Bank for International Settlements

The central bank of central banks says CBDCs are necessary for maintaining the status quo of the legacy financial system.

The Bank for International Settlements (BIS) has reaffirmed its support for central bank digital currencies (CBDCs).

In a report titled “CBDCs: an opportunity for the monetary system,” BIS researchers argued that sovereign digital currencies offered “the unique advantages of central bank money.”

According to the report, CBDCs are the embodiment of digital money designed for the public good and are best suited for interfacing with instant retail payment systems.

Indeed, several central banks around the world are experimenting with retail CBDCs with many of these projects examining ways to float a digital companion to their respective fiat currencies.

Detailing a probable retail CBDC architecture, the BIS report put forward the following: “CBDCs are best designed as part of a two-tier system, where the central bank and the private sector each play their respective role,” adding:

“A logical step in their design is to delegate the majority of operational tasks and consumer-facing activities to commercial banks and non-bank PSPs that provide retail services on a competitive level playing field. Meanwhile, the central bank can focus on operating the core of the system.”

On the subject of privacy concerns, the BIS researchers argued in favor of robust customer identification protocols. According to the report, a token-based CBDC with complete anonymity features would provide avenues for illegal financial activities.

Instead, the BIS said central banks should design account-based CBDCs that interface with already existing digital identity infrastructures such as tax records, property registries, and education certificates, among others.

Account-based CBDCs with associated digital identity systems mean there will likely be a need for a dedicated entity tasked with identity verification and user data protection.

Related: Central banks must play ‘pivotal role’ in digital money, says BIS exec

With user data across both public and private entities often a target of cyberattacks, robust cybersecurity measures will also paramount importance in any CBDC architecture.

Concerns about data privacy may become even more significant within the context of international transactions where customer information exchange across borders is necessary. On this subject, the BIS report called for greater international cooperation to handle the risks associated with sharing digital IDs across national borders.

The BIS report did not fail to bash Bitcoin (BTC) and cryptocurrencies employing the usual speculative investments, money laundering, carbon footprint and ransomware rhetorics. Earlier in June, Benoît Cœuré, BTC critic and the head of the BIS innovation hub, called El Salvador’s Bitcoin adoption an “interesting experiment.”

On the subject of stablecoins, the BIS researchers concluded that CBDCs could co-exist with privately issued stable digital currencies.