Even before COVID-19, cash payments have been decreasing, as people are now looking for alternative ways to make payments.
Looking at this, Central banks have been trusted by public for hundreds of years are actively researching the pros and cons of offering a digital currency to the public (a general purpose central bank digital currency (CBDC).
Banks including Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, Board of Governors Federal Reserve System and Bank for International Settlements have released a paper on how CBDC can used as a means of payment.
The report titled ‘Central bank digital currencies: foundational principles and core features’ also made it clear, “None of the central banks contributing to this report have reached a decision on whether or not to issue a CBDC. Instead, this report advances the foundational international work by outlining common principles and the key features a CBDC and supporting infrastructure would need in order to contribute to central bank public policy objectives.”
Banks also said that there is considerable scope for future international collaboration, knowledge-sharing and experimentation on CBDC. Simultaneous research and development of CBDC by central banks could also explore ways to improve cross-border payments, as part of the G20 roadmap (CPMI (2020)), while avoiding spillovers and unintended consequences.
“The next stage of CBDC research and development will emphasize individual and collective practical policy analysis and applied technical experimentation by central banks,” the report underlines.
CBDC design and technology framework
The report highlighted that CBDC design and technology considerations, including initial thoughts on where trade-offs lie. Far more work is required to truly understand the many issues, including where and how a central bank should play a direct role in an ecosystem and what the appropriate role might be for private participation. The speed of innovation in payments and money means that these questions are ever more urgent.
Central backed digital currencies can be an important instrument for central banks to continue to provide a safe means of payment in step with wider digitalization of people’s day-to-day lives, the report added.
Banks also said that they are considering further research in issuing a new form of money that is central bank digital currency (CBDC). A recent survey found that 80% of central banks are engaged in investigating CBDC and half have progressed past conceptual research to experimenting and running pilots. To take this forward, the central banks of Canada, Japan, Sweden, Switzerland, the United Kingdom and the United States have come together, along with the European Central Bank and the Bank for International Settlements.
A challenge in emerging market economies and advanced economies
On challenges, the report said that differences between emerging market economies and advanced economies are especially pronounced but individual jurisdictions can also vary significantly depending on their circumstances.
A CBDC system could act as an additional payment method, improving operational resilience. Compared to cash, a CBDC system might provide a better means to distribute and use funds in geographically remote locations or during natural disasters. However, counterfeiting and cyber risk present a challenge. Cash has sophisticated anti-counterfeiting features and large-scale issues rarely occur. Theoretically, a successful cyber attack on a digital CBDC system could quickly threaten a significant number of users and their confidence in the wider system (as it could for a large bank or payment service provider).
Using CBCD for cross-border payments
The G20 has made enhancing cross-border payments a priority. CPMI (2020) identifies CBDC as one area of interest for making cross-border payments using central bank money more efficient. Although many of today’s CBDC projects and pilots have a primarily domestic focus, various bilateral experiments have demonstrated the feasibility of using CBDCs for cross-border payments by various banks in 2019 and 2020, the report added.