The Bank for International Settlements, in its September report, said private digital assets could coexist with potential digital currencies exploited by central banks. The report follows China’s policy ban on private cryptos – an interesting update as it is the forerunner of CBDC trials and pilot launches. The report stated,
“Central banks need to be convinced that regulatory and supervisory frameworks will facilitate effective supervision and regulation as the system evolves. “
In a recent event, Raghuram Rajan, former vice president of the BIS, spoke in the context of China and said:
“The idea behind the Chinese central bank’s digital currency is precisely to oust Ant Financial and Tencent, at least to some extent. This is again, I think there may be a difference between the way some democracies view the CBDC.
There have been uneven efforts from different countries regarding CBDC decision making. Indeed, according to the Atlantic Council, five countries have launched CBDCs.
Singapore last month launched a BIS initiative to test the use of central bank digital currencies by joining forces with Australia, Malaysia and South Africa. Singapore, for its part, has allowed domestic and international private players to enter the digital asset market.
Meanwhile, with countries like China, Sweden and the Bahamas at an advanced stage of CBDC launches, the United States is also under more pressure to consider a ‘Fedcoin’. In a recent congressional hearing, Federal Reserve Chairman Jerome Powell made it clear that there are no plans to regulate the industry like China.
Powell said the United States had “no intention of banning” Bitcoin and other private cryptos. However, the Fed remains “undecided” on the CBDC front.
The report further predicts that the CBDC ecosystem would engage the public and private sectors in a balance to enable innovation. Therefore, countries may need to consider coexistence in the payments ecosystem.
However, the report agreed that CBDCs could also pose challenges for the banking sector. According to the study, it is likely that large banks with a relatively higher share of transactional deposits could lose deposits to the benefit of the CBDC. Nonetheless, the central banks that were part of the report identified the CBDCs as an important instrument for public policy.
According to the same, the issuance and design of CBDC are sovereign decisions, while alleviating some concerns about financial instability. Rajan also accepted the participation of the private sector and added,
“We have to be very careful not to stifle the private sector, because the private sector has been very innovative.”
That said, the BIS believes that “a reliable and resilient currency is a prerequisite for monetary and financial stability”. And to build a digital currency, central banks would need dialogues with “stakeholders outside the traditional payments ecosystem”.
Regarding new payment technology, Rajan agreed that “it helps to let these technologies flourish”.