CBDCs: An Thought Whose Time Has Come?
In 1987, Nobel Prize winner James Tobin proposed the concept of a central bank digital currency for private customers. The idea was that central banks should create a public payment medium that “offers the convenience of deposits and the security of currencies”.
It was a novel idea that has only recently been taken seriously. Officials were first warming to it in response to declining cash use in some countries. An early example is Sveriges Riksbank Deputy Governor Cecilia Skingsley, who said in a 2016 speech: “The Riksbank should consider carefully meeting the public’s needs for central bank money by making it available in electronic form.”
This post is part of CoinDesk’s 2020 Year in Review – a collection of posts, essays, and interviews about the year in Crypto and beyond. Raphael Auer is chief economist in the money and economics department of the Bank for International Settlements.
Spurred on by the popularity of cryptocurrencies like Bitcoin and announcements of stablecoin projects like Libra (now Diem), many more central bankers have since joined. And certainly the decline in the use of cash during the COVID-19 pandemic has given this debate an extra boost.
As a result, research and development of CBDCs is taking place worldwide. Recently we have created a database of all publicly announced CBDC projects. By the end of November 2020, 46 monetary authorities are researching and developing CBDC in wholesale or retail (see Figure 1).
Four pilots are underway for CBDC retail programs: the People’s Bank of China, the Central Bank of the Eastern Caribbean, the Bank of Korea and the Sveriges Riksbank. A CBDC project – the sand dollar in the Bahamas – is already up and running.
What’s in store for 2021?
First, policymakers ‘attitudes toward CBDCs continued to improve over the course of 2020 – underscored by the increasingly positive tone of central banks’ speeches (see Figure 2). One cannot exaggerate how remarkable this change of mind is.
In mid-2018, the net position for the issuance of CBDC was still in the negative range (see Figure 2). In a joint report by the BIS Market Committee and the Committee on Payments and Market Infrastructures in March 2018, it was argued that “steps towards the possible introduction of a CBDC should be carefully and thoroughly examined”.
Part of the reason for this change of mind is that policymakers are now more convinced that CBDCs can be issued to commercial banks with no adverse side effects. In fact, a key report by the BIS and seven major central banks in October laid out a sort of Hippocratic oath for the issuance of CBDC – “First, do no harm” is the premise, and CBDCs are therefore viewed as evolution rather than revolution.
While the debate on how exactly this can be ensured continues, workable proposals have emerged (see a proposal by Ulrich Bindseil here). On the operational side, it is now clear that “hybrid” CBDC architectures can give the private sector a leading role in the payment system for private customers. Thanks to these new perspectives, there is a growing likelihood that CBDCs will be part of the future currency landscape.
See also: What is a CBDC?
Second, many central banks will continue to step up their development efforts in 2021. Figure 2 shows that the research and design efforts of the CBDC also increased significantly over the course of 2020. The European Central Bank (ECB) is intensifying its work on a digital euro, while the US central banking system – as outlined by Governor Lael Brainard – in the US state is in the middle of a series of research projects, including in collaboration with MIT’s Digital Currency Initiative .
Meanwhile, reports from a number of central banks continue to be released, including the ECB, Bank of England, Riksbank, Bank of Canada, and Bank of Japan. And of course the Volksbank von China has continuously expanded its pilot project.
After all, a live retail CBDC is unlikely to be launched in the New Year in a large advanced economy. From now on the big central banks – the guardians of stability – are proceeding with great caution. According to studies by the International Monetary Fund (IMF), the issuance of CBDC would also require a change in central bank law in most countries.
The change in central bank law is a slow process which, if continued, would take years and broad political dialogue. For example, when Bloomberg returned to Sweden, he recently reported that the government would launch a review process to investigate the feasibility of a CBDC. The results are expected in November 2022.
However, we are likely to see more research, pilots and announcements as central banks continue to work together and learn from each other. Even if it turns out that 2021 is not the year to announce Tobin’s “Medium with the Convenience of Deposit and the Safety of Currency” in a large advanced economy, it could certainly bring that day much closer.
The views expressed in this column are those of the author and do not necessarily reflect those of the Bank for International Settlements. It is based on BIS Working Paper 880 “The Rise of Central Bank Digital Currencies: Drivers, Approaches and Technologies”, co-authored with Giulio Cornelli and Jon Frost, and “The Central Bank Digital Currency Technology for Retail Customers”, which jointly was written with Rainer Böhme and published in March 2020 BIS Quarterly Review.
Year in Review is a collection of posts, essays, and interviews about the year in Crypto and beyond.