Bank of International Settlements CBDC: The Future of Central Bank Digital Currencies

The Bank of International Settlements (BIS) has been exploring the concept of Central Bank Digital Currencies (CBDCs) for several years. The BIS is an international financial organization that provides a platform for central banks to discuss and collaborate on key issues.

The BIS has been actively involved in the development of CBDCs, with a focus on understanding their potential benefits and challenges. In 2020, the BIS published a report highlighting the potential uses of CBDCs, including cross-border payments and monetary policy implementation.

The BIS has also been working with other central banks to develop a common framework for the development of CBDCs. This framework aims to provide a standardized approach to the design and implementation of CBDCs, which will help to ensure that they are compatible with existing financial systems.

The Bank of International Settlements (BIS) has been actively involved in the development of Central Bank Digital Currencies (CBDCs). They have been studying and publishing reports on the topic since 2019.

One of the key findings of the BIS is that CBDCs can provide a safe and efficient way for central banks to manage their currency in circulation. This can help to reduce the risks associated with traditional fiat currencies.

The BIS has also highlighted the need for CBDCs to be designed with user experience in mind, ensuring that they are easy to use and accessible to all. This includes developing user-friendly interfaces and integrating CBDCs with existing payment systems.

mBridge's design is a game-changer for commercial banks, enabling them to make cross-border payments via their central banks using wholesale central bank digital currencies (wCBDCs).

This design encourages direct local currency payments, bypassing the need to use US dollars, which is a significant advantage.

Banks no longer need to keep nostro accounts at the destination or use correspondent banking, saving them considerable money.

However, there's a catch - local currency payments involve less attractive FX rates, making them less appealing.

There are 180 currencies, each with its best rate against the dollar, resulting in 16,110 currency pairs, which is a staggering number.

Spreading the supply and demand across 16,110 pairs rather than 180 makes the direct local currency route less appealing due to thinner trade.

FX costs make up the largest proportion of cross-border payment costs, which is a critical issue for mBridge's viability.

State-owned Chinese companies might feel obligated to use local currencies, but companies in other economies will demand the cheapest path.

Central banks exploring CBDC have conceptual and practical considerations to keep in mind. The framework for CBDC exploration is guided by a first subsection on why central banks might explore CBDC.

Central banks should approach their experimentation with a practical mindset. This involves understanding the macro-financial implications of CBDC.

Central banks need to consider the potential benefits and drawbacks of CBDC. This includes understanding how CBDC can impact the financial system and the economy.

CBDC exploration is a critical step in understanding its potential impact on the financial system and the economy. This process involves experimentation and testing of different scenarios.

Central banks should approach CBDC experimentation with caution and a clear understanding of the potential risks and benefits. This involves careful consideration of the macro-financial implications of CBDC.

China chairs the mBridge technical working group and developed some proprietary components, including a Chinese blockchain consensus mechanism.

The country's role in mBridge is significant because Hong Kong is involved, and the UAE's central bank representative spent a large part of his career at the Hong Kong Monetary Authority.

Three out of the four central banks involved in mBridge have strong Chinese ties, which has raised concerns about the project's dependence on China.

However, mBridge started as a joint Hong Kong – Thailand initiative, so its location at the Hong Kong BIS Innovation Hub and the involvement of China were natural paths.

The BIS has launched Project Agorá, another cross-border CBDC project, but one that supports correspondent banking, unlike mBridge which has two BRICS members in China and the UAE.

No BRICS members are involved in Agorá, unlike mBridge, which has China and the UAE on board.

The International Landscape for Bank of International Settlements (BIS) CBDC is complex and varied. Central banks around the world are exploring the potential of central bank digital currencies (CBDCs) to improve financial inclusion and efficiency.

In China, the digital yuan is being tested in several cities, with over 140 million people using the digital currency. The People's Bank of China has set a goal to have the digital yuan widely available by 2025.

The Committee on Payments and Market Infrastructure (CPMI) is a key player in shaping the global payments landscape. It was established in 2014 and has 28 member central banks, including the Bank of England and the Federal Reserve Bank of New York.

The CPMI is responsible for promoting the development of safe and efficient payment systems. One of its first projects was a detailed review of payment system developments in G10 countries, which was published in 1985 in the first of a series known as "Red Books".

The Red Books provide valuable insights into the payment systems of participating countries. A recent sample of statistical data from the Red Books shows the amount of banknotes and coins in circulation in various countries.

Here's a snapshot of the data:

The current international landscape is complex and ever-changing. The rise of emerging markets, such as China and India, has led to a shift in global economic power.

These countries are now major players in international trade and investment. The G20 Summit, where leaders from these countries meet, has become a significant platform for global economic decision-making.

Globalization has also led to increased migration and cultural exchange between nations. The influx of international students in countries like the US and UK is a prime example of this trend.

International relations are also shaped by global conflicts and tensions. The ongoing tensions between the US and North Korea are a notable example of this.

The 21st century has brought significant changes to the Bank for International Settlements (BIS). The BIS successfully globalized in the 1990s-2000s, expanding its membership from 33 shareholding central bank members in 1995 to 60 in 2013, representing roughly 95% of global GDP.

The BIS has also become more global in its composition, with a diverse Board of Directors. In 1998, the BIS opened a Representative Office for Asia and the Pacific in the Hong Kong SAR, and a Representative Office for the Americas was established in 2002 in Mexico City.

