CBDCs with offline payment functionality could be a powerful digital payment instrument. ...However, providing offline payments is complex and involves a number of technology, security and operational considerations. Offline payment solutions could operate in three modes, which refer to how the solution would connect online if and when required. They could be based on tamper-resistant hardware, software or a combination of both. In sum, the BISIH projects on retail CBDC are experimenting with (i) the most promising CBDC model: a two tier model with public-private partnership; (ii) the most fundamental feature: privacy; and (iii) the greatest challenge: cyber security.
Lessons learnt on CBDCs, Report, July 2023, Bank for International Settlements - Innovation Hub
From the Bank of England’s point of view, our main motivation for a retail CBDC ...would be to promote the singleness of money by ensuring that the public always has the option of going into fully functional central bank money that can be used in their everyday lives. […] Wholesale central bank money – accounts at the Bank of England – is an extremely flexible thing. It plays a major part in implementing monetary policy, preserving financial stability through its characteristics as the ultimate liquid asset, and every day it is the engine to achieve settlement finality in payments. Versatility is a good description. Wholesale finance is an area where in my view we can say with great confidence that we will want to encourage an expansion and enhancement of the use of wholesale enhanced digital money. As part of this, we want to maintain the ability for wholesale financial transactions to settle in central bank money, the safest form of money.
New prospects for money, speech by Andrew Bailey, Governor of the Bank of England
Quantum computers represent a serious threat for the financial system.... If they become practicable, they could be used to compromise the security of the current mainstream cryptographic protocols upon which the financial system relies to secure data and transactions. […] While functional quantum computer are not yet available, the security threat needs to be urgently addressed. Already, malicious actors can intercept and store confidential, classically encrypted data with the intention of decrypting it later when quantum machines become powerful enough to do so. This means that data stored or transmitted today are, in fact, exposed to “harvest now, decrypt later” attacks by a future quantum computer. The long-term sensitivity of financial data means that the potential future existence of a quantum computer effectively renders today’s systems insecure. The aim of Project Leap is to help secure the financial system against this threat. It is already feasible to implement quantum-resistant cryptographic protocols. […] The first phase of Project Leap successfully established a quantum-safe environment in a financial systems context. As this has been achieved in a test environment, more work will be needed to explore complex real-life environments.
Project Leap: Quantum-proofing the financial system, June 2023, BIS Innovation Hub, Banque de France and Deutsche Bundesbank
The ability to make offline payments whit CBDC has attracted increased interest among central banks... as investigation into, exploration of and expectations for CBDC have developed. Many central banks view offline capability as a potential way to achieve other objectives such as financial inclusion, universal access, payment system resilience and privacy. […] An offline payment with CBDC is defined as a transfer of retail CBDC value between devices that does not require connection to any ledger system, often in the absence of internet or telecoms connectivity. […] Offline payments with CBDC could offer some of the user experience and features of physical cash payments, but in the digital space. For example, funds could be loaded into a digital wallet from an ATM in almost the same manner as we load notes into a physical wallet. However, some features of cash, such as anonymity, may not be fully achievable in practice.
Project Polaris: A handbook for offline payments with CBDC, May 2023, BIS Innovation Hub
We have previously stated that it should be possible to purchase vital good using cash as legal tender.... Among other things, the inquiry now proposes making it possible to pay taxes and purchase medicines using cash. Our proposals also covers essential groceries and fuels. […] Digitalisation is moving forward very rapidly and we are still seeing a decline in the use of cash. Not least from an emergency preparedness perspective, it is important to clarify the government’s role in the payment market to ensure that the general public is able to make payments even during crises or disruptions. Work on central bank digital currencies has accelerated strongly in recent years.
Discussion by Aino Bunge, Deputy Governor of the Sveriges Riksbank
To support American businesses and households,... the Federal Reserve Board on Sunday announced it will
make available additional funding to eligible depository institutions to help assure banks have the ability
to meet the needs of all their depositors. This action will bolster the capacity of the banking system to
safeguards deposits and ensure the ongoing provision of money and credit to the economy.
The Federal Reserve is prepared to address any liquidity pressures that may arise.
The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, saving associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.
