It is a time of profound, sweeping changes across finance, technology, and society.
As money and other alternative payment vehicles continue to ride the ever-cresting wave of digitization, a group of central banks, together with the Bank for International Settlements (BIS), are working together to explore the utility and legality of central bank digital currencies (CBDCs) for the public.
This, as a new report published by the working group last Thursday (May 25), entitled “Central bank digital currencies: ongoing policy perspectives,” examines whether the group believes there is a need to ensure ongoing retail access to central bank money via retail CBDCs.
Participating central banks behind the self-reported scan are the Bank of Canada, the Bank of England (BoE), the Bank of Japan, the European Central Bank (ECB), the Board of Governors of the Federal Reserve System, Sveriges Riksbank and the Swiss National Bank.
The BIS report notes that many jurisdictions are examining whether there is a need to ensure ongoing retail access to central bank money.
“Some of the members of this group are approaching a point where they may decide on whether or not to move to the next stage of their CBDC work,” the report states, adding that “to date, none of our jurisdictions have yet decided to proceed with the issuance of a retail CBDC.”
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There are multiple varieties of CBDCs that can be issued by a central bank, and the national banks of over 100 countries are exploring their own CBDC might look like. All G7 economies have successfully moved from the research stage of a CBDC to the development stage or are running concrete pilots.
The BIS and working group of central banks believe that the introduction of a CBDC in their respective jurisdictions could provide an innovative opportunity for the monetary system, and that the introduction of a retail CBDC in particular, versus a wholesale vehicle, may “rest primarily” on the future role of central bank issued money as a “public good.”
In order to move beyond development or piloting the future-fit digital payment vehicles, the participating central banks acknowledge that they will need to undertake include deeper investment in design decisions relating to technology, end user preferences and business models, within a final-decision-agnostic testing environment.
That’s because, ultimately, CBDC issuance and design are sovereign decisions for relevant authorities based on their assessments coming out of the contemporary testing process, taken together with each individual jurisdiction’s own circumstances.
All central banks within the working group agreed that retail CBDCs must be interoperable with other forms of public money and existing consumer and merchant payment systems — including the capability to connect with instant payment infrastructures and be processed across all point-of-sale terminals.
The report notes that international standardization across those two key use-case points and money movement occasions would be “highly beneficial” in supporting the development of any future CBDC ecosystem.
See also: US Treasury Says CBDCs Good for Consumers, Bad for Banks
While private innovation is no doubt an important factor for the long-term success of any CBDC, solving for many issues endemic to retail CBDC issuance remain a matter of national law and will tend to be highly dependent on policy choices, as well as the final technical design of the CBDC.
No meaningful retail CBDC can be issued without the support of respective governments, the BIS report explains.
Per the report, the critical legal issues surrounding retail CBDC issuance include: (i) the legal classification of a retail CBDC; (ii) the authority of the central bank to issue one; (iii) the concepts of settlement and payment finality in a retail CBDC system; (iv) data governance, privacy and anonymity in a retail CBDC system; (v) the potential imposition of restrictions on holdings; (vi) non-resident access to a retail CBDC; and (vii) the potential liabilities of participants in a retail CBDC system.
Read more: Visa Builds Programmable Finance Pilot for Brazilian Farmers Using CBDC
While leveraging blockchain as a component of a retail CBDC’s technical infrastructure offers both advantages and disadvantages, the working group of central banks allege that it is not “deemed essential” to a functioning retail CBDC system.
The thought among the working group is that central banks already have expertise in “creating and managing a sophisticated value chain for a mass market retail product — banknotes.”
The range of digital payment vehicles and platform solutions already available today provide governments with a variety of choices from which to design a future retail CBDC’s technical architecture.
As it relates to blockchain, an inherently “trustless” system, the need to proxy trust for the central bank as the issuer of a CBDC may potentially create inefficiencies around scalability and performance.
However, the benefits of blockchain include the ability for programmability of transactions and the support of real-time micropayments and atomic settlement, per the report.
As the central bank working group decides whether or not to push forward with their retail CBDC initiatives, it bears repeating that the reality of a retail CBDC is a near-future, not right-now, innovation.
“I think this is at least five-plus years away from where we are today,” Catherine Gu, head of CBDC and protocols at Visa, told PYMNTS.
A lot can happen in five years. The report notes that the emergence of quantum computing capabilities could exploit previously secure technical weaknesses within CBDC systems, requiring the need for a new generation of “post-quantum” cryptography (PQC), which is resistant to attacks by quantum computers.
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