The prospect of CBDCs is getting closer?

CBDCs, or Central Bank Digital Currency, have been investigated by the Bank for International Settlements (BIS). There “central bank of central banks” thus shows that the desire to develop digital currencies is global. No less than 15 CBDCs could exist in 2030. This initiative, often criticized within the crypto ecosystem, indeed poses multiple challenges. Decryption of the BIS survey on the future of CBDCs and their purpose.

What is a “CBDC”?

The CBDCs are quite openly inspired by stablecoins, which the President of the FED does not hesitate to qualify as “a form of money”. At the end of 2022, stablecoins represented $140 billion and nearly 15% of the cryptocurrency market. Stablecoins offer the advantage of their stability and ease of use.

CBDCs for individuals

The BIS has published a special survey of 86 central banks. The survey focuses on the progress of central bank CBDC projects. The definition of a CBDC is laid out in the following terms.

“UCBDC (Central Bank Digital Currency) is a digital payment instrument, denominated in the national unit of account, which is a direct responsibility of the central bank. If the CBDC is intended to be used by households and businesses for everyday transactions, it is called a “general purpose” or “retail” CBDC. A retail CBDC differs from existing forms of electronic payment instruments (such as wire transfers, direct debits, card payments, and e-money) because it represents a direct claim on a central bank rather than the liability of a private financial institution.

Making headway – Results of the 2022 BIS survey on central bank digital currencies and crypto

CBDCs are an initiative of many central banks in response to the emergence of cryptocurrencies. Indeed, the latter are a major innovation in terms of payments. The blockchain thus makes it possible to outperform the traditional transfer system in efficiency. What holds our attention here, beyond the desire to reaffirm “monetary authority”, is the regulatory change implied by the CBDCs. In fact, the report states that CBDCs are “a direct claim on a central bank rather than the liability of a private financial institution”.

That is, CBDC users would now be linked directly with the central bank, rather than their private bank. This constitutes a stage of strong centralization of the banking system. Legitimate criticisms can therefore be advanced on this point.

Institutional CBDCs

Alongside CBDCs for individuals, central banks are considering the creation of institutional CBDCs. These would be used between institutions for miscellaneous settlements. What is striking here is the rigid distinction that central banks make between these two types of actors. Indeed, euros are used today by both individuals and institutions. The existence of two different digital currencies within the same central currency raises questions of economic cohesion (a “two-tier economy”).

“In contrast, a wholesale CBDC targets a different group of users. Wholesale CBDCs are intended to be used for transactions between banks, central banks and other financial institutions. Thus, wholesale CBDCs would play a similar role to reserves or settlement balances held with central banks today. However, wholesale CBDCs could allow financial institutions to access new features made possible by tokenization, such as composability and programmability. »

Making headway – Results of the 2022 BIS survey on central bank digital currencies and crypto

A survey to glimpse CBDCs in 2030

In addition, the BIS survey covers 86 central banks. In fact, they represent 94% of the world’s GDP and 82% of the world’s population. It is thus specified that 93% of central banks would work on a CBDC project. The main motivations of these central banks seem to be financial stability, the efficiency and security of payments, and the anchoring of monetary policy.

Percentage of central banks engaged in CBDCs, by category and advancement. Source : Making headway – Results of the 2022 BIS survey on central bank digital currencies and crypto

The share of central banks that could launch a CBDC in the next three years has also increased from 15% to 18%. That is 16 central banks. By 2030, BIS estimates there may be 15 CBDCs in circulation. This proportion of CBDCs would make it possible to judge the success or failure of such an initiative with the population by the end of the decade.

There are currently four retail CBDCs in circulation around the world – in the Bahamas, the Eastern Caribbean, Jamaica and Nigeria. Based on the number of central banks that have indicated that they would be very likely to issue a CBDC over the next few years, it is possible that there will be 15 retail CBDCs and nine wholesale CBDCs in public circulation by the end. of this decade. »

Making headway – Results of the 2022 BIS survey on central bank digital currencies and crypto

The problem of legality

We have seen that the CBDC initiative poses a legal and ethical problem. Indeed, CBDCs would give central banks an absolute monopoly in the distribution and storage of digital currencies. Banking competition, already threatened for several decades, would therefore be on the way to disappearing. In addition, CBDCs raise the issue of control.

If the objectives of the fight against money laundering and illegal trafficking are affirmed, the question of the cooperation which would emerge between the tax and monetary authorities raises serious questions of the independence of the central bank. It would no longer be just a currency, it would be a fiscal currency. In some countries, the CBDC initiative is therefore borderline legal. The report specifies the following.

“Issuing a CBDC requires a legal framework that gives central banks the authority to do so. Compared to last year, the share of central banks with such legal authority has increased slightly, from 26% to 27% (Chart 9). Additionally, approximately 8% of jurisdictions are currently amending their laws or clarifying legal authority to allow this. For example, the European Commission plans to propose a regulation to establish a digital euro in the second quarter of 2023 (ECB (2023)). However, a quarter of central banks do not have the necessary legal bases and around 40% are uncertain.

Making headway – Results of the 2022 BIS survey on central bank digital currencies and crypto

CBDCs accessible via the private sector?

Therefore, it is more complicated for central banks to set up a CBDC project whose dissemination would be unique and centralized. Legislation is certainly more conducive to the dissemination of CBDCs through the already existing network of private institutions. Thus, the BIS study shows that 87% of central banks engaged in CBDC work plan to use private intermediaries. Under these conditions, the dissemination of CBDCs would be “more ethical”, but nothing ensures that central banks guarantee the independence of their power and the integrity of their original function.

For example, the Bank of England, the ECB and the Reserve Bank of India have recently proposed that a possible digital pound, euro and rupee could be distributed via the private sector. Most central banks believe that the private sector has a role to play in customer onboarding, including performing Know Your Customer (KYC) and anti-money laundering/countering the financing of terrorism procedures (AML/CFT), as well as in the provision of wallets, user interfaces and other frontline customer services. Approximately 60% of central banks also believe that recording retail transactions and updating retail balances could be left to the private sector.

Making headway – Results of the 2022 BIS survey on central bank digital currencies and crypto

Compete with cryptocurrencies?

The desire to create CBDCs is motivated by two essential elements. Indeed, the first important reason is the technological advance provided by the blockchain and the arrival of faster and more efficient exchange systems. On the other side, it is for central banks to reassert their authority over cryptocurrencies. Cryptocurrencies are a form of private currencies that compete with each other. This reaction to the centralization of the banking system is poorly perceived by the authorities. The precise investigation.

“While widely used for payments, crypto-assets, including stablecoins, can pose a threat to financial stability. […] Additionally, 60% of central banks said the emergence of stablecoins and other cryptoassets has accelerated their work on CBDCs.

Making headway – Results of the 2022 BIS survey on central bank digital currencies and crypto

As a result, central banks have a fairly critical approach to stablecoins. Additionally, the survey clarifies that most stablecoin transactions are small transactions. Transactions in stablecoins aimed at the payment of goods or services would represent a very small part of the exchanges observed.

“Aside from their use in decentralized finance (DeFi) and cryptocurrency trading, stablecoins are rarely used for payments outside of the crypto ecosystem. When used in this way, it is primarily for money transfers and retail payments. Nearly 30% of central banks reported that stablecoins are used in their jurisdiction by niche groups for money transfers, followed distantly by payments for goods and services and consumer donations. »

Making headway – Results of the 2022 BIS survey on central bank digital currencies and crypto

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