BIS: 90% of Central Banks are Researching the Utility of CBDCs

The world of finance is on the cusp of a monumental shift. Imagine a future where digital currencies issued and backed by central banks are commonplace, transforming how we transact, save, and interact with the global economy. This isn't science fiction; it's a rapidly approaching reality. The Bank for International Settlements (BIS), a global organization that serves as a bank for central banks, recently revealed in its annual economic report that a staggering 90% of central banks worldwide are actively exploring the feasibility and utility of Central Bank Digital Currencies (CBDCs). This groundbreaking statistic underscores the profound interest and investment in understanding how CBDCs can reshape the financial landscape.

In a new annual economic report published by the Bank of International Settlements (BIS), the financial institution revealed that approximately 90% of central banks worldwide are investigating the

But what exactly are CBDCs, and why are so many central banks dedicating resources to their research and potential implementation? This article delves deep into the BIS report, exploring the motivations behind this global movement, the challenges and opportunities that CBDCs present, and what this might mean for the future of money as we know it. We'll explore the specific design considerations being contemplated, the differences in approach between advanced economies (AEs) and emerging market and developing economies (EMDEs), and the potential impact on everything from financial inclusion to monetary policy. Get ready to unravel the complexities of CBDCs and understand why they are poised to revolutionize the world of finance.

Most central banks are exploring central bank digital currencies (CBDCs), and more than a quarter of them are now developing or running concrete pilots. This BIS paper updates earlier surveys that asked central banks about their engagement in this area. The latest responses from 81 central banks show that the Covid-19 pandemic and the emergence of cryptocurrencies have accelerated the work on

Understanding Central Bank Digital Currencies (CBDCs)

Before we delve further, let's define what we mean by a Central Bank Digital Currency (CBDC). Simply put, a CBDC is a digital form of a country's fiat currency, issued and backed by the central bank. This distinguishes it from cryptocurrencies like Bitcoin, which are decentralized and not backed by any government or central authority. Think of it as a digital version of the cash already in your wallet, but with potentially enhanced features and capabilities.

BIS: 90% of Central Banks are researching the utility of CBDCs

CBDCs come in two main flavors:

• Retail CBDCs: These are designed for everyday use by individuals and businesses, allowing them to make payments, store value, and conduct transactions directly with the central bank (or through regulated intermediaries).
• Wholesale CBDCs: These are restricted to financial institutions for interbank payments and settlement, potentially improving the efficiency and security of large-value transactions.

The BIS report primarily focuses on the growing interest in both retail and wholesale CBDCs and the various considerations central banks are weighing as they explore their development and implementation.

Why the Global Interest in CBDCs?

The surge in interest surrounding CBDCs isn't arbitrary. Several factors are driving this global movement, reflecting the evolving needs and challenges of modern financial systems:

• Increased Efficiency and Reduced Costs: CBDCs promise to streamline payment systems, reducing transaction costs and settlement times, especially for cross-border payments. This can benefit both businesses and consumers.
• Financial Inclusion: In many countries, a significant portion of the population remains unbanked or underbanked. CBDCs could provide access to financial services for these individuals, fostering greater financial inclusion.
• Countering Cryptocurrencies: The rise of cryptocurrencies like Bitcoin has prompted central banks to explore CBDCs as a potential alternative, offering the benefits of digital currencies while maintaining the stability and trust associated with sovereign currency.
• Improving Monetary Policy Implementation: CBDCs could give central banks more direct control over monetary policy, allowing them to implement targeted stimulus measures or manage inflation more effectively.
• Innovation and Competition: CBDCs can foster innovation in the financial sector by providing a platform for new payment solutions and financial services. They can also promote competition among payment providers.

The COVID-19 pandemic further accelerated the interest in CBDCs, highlighting the need for contactless payment solutions and efficient mechanisms for distributing government aid.