Press Release – Federal Reserve Board
In line with “The Bank of Japan’s Approach to Central Bank Digital Currency” ...released in October 2020, the Bank of Japan has been conducting experiments on Central Bank Digital Currency (CBDC) since April 2021. The Bank will complete the Proof of Concepts, through which it has been confirming the technical feasibility of the basic functions of a CBDC, in March 2023, as initially scheduled. Following this, in April 2023, the Bank will launch a pilot program. In the pilot program, the Bank will develop a system for experiments, in which a central system, intermediary network systems, intermediary systems, and endpoint devices are configured in an integrated manner.
Commencement of CBDC Experiments: Pilot Program, February 2023, Bank of Japan
A UK central bank digital currency – a ‘digital pound’ – would be a new form of digital money ...for use by households and businesses for their everyday payments needs. As part of the wider landscape of money and payments it would sit alongside, not replace, cash – a digital counterpart to familiar, trusted banknotes and coins, subject to rigorous standard of privacy and data protection. A digital pound would help to ensure that central bank money remains available and useful in an ever more digital economy, continuing to bolster UK monetary and financial stability while safeguarding the UK’s monetary sovereignty in a changing global financial system.
The digital pound - Consultation paper, February 2023, Bank of England and HM Treasury
The events of the past year have been marked by significant volatility and the exposure of vulnerabilities ...in the crypto-asset sector. These events highlight a number of key risks associated with crypto-assets and crypto-asset sector participants that banking organizations should be aware of, including: ● Risk of fraud and scams among crypto-asset sector participants. ● Legal uncertainties related to custody practices, redemption, and ownership rights, some of which are currently the subject of legal processes and proceedings. ● Inaccurate or misleading representations and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance, and other practices that may be unfair, deceptive, or abusive, contributing to significant harm to retail and institutional investors, customers, and counterparties. […] Given the significant risks highlighted by recent failures of several large crypto-asset companies, the agencies continue to take a careful and cautious approach related to current or proposed crypto-asset-related activities and exposures at each banking organization.
Joint Statement on Crypto-asset Risks to Banking Organizations- Fed, FDIC, and OCC
The share of cash payments at the point of sale in terms of volume has declined in recent years. ...This decline accelerated during the pandemic. In 2022, 59% of transactions were carried out using cash. Three years earlier the share of cash transactions was 72%, in 2016 the figure was 79%. However, cash remained the most frequently used method for payments at the POS in the euro area.
Study on the payment attitudes of consumers in the euro area, Report, December 2022, ECB
Part of the population does not have access to digital payment methods and therefore has to use cash. ...Today, it is difficult for these people to pay their bills or to redeem payments, for example for pensions. This is something that the government and Riksdag need to address urgently. The ability to buy vital goods and services using cash must also be legally protected.
Payments Report 2022, December 2022, Sveriges Riksbank.
Almost half of euro area consumers say they prefer to pay with cashless means of payment, such as cards. ...We will continue to provide cash, but if it is used less and less for payments, public money could ultimately lose its role as the monetary anchor for the hybrid model, threatening its key function in securing trust in payments, with implications for the economy. Payments are a public good that is simply too important to be lest to the market. […] The digital euro is more than just a Eurosystem initiative, it is a common European project. It would allow us to ensure that money and payments remain trusted, secure and efficient in a rapidly changing digital environment. And by doing so, the digital euro would essentially serve wider public policy objectives, such as strengthening Europe’s strategic autonomy and economic efficiency.
Speech by Christine Lagarde, President of the ECB
Wholesale CBDC refers to settlement of interbank transfers and related whole transactions in central bank reserves. ...But some misinterpret “wholesale CBDC” to mean any large-value payment in central bank money, regardless of who is making and receiving payment. Second, there is a widespread misconception that wholesale does not yet exist. In fact, central bank money has been available in digital form for wholesale transactions between banks for decades. This misconception is fueled by the commonly held assumption that wholesale CBDC needs to be operated using DLT. But wholesale CBDC is not synonymous with DLT, as it can be based on any digital technology.
Speech by Fabio Panetta, Member of the Executive Board of the ECB.
Finally, central banks face a tension between too much and too little adoption. ...While safeguards such as holding limits or tiered remuneration have the potential to avoid excessive use and reduce the risk of disintermediation, it is important to understand their effects on user adoption. More generally, the rapid rise in electronic payments implies that user preferences are shifting rapidly as new means of payment are becoming available. However, relatively little is known regarding the value end-users attribute to certain features, including privacy and the convenience from bundling payments with other services.
Ahnert et al, The economics of central bank digital currency, ECB WP 2713 /Discussion Papers/.
