For central bank digital currencies (CBDCs) to reach their full potential, central banks must ensure multinational interoperability and widespread access even to non-citizens, according to a new report by the Bank for International Settlements (BIS).
The 61-page “Options for access to and interoperability of CBDCs for cross-border payments” report was endorsed by the intergovernmental group G20 as part of a road map to improve cross-border payments. The International Monetary Fund (IMF) and the World Bank also contributed to the report. The BIS seeks to foster international monetary and financial cooperation.
A CBDC is a digital currency issued by a central bank. Using cryptocurrency technology, CBDCs have the ability to lower costs and raise the accessibility of a centralized currency — including for cross-border payments.
Over 90 countries have active CBDC projects ranging from the research stage through to the 10 projects which have officially launched, according to the Atlantic Council’s CBDC tracker.
The report by the “bank for central banks” recommends even central banks not actively exploring CBDCs should be involved with the planning process, however, as they will still be part of the “new potential cross-border payments landscape.”
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Cross-border functionality must be considered at the early design stages with international cooperation between central banks essential for a functional CBDC, the report said.
Three general ways of achieving interoperability between multiple CBDC systems were identified: compatibility, interlinking or using a single system. The BIS recommends that compatibility would be the easiest and cheapest way to ensure cross-border operationality in the short term, though building interlinking or even using a single system could yield even greater returns in the long run.
In July last year, the People’s Bank of China (PBoC) said it will explore cross-border payments in digital yuan (e-CNY) and was willing to discuss global standards for a digital fiat currency.
Toward that goal, it partnered with the central banks of Hong Kong, Thailand and the United Arab Emirates (UAE) in early 2021 to launch the Multiple CBDC (mCBDC) Bridge project, a wholesale CBDC initiative to explore the capabilities of distributed ledger technology (DLT) and CBDC’s applications in enhancing financial infrastructure to support multi-currency cross-border payments.
Better together
Consideration must also be given to non-residents’ access to CBDCs when both inside and outside a central bank’s jurisdiction, the report said.
Five evaluating criteria were used to analyze how CBDCs can be implemented: do no harm, enhancing efficiency, increasing resilience, assuring coexistence and interoperability with non-CBDC systems, and enhancing financial inclusion.
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Concluding there is no “one size fits all” approach for CBDCs, the report says that it is a tool for central banks to assess how CBDCs may be best used to suit their jurisdiction’s particular needs.
It recently said that Bitcoin and other cryptocurrencies are unable to address current risks in the economy unless backed by the trust inherent in money issued by a central bank. Similarly, the IMF has cautioned against countries adopting Bitcoin as legal tender, as El Salvador and more recently the Central African Republic have done.