Key Findings from the BIS Report

The BIS report offers valuable insights into the current state of CBDC research and development. Here are some of the key findings:

• Widespread Research: As mentioned earlier, approximately 90% of central banks are exploring CBDCs, indicating a broad consensus on their potential significance.
• Development and Experimentation: Around two-thirds of the surveyed central banks are actively developing or experimenting with CBDCs, moving beyond the research phase and into practical implementation.
• Diverse Approaches: Central banks are adopting diverse approaches to CBDC design, reflecting the unique needs and circumstances of their respective economies. There's no one-size-fits-all solution.
• Focus on Key Features: For retail CBDCs, central banks are carefully considering features such as holding limits, interoperability (the ability to work seamlessly with other payment systems), offline functionality (the ability to make transactions without an internet connection), and whether to offer interest (remuneration) on CBDC holdings.
• AEs vs. EMDEs: There are notable differences in approach between advanced economies (AEs) and emerging market and developing economies (EMDEs). EMDEs are more likely to explore the use of distributed ledger technology (DLT) and may impose transaction limits to mitigate risks.

Design Considerations for Retail CBDCs

Retail CBDCs present a unique set of design challenges. Central banks must carefully consider several factors to ensure that CBDCs are safe, efficient, and widely adopted:

• Holding Limits: Implementing holding limits can prevent excessive concentration of CBDC holdings and mitigate potential risks to the banking system.
• Interoperability: Ensuring that CBDCs can seamlessly interact with existing payment systems is crucial for widespread adoption and usability.
• Offline Functionality: Providing offline payment capabilities can enhance the resilience of the payment system and promote financial inclusion in areas with limited internet access.
• Remuneration: Deciding whether to offer interest on CBDC holdings is a complex issue that can impact the demand for CBDCs and the effectiveness of monetary policy.
• Privacy: Balancing the need for transparency and accountability with the desire for user privacy is a critical consideration. Different CBDC designs offer varying levels of privacy.
• Security: Robust security measures are essential to protect CBDCs from fraud and cyberattacks.

The Role of the Bank for International Settlements (BIS)

The Bank for International Settlements (BIS) plays a crucial role in the global CBDC landscape. As a forum for international cooperation, the BIS facilitates dialogue and collaboration among central banks on CBDC research and development. The BIS also conducts its own research and publishes reports like the one discussed here, providing valuable insights and guidance to central banks around the world.

The BIS's vision for the future of money emphasizes the importance of trust in central banks' stable sovereign currencies and safe payment systems. The institution encourages innovation while advocating for responsible development and regulation of digital currencies.

Criticisms and Challenges of CBDCs

While CBDCs offer numerous potential benefits, they also face criticisms and challenges. Some of the main concerns include:

• Privacy Concerns: Critics argue that CBDCs could give governments unprecedented access to individuals' financial transactions, potentially leading to surveillance and abuse of power.
• Cybersecurity Risks: CBDCs are vulnerable to cyberattacks, which could disrupt the payment system and erode public trust.
• Disintermediation of Banks: Some fear that CBDCs could disintermediate banks, reducing their role in the financial system and potentially impacting credit availability.
• Implementation Costs: Developing and implementing CBDCs can be costly and complex, requiring significant investment in technology and infrastructure.
• Risk of Central Bank Overreach: The power inherent in controlling a nation's currency could lead to governments exerting undue influence on the economy and individual financial decisions.

Addressing these concerns is crucial for the successful adoption of CBDCs.

CBDCs vs. Cryptocurrencies

It's important to distinguish between CBDCs and cryptocurrencies. While both are digital currencies, they differ in fundamental ways:

The BIS report highlights the ability of current sovereign fiat money to provide (relative) price stability, a characteristic that most cryptocurrencies lack. This difference underscores the fundamental role of central banks in maintaining monetary stability.

The Future of Money: A CBDC-Powered World?

The widespread research and development of CBDCs suggest that they are likely to play a significant role in the future of money. However, the exact form and function of CBDCs will vary depending on the specific choices made by individual central banks.

