Central banks must ‘carefully weigh’ implications of issuing digital currencies to public: Report

When mulling the issuance of digital currencies to the public, global central banks must “carefully weigh” the implications of doing so in areas such as payments, monetary policy and financial stability. 

This even as the underlying technologies might hold more promise for wholesale payments, clearing and settlements, said a joint report by the Committee on Payments and Market Infrastructures (CPMI) and the Markets Committee released on Monday (Mar 12). 

The affiliate body of the Bank for International Settlements (BIS) noted that some central banks have started to consider issuing digital currencies of their own. This is fuelled by factors such as interest in technological innovations for the financial sector, the emergence of new entrants into payment services and intermediation, declining use of cash in a few countries and increasing attention to so-called private digital tokens. 

“CBDC (Central bank digital currencies) is potentially a new form of digital central bank money that can be distinguished from reserves or settlement balances held by commercial banks at central banks,” said the report from the Basel-based institution. 

It looked at two forms of central bank-issued digital currency – a wholesale currency limited to select financial institutions and a general purpose currency accessible to the public – and their implications on core areas like payments, monetary policy implementation and financial stability. 

The report noted that wholesale CBDCs, combined with the use of distributed ledger technology, may enhance settlement efficiency for transactions involving securities and derivatives. 

However, currently proposed implementations for wholesale payments “look broadly similar to, and not clearly superior to, existing infrastructures”. 

As such, “more experimentation and experience would be required before central banks can usefully and safely implement new technologies supporting a wholesale CBDC variant”, the report added

When it comes to a digital currency that could be made widely available to the general public and serve as an alternative to cash, the provision of CBDC could bring substantial benefits, said the report.

However, central banks should also analyse whether these benefits could be achieved by other means. “Most importantly, while situations differ, the benefits of a widely accessible CBDC may be limited if fast and efficient private retail payment products are already in place or in development,” the report said. 

A central bank introducing such a CBDC would also have to ensure the fulfilment of anti-money laundering and counter-terrorism financing requirements, as well as satisfy the public policy requirements of other supervisory and tax regimes, it added. 

Mr Benoit Coeure, the committee’s chair and a member of the European Central Bank’s Executive Board, said: “Central bank digital currencies could help make settling trades of securities and foreign exchange more efficient in the future. But more work and experimentation would be needed to explore these benefits.”  

“General purpose central bank digital currencies could revolutionise the way money is provided and the role of central banks in the financial system, but these are uncharted waters, with potential risks,” he added. 

While CBDCs could give central banks a new monetary policy tool that could enhance the transmission of policy rates to the real economy, existing tools can already achieve similar goals, according to Ms Jacqueline Loh, chair of the Markets Committee. 

“Central banks should continue to monitor developments in digital innovations, as well as analyse the possible implications of central bank digital currencies for areas that are core to the central banking mandate,” added Ms Loh, who is also deputy managing director of the Monetary Authority of Singapore (MAS). 

“For example, a general purpose central bank digital currency could impact bank deposits, a major source of funding for commercial banks, with implications for financial stability,” she said. 

Hence, any steps towards the possible launch of a CBDC should be subject to careful and thorough consideration, the report said.

“Further research on the possible effects on interest rates, the structure of intermediation, financial stability and financial supervision is warranted. The effects on movements in exchange rates and other asset prices remain largely unknown and also deserve further exploration.

“More generally, central banks and other authorities should continue their broad monitoring of digital innovations, keep reviewing how their own operations could be affected and continue to engage with each other closely. This includes monitoring the emergence of private digital tokens that are neither the liability of any individual or institution nor backed by any authority,” it said. 

The report noted that at the moment, volatile valuations, as well as inadequate investor and consumer protection, make digital currencies “unsafe to rely on as a common means of payment, a stable store of value or a unit of account”. 

Speaking at a separate UBS event in January, MAS managing director Ravi Menon said while Singapore’s central bank is not ruling out the idea of issuing digital currencies to the public, he wasn't sure it would be a good idea.

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