After Facebook shocked policymakers with its plan to launch a digital currency last year, central banks have been forging ahead with discussions on how they could create their own virtual money.
Now, they’ve come up with a rough framework for how such a system could work. On Friday Oct. 9th, the Bank for International Settlements and seven central banks, including the Federal Reserve, European Central Bank, and the Bank of England, published a report laying out some key requirements for central bank digital currencies or CBDCs.
Among the recommendations the central banks made were that CBDCs compliment — but not replace — cash and other forms of legal tender, and that they support rather than harm monetary and financial stability. They said digital currencies should also be secure, as cheap as possible — if not free — to use and “have an appropriate role for the private sector.”
The report on CBDCs comes as various central banks around the world consider their own respective digital currencies. Blockchain, the technology that underpins cryptocurrencies such as bitcoin, has been touted as a potential solution. However, cryptocurrencies have drawn a lot of scrutiny from central bankers, with many concerned they open the door to illicit activities like money laundering
In China, a country where digital wallets like Alipay and WeChat Pay have seen widespread adoption, the central bank is already partnering with a handful of private sector companies to trial an electronic currency it’s been working on for years. Meanwhile, Sweden’s central bank is working with consulting firm Accenture to pilot its proposed “e-krona” currency.
“A design that delivers these features can promote more resilient, efficient, inclusive and innovative payments,” said Benoit Coeure, the former European Central Bank official who now leads BIS’ innovation efforts.
“Although there will be no ‘one size fits all’ CBDC due to national priorities and circumstances, our report provides a springboard for further development of workable CBDCs.
It’s worth emphasizing that these central banks aren’t taking a stance yet on whether they and other institutions should issue digital currencies; they’re still looking into whether such virtual currencies are feasible. Advocates for digital currencies say they could enhance financial inclusion by onboarding people without access to a bank account. But there are concerns this could leave out commercial banks.
Central bank work around digital currencies appeared to gather steam last year after Facebook introduced its own version — libra — which is backed by a coalition of companies including Uber and Spotify. The troubled project was met with an intense regulatory backlash as well the departure of high-profile backers like Mastercard and Visa.
The group overseeing the initiative, called the Libra Association, has since scaled back its approach, opting for multiple currency-pegged cryptocurrencies instead of the previously proposed single digital coin backed by multiple currencies.