The Bank for International Settlements (BIS) says central bank digital currencies (CBDCs), which are new forms of digital fiat guaranteed by governments, could be the future of money.
In a new annual economic report, the BIS reveals that central banks are well-positioned to trigger innovative changes in the current payments infrastructure.
“Technology – in particular, in the field of digital currency – opens up opportunities for payment systems. CBDCs combine this innovative technology with the tried and tested foundation of central banks. It is the central banks’ choice to harness these forces for the common good. They can combine their role as catalysts, overseers, and operators and develop an entirely new set of payment arrangements that run on digital currencies.”
CBDCs may be based on blockchain technology, which powers cryptocurrencies, to create digital versions of traditional fiat money. They have been compared to stablecoins and are designed to enable quick and easy domestic and cross-border transactions 24-hours a day.
The report also highlights the pros and cons of adopting CBDCs.
“Such an innovation would provide general users with direct access to central bank money and potentially offer a safe, reliable, and universally accessible settlement instrument – just as cash does now. The benefits would have to be carefully weighed against the implications for the functioning of the financial system such as the risk of disintermediation, including accelerating bank runs at times of stress and a potentially larger central bank footprint in the financial system.”
To be successful, the BIS report says CBDCs must have certain features that make cash attractive.
“The basic elements are trust in the issuing entity, legal tender status, guaranteed real-time finality, and wide-availability.”
In addition, the BIS points out that CBDCs must be user-friendly, resilient against cyberattacks, and counterfeit-proof.