Central bank digital currencies can offer finality, liquidity, integrity: BIS

New Delhi: Central bank digital currencies can offer “finality, liquidity and integrity”, and could provide strong data governance as well as privacy standards based on digital identities, the Bank for International Settlements (BIS) said on Wednesday.

The backing for such currencies by the Switzerland-headquartered BIS, which is also known as the central bank of all central banks, also comes at a time when there are ongoing intense discussions in India and many other countries on cryptocurrencies.

Noting that central banks stand at the centre of a rapid transformation of the financial sector and the payment system, BIS said Central Bank Digital Currencies (CBDCs) represent a unique opportunity to design a technologically advanced representation of central bank money, one that offers the unique features of finality, liquidity and integrity.

“Innovations such as crypto currencies, stable coins and the walled garden ecosystems of big techs all tend to work against the public good element that underpins the payment system.

“The DNA (Data-Network-Activities) loop, which should encourage a virtuous circle of greater access, lower costs and better services, is also capable of fomenting a vicious circle of entrenched market power and data concentration. The eventual outcome will depend not only on technology but on the underlying market structure and data governance framework,” BIS said.

On Wednesday, BIS released a chapter titled ‘CBDCs: an opportunity for the monetary system’ that is part of its Annual Economic Report 2021.

To realise the full potential of CBDCs for more efficient cross-border payments, BIS said international collaboration will be paramount.

“Cooperation on CBDC designs will also open up new ways for central banks to counter foreign currency substitution and strengthen monetary sovereignty,” it A few countries, including China, are working on CBDCs.

An analysis BIS found that CBDCs would best function as part of a two-tier system where the central bank and the private sector work together to do what each does well.

From a practical perspective, the BIS said the most promising CBDC design would be one tied to a digital identity, requiring users to identify themselves to access funds. A careful design would balance protecting users against the abuse of personal data with protecting the payment system against money laundering and financial crime, it added.