and noted that the underlying technologies “might hold more promise for wholesale payments, clearing and settlements”.
However, its use also raises “important questions and challenges that would need to be addressed”.
For instance, central banks would have to ensure that the digital currencies they issue fulfil anti-money laundering and counter-terrorism financing requirements. The currency will also need to satisfy the public policy requirements of other supervisory and tax regimes.
It noted that in some jurisdictions, central banks may lack the legal authority to issue a digital currency, and “ensuring the robust design and operation of such a system could prove to be challenging”.
“Further research on the possible effects on interest rates, the structure of intermediation, financial stability and financial supervision is warranted. The effects on movements in exchange rates and other asset prices remain largely unknown and also deserve further exploration,” the report said.
UNCHARTED WATERS, FURTHER DISCUSSION NEEDED
Mr Benoit Coeure, chair of the CPMI, said that general-purpose central bank digital currencies could “revolutionise the way money is provided and the role of central banks in the financial system”.
“But these are uncharted waters, with potential risks. This report is a starting point for further discussion and research, and will help countries make choices given their own circumstances.”
He added that so far, central banks are noting the possibilities offered by the underlying technologies of a digital currency. “There’s a lot going on in central banks on using blockchains,” he said.
For some other central banks which are facing the most decline in the demand of cash, “they are reflecting on” issuing one.
To his knowledge, no central bank has issued a digital currency, because of the several reasons mentioned in the report, as well as the possible impact on financial structures and risks to financial stability that have to be considered.
“It is a discussion we are having,” Mr Coeure said.
Ms Jacqueline Loh, chair of the Markets Committee, who is also the Monetary Authority of Singapore’s deputy managing director, said that while a digital currency could give a central bank a new monetary policy tool that could enhance the transmission of policy rates to the real economy, existing tools can already achieve similar goals.
DIFFERENT IMPLICATIONS FOR PAYMENT SYSTEMS
In the report, which comes on the back of growing interest in digital currencies, the Bank for International Settlements recognised that central bank digital currencies are potentially a new form of “digital central bank money” that can be distinguished from reserves or settlement balances held by commercial banks at central banks.
It can have various design choices, and many forms of such currencies are possible, with different implications for payment systems, monetary policy transmission, as well as the structure and stability of the financial system.
One question raised with regard to digital currencies is the role of central bank money, the report noted.
There is the traditional framework where (digital) account-based forms of central bank money to banks are limited in access, and physical central bank money (or cash) is widely accessible. This approach has served “the public and the financial system well”, thus “setting a high bar for changing the current monetary and financial structure”.
In general, central banks and other authorities should continue their broad monitoring of digital innovations, and to “keep reviewing how their own operations could be affected and continue to engage with each other closely”, the Bank for International Settlements said.
This includes monitoring the emergence of private digital tokens that are neither the liability of any individual or institution nor backed by any authority.
At this time, the general judgement on digital currencies is: “Their volatile valuations, and inadequate investor and consumer protection, make them unsafe to rely on as a common means of payment, a stable store of value or a unit of account.”
