2023-Public-Sector-Perspectives

Why are governments and central banks interested in CBDCs? Central banks have been investigating blockchain, DLT and other associated technologies for some time, motivated by potential benefits, such as improved payments efficiency (both generally within the economy and specifically for intra-government payments and government funds dispersion, including offline in emergency situations). Central banks are also cognizant of growing consumer and business expectations for 24/7 payments and transactions, fueled by the rise of mobile banking; they are eager to meet such demands. At the same time, central banks have increased their focus on CBDCs for defensive reasons. During the pandemic, the explosion of cryptocurrency trading and the proliferation of stablecoins raised red flags for many authorities. Cryptocurrencies and stablecoins have the potential to move money outside of traditional regulated infrastructures, and therefore outside most government and regulatory control. Widespread use of dollar-denominated stablecoins is seen to potentially threaten the fiat money supply and monetary stability. The Reserve Bank of India noted that “the unabated use of crypto assets can be a threat to monetary policy objectives as it may lead to creation of a parallel economy and will likely undermine the monetary policy transmission and stability of the domestic currency”. 3 The recent instability of some cryptocurrencies and stablecoins and the onset of the crypto winter appears to have emboldened many central banks to move further and faster with their CBDC projects. In October 2022, the US Financial Stability Oversight Council noted that “crypto- asset activities could pose risks to the stability” of the financial system. 4 The same month, the Financial Stability Board emphasized the superiority of CBDCs (alongside fast payment systems and associated data architectures) over cryptocurrencies “as the basis for a monetary system”. The Bank for International Settlements (BIS) presented its future monetary system report in June 2022, which laid out new ideas for interlinking national CBDCs into multi-CBDCs. 5 What is a CBDC? • BIS has defined CBDC 2 as a digital payment instrument, denominated in the national unit of account, that is a direct liability of the central bank. • With a CBDC, both value and the information associated with it are fully integrated and held on a digital platform, which can be based on distributed ledger technology (DLT) or other technology. • ‘Retail CBDC’ is the term typically used for CBDC schemes designed for use by the general public and by businesses when making payments. • ‘Wholesale CBDC’ is the term typically used for CBDC that is used only for transactions between financial institutions. 2 https://www.bis.org/publ/arpdf/ar2021e3.htm 3 https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CONCEPTNOTEACB531172E0B4DFC9A6E506C2C24FFB6.PDF 4 https://home.treasury.gov/system/files/261/Fact-Sheet-Report-on-Digital-Asset-Financial-Stability-Risks-and-Regulation.pdf 5 https://www.bis.org/publ/arpdf/ar2022e3.htm 50 Central Bank Digital Currencies: Opportunities, Challenges and Interoperability