The Bank for International Settlements (BIS) released a report on central bank digital currencies (CBDCs) in emerging market economies (EMEs) such as Hong Kong, Brazil, South Africa, United Arab Emirates (UAE), and Mexico.
The report was a compilation of papers from a meeting of 26 deputy governors from emerging economies in February. The 21-page report chronicled key areas such as the motivations for CBDC issuance and potential concerns about the key designs that CBDCs should integrate.
According to the report, the desire to enhance financial inclusion and provide a digital iteration of currencies are part of the reasons for the creation of CBDCs. Improving the efficiency of domestic payments was cited as an upside by the BIS, with central banks keen on using them to “mitigate some of the market imperfections inhibiting inclusion.”
“The introduction of a CBDC as an alternative means of payment can affect the competitive structure of the underlying payment system,” reads the report. “Depending on the design, it could improve competition and reduce costs; it could also help prevent walled gardens.”
The BIS identified salient concerns related to the issuance of CBDCs, ranging from financial, operational, and macroeconomic concerns. Cybersecurity risks, disintermediating banks, low user adoption, and mandating inferior technology are some of the concerns raised by the Banks.
Per BIS, cash has anti-counterfeiting features that CBDCs lack, and a breach into the system could be fatal for the economy. Operational burdens of running centralized digital assets by central banks were identified and the lack of users of the CBDC could stifle the economic reforms that banks hoped to achieve.
The elements of a proper CBDC
After identifying the use cases and challenges of CBDCs, the BIS delved into the fundamental designs of CBDCs. According to the Bank, CBDCs can either be retail or wholesale, with the latter being a general-purpose asset and the former being available for specific institutions.
Presently, most central banks are leaning towards retail CBDCs and are proceeding without plans to offer interest on CBDCs. Moreover, 20 out of the 26 participating banks are unsure whether or not they will impose limits on usage and holdings because of the public policy issues that could be raised. The report noted that there seems to be a consensus on the preference for a two-tiered system with central banks providing the main structure and commercial banks delivering the “customer-facing activities.”
Other key factors in the CBDC design include the debate over distributed ledger technology (DLT) or centralized ledger technology (CLT), the nature of data governance, and domestic interoperability.
Around the world, countries are making a frantic push for the development of CBDCs. Zambia, Iran, and a handful of other countries are at various stages in their CBDC experience, with China’s digital yuan being widely anticipated. Currently, the Bahamas and Nigeria are among the early countries to have digital versions of their currencies.