Here are some potential scenarios for the future of money:

• Coexistence of CBDCs and Traditional Payment Systems: CBDCs could coexist alongside traditional cash, debit cards, and credit cards, providing consumers with a wider range of payment options.
• Integration with Existing Financial Infrastructure: CBDCs could be integrated with existing financial infrastructure, improving the efficiency and security of payments and settlements.
• Cross-Border CBDC Payments: CBDCs could facilitate faster and cheaper cross-border payments, reducing reliance on correspondent banking networks.
• New Financial Products and Services: CBDCs could enable the development of new financial products and services, such as microloans, smart contracts, and decentralized finance (DeFi) applications.

What Questions Are Being Considered?

Here are some critical questions that policymakers and central bankers are trying to answer as they consider the future of CBDCs:

• What level of privacy should CBDCs offer users?
• How can CBDCs be designed to be secure and resilient against cyberattacks?
• How can CBDCs be integrated with existing financial infrastructure?
• How will the introduction of CBDCs affect the banking system and credit availability?
• How will CBDCs be used to improve financial inclusion?
• What is the best approach for implementing holding limits on CBDCs?
• How can interoperability between different CBDC systems be ensured?

Practical Examples of CBDC Initiatives

Several countries are already piloting or have launched CBDCs. Here are a few examples:

• The Bahamas: The Bahamas launched the Sand Dollar, the world's first CBDC, in 2020. The Sand Dollar aims to promote financial inclusion and improve the efficiency of payments in the archipelago nation.
• China: China is actively testing its digital yuan (e-CNY) in several cities. The e-CNY is intended to replace some physical cash and improve the efficiency of the payment system.
• Sweden: Sweden is exploring the e-krona, a potential CBDC that could complement or replace physical cash.
• The United States: The Federal Reserve is exploring the implications of, and options for, introducing a CBDC. They have released discussion papers and are engaging with stakeholders to gather feedback.
• European Union: The European Central Bank (ECB) is investigating the potential of a digital euro.

These initiatives provide valuable lessons and insights for other countries considering CBDCs.

What Does This Mean for You?

The rise of CBDCs has the potential to impact everyone, from consumers and businesses to financial institutions and governments. Here's what you need to know:

• Potential for Faster and Cheaper Payments: CBDCs could make payments faster, cheaper, and more convenient, especially for cross-border transactions.
• Increased Financial Inclusion: CBDCs could provide access to financial services for the unbanked and underbanked, improving their economic opportunities.
• Enhanced Security and Transparency: CBDCs could be more secure and transparent than traditional payment systems, reducing the risk of fraud and money laundering.
• Potential for New Financial Products and Services: CBDCs could enable the development of new financial products and services, tailored to individual needs.
• Need to Stay Informed: It's important to stay informed about the development of CBDCs and their potential impact on your financial life.

Actionable Advice

1. Educate yourself: Learn about the potential benefits and risks of CBDCs.
2. Follow the news: Stay updated on the latest developments in CBDC research and development.
3. Engage in discussions: Participate in conversations about CBDCs and share your views with policymakers.
4. Prepare for change: Consider how CBDCs might impact your financial life and adjust your strategies accordingly.

Conclusion: Embracing the Digital Future of Money

The BIS report's finding that 90% of central banks are researching the utility of CBDCs underscores the transformative potential of digital currencies issued by central banks. While challenges and criticisms remain, the drive towards exploring and potentially implementing CBDCs is undeniable. This global movement signifies a fundamental shift in how we perceive and interact with money. CBDCs offer the promise of greater efficiency, financial inclusion, and innovation, but their successful implementation requires careful consideration of privacy, security, and potential disruptions to the existing financial system. As central banks continue to explore the possibilities, it's crucial for individuals, businesses, and policymakers to stay informed and engaged in the conversation, shaping the future of money for the benefit of all.

The journey towards a CBDC-powered world is just beginning. Keep an eye on future developments and be prepared to adapt to the changing landscape of finance.