A Joint Report by BIS, IMF and World Bank Calls For Global Cooperation On CBDC

The Bank for International Settlements, the World Bank, and the International Monetary Fund (IMF) have called for nations to enhance cooperation in the early stages of CBDC in a joint report. The report asks for collaboration between various countries in the design of CBDC. According to the BIS report, although every country/jurisdiction will have its legal frameworks, the design should be the same. They believe this will make it easier for the currency system to work across borders. 

In June 2022, BIS, based in Basel, Switzerland, raised concerns that countries will not agree with each other regarding the CBDC design. The report adds that there should be interoperability between the fiat money system and the digital currency to promote the coexistence of CBDC with other forms of money. 

As countries embark on creating CBDC, the central banks have to decide who gets to use the digital currency directly. They also determine whether private companies or institutions will have access to the CBDC. According to the report, central banks should come up with and agree on common standards. These will allow people to transact efficiently with one another across borders. 

When creating a CBDC, central banks must agree on common standards and systems. These will allow people to transact with one another irrespective of their location. Collaboration is vital to improve efficiency, enhance cross-border payments and allow financial inclusion. Over 100 countries representing more than 95% of the global GDP are exploring CBDCs. 

BIS principals on CBDCs

The BIS suggest these principles that central banks should follow as they create CBDCs. 1. Central banks should not harm. 2. They should enhance efficiency. 3. Increase resilience. 4. Ensure coexistence. 5. Enhance interoperability with other systems. 6. Boost financial inclusion. 

What are the different CBDC designs being considered?

A CBDC is a digital token like cryptocurrency, but it is issued and regulated by the central bank. The CBDC is also pegged against the value of the individual country’s fiat currency. There are three different design choices for CBDC being considered. The design choice is based on who issues the CBDC, how it will be distributed, and where the digital currency will be held. The different designs include: 

Direct model

In this design, the central bank issues the digital currency directly to the customers. The central bank acts as a regular bank, and people open accounts there. The bank will also be involved in retail payments directly. The downside is that this design will put more pressure on the central bank. It has to manage customer information, onboarding, and KYC (know your client). The central bank will also be involved in conducting anti-money laundering checks (AML) which is an additional operational cost. 

Hybrid CBDC model

In this model, regular banks or private institutions handle all retail payments and account openings. This means that private entities handle the customer onboarding process. This model also represents a liability to the central bank because it keeps a centralised ledger of all transactions. The customer’s CBDC assets are not tied to the regular bank through this model. Therefore you can claim 100% of all your digital assets as legal tender from the central bank. 

Indirect CBDC model

The indirect model looks like our current financial system, where regular banks reissue central bank money to the customers. They also handle all customer registration (onboarding), compliance checks, and retail payments. In this model, your CBDC assets are not on the central bank’s balance sheet meaning that the regular banks hold all the liability. The disadvantage is that customers will not be able to claim 100% of their CBDC assets. Each CBDC model has risks, including interoperability (ability to work with other existing systems), financial stability, and data protection and privacy. One of the major speculated risks is the potential of CBDC substituting the local currency. 

Will cooperation help?

Most nations are still undecided on what CBDC design to adopt. If they cooperate early enough, this means they have a clean slate to introduce a regionally or universally accepted CBDC design. Countries can create a common hub linking different CBDC systems through cooperation. This will help improve cross-border payments. Cooperation in the design will also lead to a higher adoption rate as various jurisdictions can make payments and transact with each other easily. The collaboration will increase interoperability. CBDCs are integrated with existing payment systems such as fiat currency. This will enable people to make domestic and international payments effortlessly. By cooperating and coming up with a common design, central banks will make payments and transactions faster, cheaper, and more inclusive to the citizens. 

The move toward CBDC adoption

About 100 countries are exploring CBDCs. Some are researching its benefits and testing implications, and a few are already using CBDCs in their financial system. Countries already launched CBDC include the Bahamas, Nigeria, the Eastern Caribbean nations (ECCU), and Jamaica. China is also ramping up efforts to introduce its CBDC, the digital yuan. Bahamas was the first country to launch a CBDC known as the “sand dollar” in 2020. Nigeria became the first African country to introduce its digital currency, the e-naira, in October 2021. CBDC’s adoption has been slow as many countries shy away from the digital currency due to key concerns such as: 

• Privacy
• Security
• Financial inclusion
• Interoperability
• Technology

Most countries have expressed interest in CBDC but have taken the wait-and-see approach. They are holding back until some crucial answers on the possible financial implications are fully examined. 

Conclusion

Although there are risks, collaboration in CBDC design effectively minimises some implications that could occur if each nation had a different design. Cooperation will make it easier for systems to work across borders, making payments and transactions faster, cheaper, and seamless. As countries look to launch CBDCs in the future, they should have conversations on how best to collaborate and develop regional systems. CBDC adoption among various jurisdictions will mainly depend on the design they choose.