The Central Bank digital currencies offer unique features of central bank money settlement finality, liquidity, and integrity. According to BIS, this makes CBDC a good opportunity for monetary systems to adopt a new payment technology.
Recently several developments have placed several potential innovations involving digital currencies high on demand. First, growing attention is received by bitcoin and other cryptocurrencies. The second is the debate on stablecoins. The third is the entry of large technology firms into payment services and financial services.
Stablecoin attempts to import credibility by being backed by real currencies. Stable coins are ultimately only an appendage to the conventional monetary system and not a game-changer. These are only as good as the governance arrangement and can potentially fragment the liquidity of the monetary system.
The ultimate benefits of adopting a new payment technology depend on the competitive structure of the underlying payment system. CBDCs and open platforms are the most conducive to a virtuous circle. A Few countries, including China, are working on CBDCs.
BIS on Role of CBDC in monetary systems
BIS Annual economic report 2021 Hyun song shin report “By now it is clear that cryptocurrencies are a speculative asset and in many cases are used in facilitating money laundering, ransomware attack, and other financial crimes. Bitcoin, in particular, a few redeeming public interest attributes when also considering its wasteful energy footprint.’
CBDC is a concept whose time has come,” he says. “They open a new chapter for the monetary system by providing a technologically advanced representation of central bank money. In doing so, they preserve the core features of money that only the central bank can provide anchored in the foundation of trust in the central bank.”
“Cooperation on CBDC design will also open up new ways for the central bank to counter foreign currency substitution and strengthen monetary sovereignty,”
The outcomes depend upon the rules governing the payment system and whether these will result in an open payment platform.
BIS analysis finds that CBDC would best function as part of a two-tier structure. The central bank would operate the core of the system and ensure its safety and efficiency. On the other hand, the private sector, such as banks and payment service providers, would compete to develop innovative use cases.
The careful design would balance protecting users against abuse of personal data to protect the payment system against crime.
How CBDC helps Central banks?
Central banks stand at the centre of a rapid transformation of the financial sector and the payment system. Innovations such as cryptocurrencies, stablecoins and the walled garden ecosystems of big techs all tend to work against the public good element that underpins the payment system.
Central banks around the world are working to safeguard public trust in money and payments during this period of upheaval. To shape the payment system of the future, they are fully engaged in the development of retail and wholesale CBDCs, alongside other innovations to enhance conventional payment systems. The aim of all these efforts is to foster innovation that serves the public interest.
Also Read: US House Bans Fed from Issuing CBDC for 2026 Defence Policies
