The Bank for International Settlements (BIS) recently analyzed different factors within the digital transformation of payments worldwide. The study indicates that central bank digital currencies (CBDC) are aimed at providing an innovative response in this regard.

In the framework of its Annual Economic Report, the Bank for International Settlements devoted a chapter to central banks and digital payments. In that report, they explored the reality of central banking institutions in the face of current challenges, regarding the current COVID-19 pandemic, and the evolution of digital payments.

The BIS believes that central banks should accelerate their participation in the digital transformation of payments. The intention is to promote interoperability, and support competition and innovation, to operate in public infrastructures that provide easy, low-cost, and high-quality access to payments.

The institution highlights that central banks must lead what they call “the next step in the evolution of money” since they consider that the issuance of a CBDC “is not a reaction to cryptocurrencies and stablecoin proposals from the private sector.” On the contrary, they believe that it is rather “a technological effort to pursue various public policy objectives”, which are related to financial inclusion, security, speed, economy, and integrity of payments.

Wholesale and Retail CBDCs

in its publication, the Bank for International Settlements states that it is possible to promote CBDCs at both wholesale and retail levels, options that central banks have studied and tested experimentally. As for the wholesale scale, these can “improve security and speed, and potentially simplify the post-trade clearing and settlement cycle.” They can also “help mitigate the risk of fraud and cyberattacks.”

For its part, a retail CBDC “would provide general users with direct access to money of the central bank and would potentially offer a secure, reliable, and universally accessible settlement instrument, the same as cash does today.” The BIS adds that “unlike cash, retail CBDCs could generate interest and influence the transmission of monetary policy, even by lowering the effective lower limit of nominal policy rates.”

First Steps and Development for the Future

Central Bank Digital Currencies can coexist with both cash and electronic payment options, according to the BIS. In this way, it completes a two-layer design that allows both the public and private sectors to take advantage of them equally. They state that the private sector seems to be better able to bring CBDCs to consumers.

In general, CBDCs must meet some essential characteristics, such as ease of use, reliability, and attractiveness of use. They must also be operational resistant in terms of infrastructure and cyberattacks. Other key factors are the security and integrity of payments, along with user privacy and regulatory compliance, such as anti-money laundering (AML) standards.

In its report, the BIS concludes that the right design would enable CBDCs to “lead to a new, interoperable default payment mechanism, foster competition among private sector intermediaries, and set high standards for security and risk management” in the future of payments.

By Alexander Salazar


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