Central bank digital currencies (CBDCs) are moving from concept to practical design and could renew the institution of money for the digital age, according to the Bank for International Settlements (BIS).

In its latest annual economic report, the BIS lays out the design choices for CBDCs, which, alongside cash, would be issued and backed by a central bank.

It offers an economic analysis of their implications for consumers, financial institutions and the central bank itself, and finds that CBDCs function best as part of a two-tier system, with the bulk of the customer-facing activities taken on by banks and other payment service providers.

The most promising design for general use is a CBDC built on a digital identity scheme, the report finds, which would safeguard data privacy while offering protection against illicit activity and potentially streamlining cross-border payments.

CBDCs would build on the central bank's traditional roles in the payment system, to ensure that payments are final and certain; that there is enough liquidity for the payment system to function; and that the playing field is level, by making central bank money available on an equal basis to all parties, the report states.

From a practical perspective, the BIS says the most promising CBDC design would be one tied to a digital identity, requiring users to identify themselves to access funds.

A careful design would balance protecting users against the abuse of personal data with protecting the payment system against money laundering and financial crime.

Hyun Song Shin, economic adviser and head of research of the BIS, explained: “CBDCs are a concept whose time has come. They open a new chapter for the monetary system by providing a technologically advanced representation of central bank money. In doing so, they preserve the core features of money that only the central bank can provide, anchored in the foundation of trust in the central bank.”

In addition, the BIS says international cooperation on design will be vital if central banks are to harness the full benefits of CBDCs, and to improve cross-border payments while countering foreign currency substitution.

Commenting on the report, Benoît Cœuré, head of the BIS Innovation Hub, said: “CBDCs could form the backbone of a new digital payment system by enabling broad access and providing strong data governance and privacy standards. They are the best way to promote the public interest case for digital money.”

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