BIS issues report on the effectiveness of central bank digital currencies (CBDCs)

The Bank for International Settlements (BIS) published a report on how effective it would be for central banks to issue their own so-called central bank digital currencies (CBDCs).

A CBDC is essentially the digital form of fiat money – a currency established as legal tender by law – distinguishable from reserves or settlement balances that commercial banks hold at central banks.

The report, by Benoît Cœuré (member of the Executive Board of the ECB and Chair of the BIS Committee on Payments and Market Infrastructures) and Jacqueline Loh (chair of the BIS Markets Committee), looked at the potential of a wholesale CBDC (for use in financial markets), and a general purpose CBDC (for use by the general public) and their implications for payments, monetary policy and financial stability.

It concluded that a general purpose CBDC could have “wide-ranging implications for banks and the financial system,” pointing to the reliance commercial banks have on customer deposits.

The report found that “wholesale CBDCs might be useful for payments but more work is needed to assess the full potential. Although a CBDC would not alter the basic mechanics of monetary policy implementation, its transmission could be affected.”

In an opinion piece on the European Central Bank’s website, Cœuré went into detail on whether central banks should issue their own digital coinage.

Bitcoin is “not the answer to the cashless economy,” said Cœuré. Whilst cryptocurrencies are “something of a mirage, they might be an early sign of change,” Cœuré stated. However, he noted that “despite its many faults,” bitcoin has “put the spotlight on an old failing of our current system: cross-border retail payments.”

“Such payments not only permit shoppers to easily buy goods online from overseas, but also allow foreign workers to send money home, supporting financial inclusion and development,” Cœuré said.

“However, these payment channels are generally much slower, less transparent and way more expensive than domestic ones. Improvements here are the best way of rising to the bitcoin challenge.”

Cœuré said that central bank digital currencies (CBDC) “would have to be as convenient for consumers and businesses to use as the commercial equivalent.”