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Big risks and unclear benefits may scupper CBDC

The closer central banks come to hard design choices over retail central bank digital currencies, the less clear cut the case is to proceed with them.

Photo: iStock

The Bank for International Settlements (BIS) produced a chapter in its annual economic report in June asserting that central bank digital currencies (CBDCs) are in the public interest. It concludes that CBDCs will likely have to work in a two-tier, account-based system, instead of being either token-based or held in direct accounts at the central banks.

This probably calls for a hybrid architecture where the private sector onboards all clients, is responsible for enforcing anti-money laundering regulations and conducts all retail payments. However, the central bank also records retail balances and acts as a backstop to the payment system. Should a payments service provider fail, the central bank has the necessary information to substitute for it.

The e-CNY, the CBDC issued by the People’s Bank of China and currently in a trial phase, exemplifies such a design.

The BIS cannot get away from the fact, however, that even with a two-tier system people will now have some kind of account-based claim on the central bank itself.


It will probably require negative interest rates and caps on how much CBDC people can hold to preserve bank funding.

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