I’ve dashed off quick summaries of a triplet of late breaking central bank digital currency-related papers/speeches from the Bank for International Settlements:
Most central banks are exploring central bank digital currency (CBDC) according to the third annual Bank for International Settlements (BIS) survey. Central banks are progressing from conceptual research to practical experimentation, but most have no plans to issue CBDCs in the foreseeable future. However, central banks collectively representing a fifth of the world’s population are likely to launch retail CBDCs in the next three years.
86% of the 65 central banks surveyed said they were at least considering the pros and cons of issuing CBDC (up from 80% last year). 60% of them are now conducting experiments or proof of concepts (versus 42%), while 14% are moving forward to development and pilots. Emerging market central banks are leading the way, citing financial inclusion and payments efficiency as top motivating forces. They’re also participating in higher numbers: seven out of eight CBDC projects are in emerging markets.
BIS General Manager Agustín Carstens argues that CBDC will incorporate some element of identification, most likely with primarily account-based access. He believes that some form of identification is crucial for the safety of the payment system, preventing fraud, and supporting anti-money laundering and combating the financing of terrorism (AML/CFT). There are trade-offs between access and traceability. Socially, there are many benefits to having more information, for example to prevent money laundering or tax evasion. Good identification can help here, giving law enforcement authorities new tools to fulfil their mandate. He concludes that a purely anonymous system will not work, and the vast majority of users would accept for basic information to be kept with a trusted institution – be that their bank or public authorities.
A BIS paper explores the economics and optimal design of “permissioned” distributed ledger technology (DLT) in a credit economy. Designated validators verify transactions and update the ledger at a cost that is derived from a supermajority voting rule, thus giving rise to a public good provision game. Without giving proper incentives to validators, however, their records cannot be trusted because they cannot commit to verifying trades and they can accept bribes to incorrectly validate histories. Both frictions challenge the integrity of the ledger on which credit transactions rely. In this context, the examines the conditions under which the process of permissioned validation supports decentralized exchange as an equilibrium, and analyze the optimal design of the trade and validation mechanisms. It solves for the optimal fees, number of validators, supermajority threshold and transaction size. A stronger consensus mechanism requires higher rents be paid to validators. The results suggest that a centralized ledger is likely to be superior, unless weaknesses in the rule of law and contract enforcement necessitate a decentralized ledger.
* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.