In the Eurosystem, we are currently working to establish how this potential can be harnessed. ...The initial focus of the work is on using the digital euro within the euro area. Should it come to fruition, a digital euro is intended to enable simple payments in everyday life – just like we’re familiar with when we use cash, but in digital form. It should therefore be usable in both retail outlets and when making purchases online. Equally, it should be possible to use the digital euro for cashless payments from person to person or payments made between individuals and public authorities. In the Eurosystem, we have identified two possible design options that would make the digital euro available for these purposes: an online version allowing payments to be processed by a third party and an offline version in which payments are made directly from person to person.
Speech by Joachim Nagel, President of the Deutsche Bundesbank
The future monetary system should meld new technological capabilities ...with a superior representation of central bank money at its core. Rooted in trust in the currency, the advantages of new digital technologies can thus be reaped through interoperability and network effects. This allows new payment systems to scale and serve to real economy. The system can thus adapt to new demands as they arise – while ensuring the singleness of money across new and innovative activities.
Annual Economic Report – III. The future monetary system, Bank for International Settlement
CBDCs, if adopted, would be the first new type of central bank liability for centuries. ...They could have important implications for the size, composition and risk profile of our balance sheets; for the monetary policy transmission mechanism, and for monetary control. We need to understand these effects, and build them into the design of CBDCs and our operational toolkits. But, by themselves, balance sheet considerations do not obviously present any ‘redline’ arguments against CBDC adoption, if that is the chosen way forward. Indeed, while the technologies for such currencies would be new, the use of the central bank balance sheet to provide state-backed transactional money is one of our most longstanding functions. The dog may be old, but it can still perform new tricks!
Speech by Andrew Hauser, Executive Director for Markets, Bank of England
As we assess the future digital financial system, ...it is prudent to consider how to preserve ready public access to safe central bank money, perhaps through the digital analogue of the Federal Reserve’s issuance of physical currency. At present, consumers and businesses do not consider whether the money they are using is a liability of the central bank, as with cash, or of a commercial bank, as with bank deposits. Confidence in commercial bank money is built upon deposit insurance, banks’ access to central bank liquidity, and banking regulation and supervision.
Lael Brainard, Vice Chair Board of Governors of the Federal Reserve System, Statement
Nine out of 10 central banks are exploring central bank digital currencies (CBDCs), ...and more than half are now developing them or running concrete experiments. In particular, work on retail CBDCs has moved to more advanced stages. Both Covid-19 and the emergence of stablecoins and other cryptocurrencies have accelerated the work on CBDCs – especially in advanced economies, where central banks say that financial stability has increased in importance as a motivation for their CBDC involvement. Globally, more than two thirds of central banks consider that they are likely to or might possibly issue a retail CBDC in either the short or medium term.
Kosse and Mattei, Gaining momentum – Results of the 2021 BIS survey on CBDC, BIS Paper No 125.
An e-krona, regardless of design and technology, will mean that the public has access, ...to a new form of money issued by the Riksbank. The different issues relating to an e-krona are often complex, some from a purely technical perspective, others from a policy perspective and others with regard to how responsibilities and roles should function in a distributional model for the e-krona. Add to this the legal issues that need to be resolved with regard to a new form of money. During Phase 2, many of these issues have been addressed and for the pilot project’s purpose of increasing the Riksbank’s knowledge, the work has been valuable..
E-krona pilot Phase 2, Report, Sveriges Riksbank.
Risk-freeness, a feature that sets the digital euro apart from any other digital payment method ...currently available, is appreciated, but many participants did not fully understand its intrinsic added value. Unsurprisingly, most did not see a difference between central bank money and commercial bank money – both were seen as safe and secure, particularly as amounts up to €100,000 in their bank are protected by public deposit guarantees, something which the vast majority were actually unaware of.
Study on New Digital Payment Methods, Report, Kantar Public (commissioned by the ECB)
Sovereign money is at the core of a well-functioning financial system, ...macroeconomic stabilization policies, and economic growth. My Administration places the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC. These efforts should include assessments of possible benefits and risks for consumers, investors, and businesses; financial stability and systemic risk; payment system; national security; the ability to exercise human rights; financial inclusion and equity; and the actions required to launch a United States CBDC I doing so is deemed to be in the national interest.
