A group of seven major central banks reached a milestone on Friday in identifying attributes critical to a central bank digital currency and creating somewhat of a consensus about what the experimental currency would require, but they lag behind others like China that are already barreling ahead with pilot issuances.
Among the key principles identified in the new report are the digital currency’s coexistence with cash “and other types of money,” promotion of innovation and efficiency and support of wider policy objectives that “do no harm to monetary and financial stability.”
The framework was authored by the Bank of International Settlements and seven central banks, including the Bank of Canada, the Bank of England, the European Central Bank, the U.S. Federal Reserve, Sveriges Riksbank and the Swiss National Bank.
Jacqui Hatfield, head of U.K. regulation for international law firm Orrick, said it’s interesting that the group does not include Germany, which in 2018 said a central bank digital currency was too risky and the need was too small.
Without Germany, Hatfield said, a digital euro is unlikely to get off the ground.
The BIS and the seven central banks said their report intentionally did not provide an opinion on whether countries should issue their own currencies.
Based on the principles they agreed upon, the working group said in the report, any central bank digital currency system must be “resilient and secure,” available at low or no cost to end users, underpinned by “a clear legal framework” and have “an appropriate role” for the private sector that promotes competition and innovation.
Jon Cunliffe, deputy governor of the Bank of England, said the report “is a real step forward” in identifying common principles and key features for a workable central bank digital currency system.
“This group of central banks has built a strong international consensus which will help light the way as we each explore the case and design for CBDCs in our own jurisdictions,” Cunliffe said. Cunliffe also serves as the co-chair of the working group that published the report and chair of the BIS committee on payments and market infrastructures.
The BIS said the working group will continue to meet in order to “explore the practical implications outlined in the report.”
“A CBDC of one jurisdiction could impact on another’s monetary policy or financial stability … or be used to avoid laws and regulations outside a jurisdiction where sufficient controls are not in place,” the group said in the report. “Transparency and coordination between central banks and other public authorities will be needed to understand and manage any unintended consequences.”
Joel Telpner, chair of the fintech and blockchain group at law firm Sullivan & Worcester, said although it’s important to retain international standards as the economy digitizes, it’s equally important that global markets are allowed to experiment with central bank digital currencies.
“We don’t exactly know what the best model or methodology is for creating and disseminating and using a digital currency,” Telpner said. “We don’t want to force everybody into a single digital approach when we don’t even know exactly how the technology is going to work.”
And whatever pleas there are for international cooperation, they certainly aren’t stopping some central banks from blazing their own trails. Despite being a member of the committee on payments and market infrastructures at the BIS, the People’s Bank of China was left out of the working group, but that isn’t stopping the central bank from forging ahead.
China’s digital currency has not been officially rolled out, but it has been used in more than CNY 1.1 billion ($164.3 million) worth of transactions through pilot programs in Shenzhen, Suzhou, Xiongan, Chengdu and venues for the 2022 Winter Olympic Games, according to the South China Morning Post.
Chinese technology company Sina said Friday that the PBOC and the Luohu District in Shenzhen are ready to hand out a total of CNY 10 million ($1.5 million) of digital currency to 50,000 applicants over the next few weeks as part of a new pilot program. Sina said this indicates that the digital currency is close to being launched to the public.
Hatfield said some countries, especially the U.S., are concerned about China’s progress on a digital currency and don’t want to get left behind.
But it is hard to tell whether any one country is closer than others to implementing a digital currency, Telpner said.
“I think it’s constantly changing. I mean, there have been various experiments and some prototypes,” he said. “There may be a country that takes a step forward, and then takes two steps backward.”
The Bank of Korea, for example, also left out of the BIS working group, said earlier this week that it is moving forward with its pilots as well. The Korea Herald reported that the central bank plans to test distribution of the digital currency could next year, but unnamed critics within the government told The Korea Times that the central bank may be moving too hastily. Research on the emerging area is a step in the right direction, the critics say, but as Korea’s won is not a key currency in the global market, the digital currency will have limited influence.
“Under the circumstances, few countries will be politically and economically affected by the possible CBDC issuance from the BOK,” an unnamed official told the Times.
Still, the banks will keep watching each other and calling for coordination. Christine Lagarde, president of the European Central Bank, said Friday that although technology is changing the way people pay, “Central banks have the duty to safeguard people’s trust in our money.”
“Central banks must complement their domestic efforts with close cooperation to guide exploration of central bank digital currencies to identify reliable principles and encourage innovation. The present report is a convincing proof of this international cooperation.”