Getting Ready for Central Bank Digital Currency

 Let me start by thanking the Atlantic Council for providing a convenient place to discuss central bank forays into cryptocurrency.

Since its founding in 1961, the Council has made important contributions to strategic, political, and economic policy discussions. These discussions have served us well, helping us to test the limits of our thinking and better prepare for what lies ahead.

Central Bank Digital Currency

Therefore, today we aim to test our thinking again. We are beyond the conceptual discussions of CBDCs and are now in the beta phase. Central banks are rolling up their sleeves and learning about the bits and pieces of digital money.

It's still early days for central bank digital currencies and we don't quite know how far it will go and how fast it will go. What we do know is that central banks are building capabilities to harness new technologies - to be ready for what may lie ahead.

If central bank digital currencies are wisely designed, they are likely to offer greater flexibility, more security, greater availability, and lower costs than private forms of digital money. This is clearly the case when compared to unsupported and inherently volatile crypto assets. Even better managed and regulated stablecoins may not be a perfect match for a well-designed, stable digital currency for a central bank.

We know that the move towards digital central bank currencies is gaining momentum, driven by the ingenuity of central banks.

Altogether, there are about 100 countries that are exploring primary digital currencies for banks at one level or another. Some research, some testing, and some actually distributing CBDC to the public.

In the Bahamas, the sand dollar - the central currency of the local central bank - has been in circulation for more than a year.

Sweden's Riksbank has developed a proof of concept and explores the technological and policy implications of CBD.

In China, the digital renminbi (called e-CNY) continues to advance, with more than one hundred million individual users and billions of yuan in transactions.

And just last month, the Federal Reserve issued a report stating that “central bank digital currency can fundamentally change the structure of the US financial system.” [i]

As you might expect, the IMF is deeply involved in this issue, including by providing technical assistance to several members. An important role of the fund is to promote the exchange of experiences and support the interoperability of digital currencies for central banks.

As part of a service to our members, today we are publishing a paper highlighting the experiences of six central banks at the border - including China and Sweden - to be covered in a panel discussion following my remarks.

We draw three common lessons from these central banks that others may benefit from.

Lesson 1: There is no one size fits all.

There is no global case for central bank digital currencies because every economy is different.

In some cases, central bank digital currency may be an important path to financial inclusion - for example, when geography is an obstacle to physical banking.

In other cases, the CBDC can provide an essential backup in case other payment instruments fail. One such case was when the Eastern Caribbean Central Bank extended a trial range of the volcano's digital currency to areas hit by a volcanic eruption last year.

Therefore, central banks must design plans according to their specific conditions and needs.

Lesson #2, Financial stability and privacy considerations are paramount in the design of CBDCs.

Central banks are committed to minimizing the impact of central bank digital currencies on financial intermediation and credit provision. This is very important for the wheels of the economy to run smoothly. The countries we studied offer interest-free central bank digital currencies—which makes central bank digital currencies useful, but not as attractive as a savings tool as traditional bank deposits.

We have also seen in all three active CBDCs — in the Bahamas, China, and the Eastern Caribbean Currency Union — that they clamp down on central bank digital currency holdings, once again, to prevent sudden bank deposit outflows into central bank currencies.

Restrictions on central bank digital currency holdings also help satisfy people's desire for privacy while protecting against illicit financial flows. Smaller holdings are allowed without the need for full identification if the risk of money laundering and terrorist financing is low - this can be a boon for financial inclusion. At the same time, larger transactions and collectibles require tougher checks, as you would expect if you deposit a bag of cash in the bank.

In many countries, privacy concerns are a potential deal-breaker when it comes to CBD legislation and adoption. Therefore, it is critical for policy makers to get the right mix.

And that brings me to the third lesson: balance.

Introducing CBDC is about finding a delicate balance between developments on the design front and on the policy front.

Getting the design right requires saving time and resources, and continuous learning from experience - including shared experiences across countries. In many cases, this will require close partnerships with private companies to successfully distribute the underlying cryptocurrency

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