President Joseph Biden, Ensuring Responsible Development of Digital Assets, Executive Order
The European Central Bank is the custodian of the euro. ...It is our job to keep banknotes secure and safeguard the supply of euro cash to the economy, as well as investigating innovative and complementary forms of payment. Last year, we launched the digital euro project. We will investigate how a digital euro could offer a convenient, cost-free means of payment, allowing people to pay anywhere in the euro area with risk-free digital money – for example, when making payments online, which preclude the use of cash. In any event, a digital euro would complement cash, not replace it.
Speech by Christine Lagarde, President of the ECB.
The different types of money carry different amounts of credit and liquidity risk. ...Commercial bank money has very little credit or liquidity risk due to federal deposit insurance, the supervision and regulation of commercial banks, and commercial banks’ access to central bank liquidity. Nonbank money lacks the full range of protections of commercial bank money and therefore generally carries more credit and liquidity risk. Central bank money carries neither credit nor liquidity risk, and is therefore considered the safest form of money.
Money and Payments: The U.S. Dollar in the Age of Digital Transformation, Discussion Paper, Board of Governors of the Federal Reserve System
The soul of money is trust. So the question becomes: which institution is best placed to generate trust? ...I will argue that central banks have been and continue to be the institutions best placed to provide trust in the digital age. This is also the best way to ensure an efficient and inclusive financial system to the benefit of all.Speech by Augustin Carstens, General Manager of the BIS.
Major operational incidents in payment systems suggest the need to improve their resiliency. …Meanwhile, as payment infrastructures become more digitalized, integrated, and interdependent, they require an even higher degree of resilience. Moreover, risks that could trigger major disruptions have become more acute given the rise in power outages, cyber incidents, and natural disasters. International experiences suggest the need to strengthen reliability objectives, redundancies, assessment of critical service providers, endpoint security, and alternative arrangements. Khiaonarong et al,
Operational Resilience in Digital Payments: Experiences and Issues, IMF WP/21/288, Monetary and Capital Markets Department
Khiaonarong et al, Operational Resilience in Digital Payments: Experiences and Issues, IMF WP/21/288, Monetary and Capital Markets Department
In recent years, a phenomenon referred to as the “paradox of banknotes” …has been observed worldwide: despite reduced opportunities to pay in cash due to the increase in cashless payments such as payment by credit card, the amount of banknotes in circulation has increased. Reasons that have been highlighted include the decline in the opportunity costs of holding cash amid the low interest rate environment as well as increased precautionary demand due to heightened economic uncertainty.
Yoshizawa et al, Development in Banknotes in Circulation since the Start of the Pandemic, Bank of Japan Review.
Cost of payments have generally fallen over time, but surprisingly, not by much – …credit card networks still routinely charge merchants service fees of 3 percent, and card revenues make up over 1 percent of GDP in the United States and much of Latin America. High transaction costs can attenuate economic activity and commerce. Auer et al, Why Central Bank Digital Currencies? Liberty Street Economics, Federal Reserve Bank of New York.
Auer et al, Why Central Bank Digital Currencies?
Liberty Street Economics, Federal Reserve Bank of New York.
No decision has been made on whether to introduce a CBDC in the UK, …which would be a major national infrastructure project. In April 2021, the Bank and HMT initiated the joint CBDC Taskforce to coordinate the exploration of a potential UK CBDC. […] If the results of this ‘development’ phase conclude that the case for CBDC is made, and that it is operationally and technologically robust, then the earliest date for launch of a UK CBDC would be in the second half of the decade.
Statement on Central Bank Digital Currency next steps– HM Treasury and the Bank of England.
The Banque de France launched its own experimentation program on the use of a wholesale CBDC. …The program explored how a wholesale CBDC would answer the demand for secure settlement on blockchains, expressed by market participations, […] This report shows how a wholesale CBDC could be part of central banks’ strategies to accompany the rise of tokenized finance. […] Finally, the experiments’ findings highlight that a wholesale CBDC should be considered further, in particular in view of complementing the Eurosystem’s ongoing work on a digital euro for retail purposes.
Wholesale Central Bank Digital Currency experiments with the Banque de France: Results & key findings – Banque de France.
The cash paradox – In several advanced economies, the demand for cash is increasing, …at the same time as the percentage of payments in cash is declining in favor of cards and digital payments. This is a phenomenon known as the cash paradox. The paradox is explained by the general public wanting to keep cash as savings, especially in times of crisis. The paradox is visible in the statistics on the volume of cash in circulation, where the volume of cash in in higher denominations, which are more suitable for savings, is increasing, while the volume of cash in smaller denominations is declining. Payments Report 2021, Sveriges Riksbank.
