Thank you so much for asking me to speak at the Bund Summit. I am only sorry that I cannot be with you in person in Shanghai.
Today I would like to share some thoughts on a topic where the whole world is looking for China: central bank digital currency, or “CBDC”. We have just had the annual (and virtual) International Monetary Fund and World Bank meetings. And I open with a question that was on the mind of many central bankers there. Who wants CBDC?
Apparently - many people. Millions of people signed up to the People’s Bank’s CBDC red letter lottery in Shenzhen. The lucky winners were able to use thousands of shops participating in the pilot. Outside China, industry groups are advocating digital cash under various forms. The Libra stablecoin project officially wants to “integrate” CBDCs. Technology firms, banks, NGOs and consultancies are now jostling to ride the next wave of innovation. The IMF and the World Bank are reflecting on the international consequences of CBDC, and the newly adopted G20 action plan to enhance cross-border payments hints at CBDC being part of the solution.
Digital cash could be a useful tool – combining the safety of central bank money with electronic convenience. Earlier this year, 80% of the world’s central banks had already started to conceptualise and research the potential for CBDCs, 40% were building proofs-of-concept, and 10% were deploying pilot projects.
Yet safe electronic money is hardly revolutionary. For most people in advanced economies, good banking services with deposit insurance are freely available.
So why issue a CBDC? Especially when concerns have been raised that a super-safe, super-convenient new kind of money could crowd out bank deposits. That might starve an economy of credit in normal times and even snowball into faster-than-ever bank runs through easy withdrawals of savings.
Everyone has in mind Giuseppe Tomasi di Lampedusa’s famous line in The Leopard: “If we want things to stay as they are, things will have to change.” If central banks want to keep delivering monetary and financial stability in a changing technological environment, they will have to do it differently – and harness technology.
For a start, a CBDC would ensure that, as our economies go digital, the public would retain access to safe central bank money, just as they use banknotes today. And this will be in a form that they could use freely in their daily lives. A digital banknote can do more than a paper one. It could help central banks promote payment diversity, help make cross-border payments faster and cheaper, foster financial inclusion, and even facilitate fiscal transfers in times of crisis, such as the current Covid-19 pandemic. CBDC can also help uphold stability at the heart of our financial systems – in financial market infrastructures. It can help ensure that transactions remain settled with central bank money in new and different – say, tokenised - technological environments.
Balancing these opportunities and risks is a significant practical and technical challenge. A recent report from the Bank for International Settlements (BIS) and the central banks of Canada, the euro area, Japan, Sweden, Switzerland, the United Kingdom and the United States sets out the principles and offers a guide to navigating these uncharted waters. It also puts forward the equivalent of a monetary Hippocratic oath – pledging that any potential CBDC should “do no harm” to central banks’ monetary and financial stability mandates. In fact, it goes one step further, stating that a CBDC should complement – not replace – cash and safe private money in a new monetary ecosystem that nurtures innovation and private competition.
This is the real opportunity for a CBDC – it is more than just another way to pay. It could be the evolutionary foundation for new publicly accessible platforms to encourage diverse ecosystems of banks and fintechs, avoiding the “winner takes all” networks that we have seen emerging in our daily digital lives, and making sure that innovation benefits the many, not just a few.
The exact design will vary by jurisdiction, as well as the extent to which a CBDC will seek to be a neutral means of payment or a new way to do monetary policy, or choices related to user privacy. Answers will vary by central bank, as will many other design choices, and will likely involve extensive consultations with the government, the industry and the public at large.
But if a CBDC is a matter of national taste, why (and how) should central banks work together across borders? That is where the BIS and its Innovation Hub come in. The BIS is owned by, and run for 63 central banks around the world, including the People’s Bank of China.
We started out in 1930 but we focus on the future. We are serious about exploring CBDCs because central banks realise that this provides an essential opportunity to pool knowledge and resources as well as build systems that complement each other and thereby remove, or at least reduce, many of the frictions that exist today for smaller cross-border payments. Money is at the heart of sovereignty and in any country, launching a CBDC will always be a political decision – but when preparing for it, cooperation is of the essence.
The BIS Innovation Hub is building technological capacity and skills through our centres around the world – currently in Hong Kong SAR, Singapore and Switzerland, and soon also in Frankfurt and Paris, London, Stockholm and Toronto. Together with our host central banks, we are utilising our technical capacity to design workable solutions. By the end of this year, we plan to publish our first wholesale CBDC proof-of-concept with the Swiss National Bank. Looking ahead, we plan to build on central banks’ experiences with cross-border use of CBDC, including between the HKMA and the Bank of Thailand.
This work will pave the way for experiments on the building blocks of a retail CBDC to inform central banks’ design and technological choices. These building blocks might include interlinkages with existing payment systems, application programming interfaces for distribution, digital identity rails, compliance monitoring, cyber and counterfeiting resilience and offline functionality. And to do that, we will grow our own blockchain capacity.
This complex technical work is, above all, directed towards practical solutions rather than the conceptual research of recent years. Our CBDC strategy at the BIS Innovation Hub is built on international cooperation. As we can see, China and other countries are leading the way in CBDCs, but through collaboration between central banks, every country can learn and we can progress together.
So who wants CBDC? They will not usher in an age of prosperity or solve a raft of societal issues – this is beyond the scope of any currency. They are not a revolution or an end in themselves. But CBDCs might be a way of achieving a more inclusive, accessible, safe and convenient form of money. They might support a more diverse payment ecosystem, nationally and internationally and, if developed astutely, provide a new form of global public good. Those are things many people would want.