BIS Issues Reports Providing Road Map for Interoperable Central Bank Digital Currency (CBDC) System | Practical Law

BIS Issues Reports Providing Road Map for Interoperable Central Bank Digital Currency (CBDC) System | Practical Law

The Bank for International Settlements (BIS), a global forum for central banks, issued a series of reports that are designed to function as an operating manual for a central bank digital currency (CBDC) system. The reports provide guidelines for a system that would benefit from private-public collaboration and interoperability.

BIS Issues Reports Providing Road Map for Interoperable Central Bank Digital Currency (CBDC) System

by Practical Law Finance
Published on 16 Oct 2021USA (National/Federal)
The Bank for International Settlements (BIS), a global forum for central banks, issued a series of reports that are designed to function as an operating manual for a central bank digital currency (CBDC) system. The reports provide guidelines for a system that would benefit from private-public collaboration and interoperability.
On September 28, 2021, the Bank for International Settlements (BIS), a global forum for central banks, issued a series of reports providing guidelines for central banks to create a central bank digital currency (CBDC) system. The reports outline guidelines for designing a system that would benefit from both private-public collaboration and interoperability.
The first report focuses on creating a retail CBDC with interoperability as its key feature.
The CBDC system design includes:
  • Multiple elements and functions, such as a core ledger consisting of rules for a processing infrastructure, processing providers, and user services.
  • Both private and public sector functions.
The elements of this CBDC system design consist of:
  • A core rulebook outlining CBDC principles, transactions, legal basis, risk management, and participant requirements.
  • A core infrastructure, including a CBDC ledger.
  • A processing infrastructure that would communicate with the core infrastructure functions.
  • Processing services, such as payment pre-checks, authorization, verification, security and regulatory checks, and data/analytics.
  • Payment services, such as pre-transaction access, transaction services (customer service) and post-transaction services (statements and billing).
  • Use-case arrangements and technical rules.
  • The primary suggested function highlighted in first report is interoperability, which would allow the CBDC system to interact with other traditional payment systems.
The second report focuses the system's adoption into a fast-paced technological landscape.
This report suggests:
  • Strategies for adoption that are tailored to already-existing payment landscapes and economic structures of each jurisdiction.
  • Implementation with existing technology and infrastructures to avoid requiring consumers to buy new devices to use CBDC.
The elements in this system include:
  • Safety of funds.
  • Reduced costs.
  • Offline access.
  • Security of user information.
  • Privacy from government and commercial issuers.
  • Accessibility for specific user groups and the general population.
The third report focuses on the impact that CBDC will have on traditional banking systems. The report suggests that absent limits to individual holdings, a CBDC (like other forms of digital money) could lead to higher volatility in deposits and/or a significant, long-term reduction in customer deposits. This could, under certain circumstances, affect bank profitability, lending and the overall provision of financial services. Any material loss in customer deposit funding would require banks to consider combinations of actions to try and maintain regulatory ratios and risk-adjusted profitability, possibly including:
  • Switching to alternative market-based funding sources which could be more expensive and, in some cases, less stable.
  • Reduction in assets/deleveraging.
  • Increased risk-taking to mitigate near-term margin compression.
  • Increased lending rates.
  • Actions to offset any lost fees and commissions on activities associated with customer deposits, for example, ancillary payment services. These could include actions that improve competition for customer deposits or leverage a role as CBDC intermediary.
  • Cost efficiencies (lower cost of cash handling).
These BIS reports represent an early stage of assessment of CBDC for a global standard-setting body that will play a major role in creating the framework for a global CBDC payment system. These reports are likely to provide the basis for further development of global thinking on this rapidly developing issue going forward and are likely to ultimately impact US policy in this area, as well as that of other major financial jurisdictions.