BIS, 7 other banks publish CBDC policy, design considerations

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The Bank for International Settlements (BIS) has published two papers on the legal and design considerations of central bank digital currencies (CBDCs). Jointly published with seven other central banks, the papers delve into privacy, interoperability, financial crime checks, cybersecurity, and more.

For years, the BIS has been exploring CBDCs with seven other central banks: the European Central Bank (ECB), the Bank of England (BoE), the Board of Governors of the Federal Reserve System, the Bank of Japan (BOJ), Sveriges Riksbank, the Bank of Canada and the Swiss National Bank (SNB).

This partnership has helped the eight entities gain a better understanding of the policy and system design aspects of a retail CBDC, resulting in the two papers, BIS said.

In their first paper on the legal aspects, the banks outlined four areas they believe central banks should focus on. The first is the legal classification of a retail CBDC; most legal frameworks are not designed with a digital currency in mind, so issuers will need to amend their laws to accommodate the CBDC.

Central banks must also consider the rights, obligations, and liabilities of all the ecosystem stakeholders. Additionally, they must decide whether to make their digital currency accessible across borders, which comes with its own set of laws and multilateral frameworks.

Privacy is also a central legal issue to consider. While privacy is critical to CBDC users, the group noted that central banks must tread carefully to prevent financial crimes such as money laundering and terrorist financing.

The second paper, which focused on system design aspects, also cited privacy as a critical issue. It noted that central banks might rely on novel privacy-enhancing techniques, but they come with their share of tradeoffs. Additionally, most of these techniques did not meet the required standards when group members conducted their individual tests, the paper said.

“The system should be designed in a way to ensure that the implementation of privacy still allows for robust protection of end-users and issuers against fraud and forgery.”

Centralized versus decentralized CBDC designs also pose a dilemma for central banks. While the former has its own set of security risks due to a single point of failure, they give the central banks more control over the ecosystem. The paper says the optimal design consists of a mix of the two, “each supporting a specific set of requirements.”

Security is also a significant factor with CBDCs, as malicious attackers would be greatly incentivized to attack the system. The risks are exacerbated by technological advancements, with quantum computing and artificial intelligence (AI) posing a particularly massive threat. In the favored two-tier model, where commercial lenders and payment providers are the bridge between central banks and consumers, the risks are also higher due to the vast number of stakeholders.

The two papers are the latest effort by the BIS on the CBDC front. The Basel-based entity has been the global leader in CBDC research and development, partnering with dozens of central banks in several national and regional pilots. However, it recently backed out of the mBridge pilot, claiming that the project had outgrown the need for a bilateral partner. However, industry experts believe that the BIS left due to political considerations, as the project is led by China and could soon integrate the BRICS payment rails.

Schuman Financial debuts first French stablecoin under MiCA

Elsewhere, Zug-based blockchain startup Schuman Financial has launched the first stablecoin under the Markets in Crypto Assets (MiCA) framework in France.

Dubbed EURØP, the stablecoin is euro-denominated and backed by cash and cash equivalents. Schuman issued EURØP through a French-regulated company it acquired, which was issued an Electronic Money Token (EMT) license by the French Autorité de Contrôle Prudentiel et de Résolution (ACPR). ACPR is a financial watchdog under the Banque de France that is in charge of prudential supervision of banks, insurance firms, and other financial institutions.

The EMT license was issued under MiCA, making Schuman the first stablecoin issuer licensed under the European framework in France.

MiCA, which takes full effect on December 30, has changed the stablecoin sector across the EU. For one, it requires stablecoin issuers to obtain a license from the relevant member state authorities to serve European users. Circle became the first stablecoin issuer to obtain the new license under MiCA in July from the French ACPR. Issuers used to skirting regulations and operating under shady conditions, like Tether, are considering exiting the EU market as MiCA leaves no room for regulatory arbitrage.

Despite stablecoins being a $198 billion market, the euro has failed to make its mark in the market. The top 10 stablecoins, accounting for 94% of the overall market cap, are all backed by U.S. dollars. The largest euro stablecoin is STASIS EURO, whose market cap stands at a mere $131 million. 

Watch: The state of play and what’s to come with CBDCs