Today, the BIS is wholly owned by its member central banks, having bought back its publicly traded shares. It operates in the private market as a counterparty, asset manager, and lender for central banks and international financial institutions.

The BIS has also taken a stand on global issues, suspending the Bank of Russia's membership in March 2022 following the Russian invasion of Ukraine.

Managing capital flows is crucial for maintaining economic stability. In the context of international trade, capital flows can be influenced by exchange rates, which can either attract or deter foreign investment.

The US dollar's value can significantly impact capital flows, with a strong dollar making imports cheaper and a weak dollar making exports more competitive. This is evident in the US dollar's fluctuation against the euro, which can affect trade balances.

Capital account liberalization can also affect capital flows, as it allows for greater freedom in the movement of capital across borders. This can lead to increased foreign investment, but also increases the risk of capital flight.

A country's credit rating can also influence capital flows, as a high credit rating can attract foreign investors. Conversely, a low credit rating can deter investment and increase borrowing costs.

Central Bank Strategies involve considering the role of central banks in issuing and managing CBDCs. Central banks can act as the sole issuer of a CBDC, ensuring a high level of control and oversight.

To achieve this, central banks can leverage their existing infrastructure and expertise to develop and implement a CBDC. This includes building on their existing payment systems and networks.

Central banks can also use a hybrid model, where they collaborate with commercial banks to issue and manage CBDCs. This approach can help to increase the reach and adoption of the CBDC, while still maintaining some level of central bank oversight.

The Basel Committee on Banking Supervision is a key player in establishing international regulatory standards for banks. It's hosted by the Bank for International Settlements (BIS) and has played a central role in shaping the Basel Capital Accords.

The Basel Committee has developed three main pillars: Regulatory capital, Supervisory review, and Market disclosure. These pillars work together to ensure banks maintain a minimum international standard of capital adequacy.

Regulatory capital is a crucial aspect of the Basel framework, requiring banks to hold a certain level of capital to cover potential losses. This helps improve the resilience of the banking sector.

The Basel Committee has established a series of frameworks, including Basel I in 1988, Basel II in 2004, and Basel III in 2010-2017. These frameworks have been instrumental in shaping international banking regulations.

Banks must maintain a capital adequacy ratio above a prescribed minimum international standard to comply with Basel standards. This ratio is a key indicator of a bank's financial health and stability.

Here's a breakdown of the three Basel pillars:

By understanding the Basel Committee's role and the three pillars of the Basel framework, we can better appreciate the importance of international banking regulations.

Central banks might explore alternative strategies for managing inflation and interest rates because traditional methods have limitations, such as the zero lower bound problem that restricts interest rates from going below zero.

In the face of economic downturns or financial crises, central banks often find themselves unable to stimulate the economy with conventional monetary policy tools.

Central banks may also explore alternative strategies to mitigate the impact of quantitative easing on financial markets and asset prices.

The goal of central banks in exploring alternative strategies is to achieve a balance between promoting economic growth and maintaining financial stability.

Central banks may use unconventional monetary policy tools, such as forward guidance, to signal their future policy intentions and influence market expectations.

By using forward guidance, central banks can influence long-term interest rates and shape market expectations without actually implementing new policies.

In some cases, central banks may also explore strategies to reduce their reliance on reserve requirements, which can be a source of friction in the financial system.

The use of reserve requirements can limit the ability of banks to lend and invest in the economy, which can have negative consequences for economic growth.

Central Bank Strategies involve setting interest rates to control inflation, as seen in the European Central Bank's decision to keep interest rates low to boost economic growth. This approach can have a significant impact on the economy.

Inflation targeting is a key strategy used by central banks, where they aim to keep inflation within a specific range, typically between 1-3%. The Federal Reserve, for example, has a dual mandate to promote maximum employment and price stability.

Setting interest rates is a crucial tool for central banks to control inflation, as higher interest rates can reduce borrowing and spending, thereby reducing inflationary pressures. The Bank of England, for instance, has used interest rates to combat inflationary pressures in the past.

Forward guidance is another strategy used by central banks to influence market expectations and shape inflation expectations. By communicating their future policy intentions, central banks can influence long-term interest rates and inflation expectations.

Monetary policy transmission is a crucial aspect of central bank strategies. It refers to how the central bank's actions, such as setting interest rates, affect the broader economy.

The central bank's primary tool is monetary policy, which works through various channels to influence the economy. The interest rate channel is one of the most direct and effective ways to stimulate economic growth.

Lower interest rates make borrowing cheaper, which in turn boosts consumer and business spending. This is because lower interest rates reduce the cost of borrowing, allowing consumers and businesses to take on more debt and invest in the economy.

The money supply channel is another important way monetary policy is transmitted. By increasing the money supply, the central bank can inject liquidity into the economy, reducing the cost of borrowing and stimulating economic growth.

The exchange rate channel also plays a significant role in monetary policy transmission. A lower exchange rate makes exports cheaper and more competitive, which can boost economic growth.

The central bank's actions can also affect inflation expectations, which in turn influence the overall level of inflation. By setting interest rates at a level that is consistent with the inflation target, the central bank can influence inflation expectations and keep inflation under control.