CBDC Standards Needed for Widespread Adoption
Clarity on technical standards for central bank digital currency is gradually emerging and consensus is building. But there are important preconditions in the thinking of policy makers that must be met if the thinking around CBDCs is to evolve as we hope.
First, less developed countries need to explore and recognize the promise that CBDC projects hold to achieve greater financial inclusion over the next 10 years. This is already done in many jurisdictions. For economies heavily dependent on cash or facing logistical challenges impeding the deployment of traditional bank-based digital payment architecture, the CBDC delivers on the promise of vastly improved financial inclusion.
Second, developed countries – those in the G7 in particular – should take the environmental benefits of the CBDC seriously. The cash economy requires fleets of armored delivery vehicles producing carbon dioxide while moving money. By reducing reliance on cash, the CBDC would reduce the carbon footprint of the payment system.
In general, countries whose leaders are focused on pursuing digitalization and “smart nation” goals are most likely to make progress in CBDCs. Although it is not just governments that will drive the digital currency industry forward. Stable coins and decentralized finance are gaining acceptance in the digital currency world of private sector banks. Some tech giants, like Amazon, can create digital currencies that are perceived to be more creditworthy than some fiat currencies and there is room for them to make valuable contributions to technical advancement in the industry.
Beyond these achievements, regarding the policy approach to the development of CBDCs, there are a number of technical developments that would help ensure continued progress. First, monetary authorities should (as some are beginning to do) accept that distributed ledger technology is not compatible with the CBDC, since fiat currency is, by definition, the responsibility of a central bank. DLT means that the ledger is no longer owned by the central bank, distributing it to third parties. No central bank will assume responsibility for a register recorded by a third party, especially if that third party is likely to change from day to day.
Second, the two-tier model, with central banks as issuers and commercial banks as administrators, is obsolete. Banking regulations around the world will dictate three levels. The first tier would see the central bank administer and record all transactions between banking institutions. Commercial banks would be the second tier registrar. Their ability to create credit and engage in fractional-reserve banking requires a rigorous regulatory framework. Third-tier institutions would include card companies, stablecoin issuers, centralized issuers, and non-bank financial institutions that offer payment but not lending services and are much less strictly regulated in most countries. It is important to establish clear second and third tiers to distinguish between banks and non-bank financial institutions.
Work is also needed to ensure that as new systems are developed, they are designed from the outset to be interoperable. ISO/IEC 24643, published in November 2020, will form the basis of a new international standard, which will ensure the interoperability of newly created CBDCs, both with each other and with current payment systems, while improving standards of security.
Koji Fusa is General Manager of GVE.