Internationalisation of CBDC a Major Design Consideration
As the UK joins the list of global players considering issuing central bank digital currencies (CBDC), with the Bank of England taking practical steps to explore possible costs and benefits earlier this week, one crucial hurdle lies in the level of transnational utilisation they’d be able to guarantee, a Bank for International Settlements (BIS) advisor and a senior Bank of England specialist said.
One element of particular note concerns the possibility for non-residents to hold a country’s retail CBDC, said Ross Leckow, senior fintech advisor at the BIS Innovation Hub while speaking at BAFT’s annual global meeting.
“A particular design issue of importance for CBDCs is to what degree it would be internationalised, to what degree would the country issuing allow non-residents to hold it.”
Rachel Greener, senior CBDCs specialist at the BoE, added that another crucial ‘international’ design challenge of a CBDC is its potential use in cross-border payments.
“There is a lot of frictions involved in moving money across borders.”
Although the BoE has yet to make a decision on whether a sterling CBDC is necessary, interoperability with existing cross-border payments rails would be an “important topic for exploration”, Greener said.
“There are still opportunities to explore and there are still risks to understand.”
“Our view fundamentally is that payment system has to be grounded,” added Leckow. “Money is a public good, in which the public sector, particularly central banks, has to play the critical part in ensuring that it is safe, efficient, and usable.”
The remarks add to global regulators’ and central bankers’ examination of how CBDCs could be implemented and of their possible implications on financial stability – with practical questions ranging from how these new forms of money could affect the two-tier banking system to whether central banks currently have legal authority to issue them.
The BoE consultation similarly brought up the concern that CBDCs could become another internationally traded asset and could further expose domestic economies to international shocks.
According to the paper, “there may be a trade-off between the optimal provision of transaction services – that is, payments – and intermediation services – that is, credit. On the one hand, the introduction of new forms of digital money may improve the range of transaction services available to people. On the other hand, it might reduce the efficiency of credit provision in the economy.”
The BoE paper also seeks further insight into private-sector stable coins – crypto currencies pegged to a fiat currency – outlining the need for these currencies to have the similar levels of trust that commercial bank money currently has. BAFT panellists agreed that stability is the key differentiator between stable coins and crypto assets (i.e. Bitcoin), which are extremely volatile and therefore represent an asset class that most regulators have discouraged investment in.
“The lack of price stability [in crypto-assets] is part of what has given rise to stable coins as a payment instrument,” said Dante Disparte, chief strategy officer at Circle.
“Part of the purpose of digitally-native payment instruments, whether it’s a CBDC or a stable coin, is to power an always-on, trusted form of payment that can live on the internet, reduce friction and reduce the type of opacity that we have with money transmission today.”
Though the US, the UK and the EU are considering regulation into stable coins, Disparts believes CBDCs and stable coins are part of a similar movement. He likens stable coins development to that of the Swift and other global payment networks.
“They have that property of being built in the line of sight of regulators and global interest, but really riding on private sector and free market innovations. The same holds true today with blockchain-based payment systems.
“A trusted digital currency, whether it’s privately issued or issued directly from a central bank, is only as good as the institutions [and] policies […] that guard it.”