A group of seven central banks together with the Bank for International Settlements (BIS) today published a report on central bank digital currencies (CBDCs).

The report, Central bank digital currencies: foundational principles and core features, was compiled by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, Sveriges Riksbank, the Swiss National Bank and the BIS, and highlights three key principles for a CBDC:

• Coexistence with cash and other types of money in a flexible and innovative payment system.
• Any introduction should support wider policy objectives and do no harm to monetary and financial stability.
• Features should promote innovation and efficiency.

Let’s note that the report is more of an exploration and does not imply that the central banks in this group are actively considering issuance. CBDC issuance and design remains a sovereign decision for each jurisdiction based on an assessment of how CBDC could support public policy objectives through the provision of a safe means of payment.

The potential financial stability implications of CBDC need to be considered carefully. There are two main concerns:

1. in times of financial crisis, the existence of a CBDC could enable larger and faster bank runs;

2. and more generally, that a shift from retail deposits into CBDC (“disintermediation”) could lead banks to rely on more expensive and less stable sources of funding.

The report explains that these risks are inherent in making a safe central bank money available to the public (a central purpose of a CBDC) and are already present with the existence of cash, although a CBDC could bring new structural challenges. Before launching a CBDC, a central bank would need to make an informed judgment that risks were identified and would remain manageable.

CBDC may offer opportunities that are not possible with cash. A convenient and accessible CBDC could serve as an alternative to potentially unsafe forms of private money, offer users privacy, reduce illegal activity, facilitate fiscal transfers and/or enable “programmable money”, according to the report.

However, these opportunities may involve trade-offs and unless these have a bearing on a central bank’s mandate (eg through threatening confidence in the currency), they will be secondary motivations for central banks.

Introducing a CBDC could have financial stability implications that would need to be assessed and managed carefully, the report warns. These include first, the potential for digital bank runs in times of stress and second, longer-term consequences for bank funding. While system-wide bank runs into cash are now very rare, given deposit insurance and bank resolution frameworks, there is the possibility that a widely available CBDC could make these events more frequent and severe, by enabling “digital runs” towards the central bank with greater speed and scale than is possible with cash.

Another set of concerns is that the introduction of a CBDC could erode banks’ retail deposits, resulting in a less stable funding mix.

Hence, the importance of establishing a legal framework that will underpin CBDCs.