The Bank for International Settlements (BIS), in conjunction with a group of seven central banks, today released its first joint report on central bank digital currencies (CBDC), focusing on their fundamental principles and characteristics.
Along with the report, the Bank of Japan, a member of the group of seven central banks, released a document outlining its specific approach to CBDCs from a distinctly country-focused perspective.
According to the Bank of Japan document, it will begin the first of several phases of testing for its own CBDC, the digital yen, sometime in 2021. This will include the development of a test environment for the currency and experiments on its functions. basic as a payment instrument.
The Bank of Japan intends to carry out a three-part process. Two consensus tests and a pilot program. In the first two consensus tests, the bank will develop these test environments and add additional functions to them to test their feasibility. In any case, the pilot program would arrive only if the bank deems it necessary to collect more data.
On the other hand, the document highlights five relevant aspects for the arrival of the CBDC: universal access, security, resilience, instant payment capacity, and interoperability. With this, the bank ensures that there are no excluded individuals, that it is available 24/7, and that it can provide liquidity when making a payment.
The Bank of Japan report indicates that a fundamental characteristic of the digital currency must be the resilience to an infrastructure disturbed by forces Majeure. Declares: “Off-line use in times of grid and system failures, as well as power outages, is also important for Japan, given the frequent occurrence of natural disasters.”
Due to the nature of its geography, Japan is prone to a wide range of natural disasters, including earthquakes, tsunamis, floods, typhoons, cyclones, and volcanic eruptions.
For its part, the BIS digital currency research group was announced in January 2020 and included the central banks of Japan, Canada, the United Kingdom, Sweden, Switzerland, and the European Central Bank. Since then, the United States Federal Reserve has also joined the group.
The report published today by the BIS also highlights that to fulfill the role of a true CBDC that fits in the current regulatory landscape, they must have a total of 14 fundamental characteristics, some of which include:
Convertibility: CBDC must be exchangeable for cash at parity.
Convenient: CBDC payments should be as easy to use as other payment methods like cash and mobile payments.
Instant: Transactions must be settled instantly, or in minutes.
Scalable: The system should be able to expand to cope with larger future volumes.
High performance: CBDCs should be able to process a large number of transactions simultaneously.
With these features involved, central banks are forced to implement their network from scratch because cryptocurrency chains known as Bitcoin or Ethereum cannot process such a large number of transactions.
By: Jenson Nuñez.