Payments Report 2021, Sveriges Riksbank.
77% of participants surveyed in April 2021had never heard of the digital euro before. … A fallow-up survey at the end of July found that awareness of the digital euro had already grown significantly, with 44% of respondents saying that they had heard of it. The Bundesbank’s experts take this as a sign that attitudes and perceptions surrounding the digital euro could yet change as time goes by and the general public becomes more informed. […] July 2021 saw the ECB Governing Council decide to launch the investigation phase of a digital euro project. The decision as to whether a digital euro will actually be introduced will not be made until that investigation phase is complete. Monthly report – October 2021, Deutsche Bundesbank.
Monthly report – October 2021, Deutsche Bundesbank.
The BIS Innovation Hub is helping to foster the international development of CBDC. … Our centers in Hong Kong SAR, Singapore and Switzerland are building six proofs of concept, or prototypes, with ten central banks in Asia, Europe, the Middle East and Africa, looking at different types and uses of CBDC. We are looking at wholesale CBDC, which may be used only by central banks and large financial institutions, to facilitate cross-border payments and avoid the use of the correspondent banking system that we all agree is slow, opaque and expensive. And we are investigating the digital equivalent of cash – general purpose (or retail) CBDC. Speech by Benoit Coeure, Head of the BIS Innovation Hub.
Speech by Benoit Coeure, Head of the BIS Innovation Hub.
In the jurisdiction represented by this group of central banks, no decision regarding …whether or not to issue a CBDC has been made and discussion are still underway regarding design choices. If jurisdictions decide to issue a CBDC, in most cases the actual introduction of CBDC could be some years away. In the interim providers of private money and tokens are expected to continuing developing and expanding their service offerings. CBDCs: financial stability implications, Report no 4,
Group of central banks and BIS.
CBDCs: financial stability implications, Report no 4,
Group of central banks and BIS.
If potential CBDCs are to achieve their policy goals, they would need to be adopted …by users and accepted by merchants. […] A CBDC would need to be adopted and used if it is to fulfil public policy goals that motivate its issuance. Integral to achieving adoption and use of a general purpose CBDC in a jurisdiction would be understanding and serving current and future user needs in a fast-changing payments landscape. CBDCs: user needs and adoption, Report no 3,
Group of central banks and BIS.
CBDCs: user needs and adoption, Report no 3,
Group of central banks and BIS.
If the central bank were to play too operational or dominant a role in the ecosystem, …private intermediary participation could be curtailed with a reduction in the diversity, innovation and efficiency of the system (potentially also giving rise to legal or constitutional questions). To avoid negative outcomes while still maintaining access to central bank money, interoperability with other systems and convertibility with other types of robust private money would be necessary CBDCs: system design and interoperability, Report no 2,
Group of central banks and BIS.
CBDCs: system design and interoperability, Report no 2,
Group of central banks and BIS.
Some issues became prominent amid the rapid rise of fintech, including higher possibility …of cross-product and cross-sector risk contagion, as payment institutions started to provide insurance, micro credit, fund management and other financial products, and possible market monopoly as well as lower efficiency in innovation due to the winner-takes-all of large fintech companies. Against this backdrop, China’s regulators are striving to strike a balance between encouraging fintech development and preventing financial riks. Opening remarks by Yi Gang, Governor of the People’s Bank of China.
Opening remarks by Yi Gang,
Governor of the People’s Bank of China.
A key factor in my view is that a digital euro would enable consumers and business to pay with …central bank money in a digital environment. This is a unique feature that the private sector cannot replicate. […] A digital euro would be meant to complement cash, not to replace it. The goal would be to broaden the choice of payment means available to consumers in a world that is becoming more and more digital. Opening speech by Jens Weidmann, President of the Deutsche Bundesbank.
Opening speech by Jens Weidmann,
President of the Deutsche Bundesbank.
In all that, you have the central banks, who are prompted by customer demand to produce… something will make the central bank and central bank currencies fit for the century we are in, which is why we are now looking at CBDCs – central bank digital currencies. Instead of having banknotes and cash in our pockets or in our wallet, we can have exactly the same thing but in a digital form. All of us are working on this and I was certainly keen to push the CBDC issue on our agenda because I believe that we have to stand ready for that. Interview with Christine Lagarde, President of the ECB. (Bloomberg, on 13 September)
Interview with Christine Lagarde,
President of the ECB. (Bloomberg, on 13 September)