Central bank digital currency should ‘follow customers’ needs’: BIS report

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Central bank digital currencies should be designed to meet the needs of customers, with technological trade-offs influenced by the needs of end users, according to a report.

The report, authored by the Bank for International Settlements (BIS), analyzed the so-called “trade-offs” that would be required in designing central bank digital currencies, recommending banks err towards customer needs and practicality when making these calls.

The organization is composed of some 62 central banks, and works to introduce global standards for areas like central bank digital currencies. The report even touches on whether banks should issue digital currencies at all, as well as delving into the specifics of how they should be constructed.

The report is divided into six ‘consumer needs’ as they apply to the use of CBDCs—privacy, ease of use, cash-like safety, universal access, cross-border payments, and cash-like peer-to-peer usability. It then goes on to look at the user component of each of these issues, advising central banks to follow these needs when designing their own central cryptocurrencies.

The guidance looks at three separate models for central bank digital currencies. The first is a so-called indirect model where the bank only records wholesale use of the currency, with intermediaries liable to consumers. Then there’s the option of a direct model where claims fall on the bank itself, or a hybrid model where payments only are handled by intermediaries.

While the report stops short of recommending any of the three models, it suggests the indirect model may be favored by central banks because it provides “the convenience of today’s systems based on intermediaries”, without concerning central banks in dispute resolution.

However, because the bank has no records of individual claims in the case of the indirect model, there is no direct proof of transactions. In the direct model, different issues arise, mainly around the speed, efficiency and reliability of payment systems.

The hybrid system necessarily has elements of problems from both direct and indirect CBDCs, with BIS suggesting individual central banks would need to make these calls, based on what is most effective for their users.

“The consumer’s need for cash-like payment safety means that a CBDC must be secure not only from the insolvency or technical glitches of intermediaries, but also from outages at the central bank,” according to BIS. “When it comes to achieving resilience, neither a DLT-based system nor a conventional one has a clear-cut advantage. This decision can only be made once the architecture has been decided upon, as DLT is only feasible for some operational setups.”

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.