Retail Focused Central Bank Digital Currencies are “More Advanced” where Informal Economy is Larger: BIS Report

The Bank for International Settlements (BIS), a global financial institution owned by reserve banks that aims to support international monetary and financial cooperation and acts as a bank for central banks, has noted that central bank digital currencies (CBDCs) are now “in the limelight.”

However, the BIS points out that the reasons or motivations for developing CBDCs tend to vary between different countries or jurisdictions. Governments across the globe have adopted different policy approaches and appear to be working on various technical designs for potentially their own digital currencies.

According to BIS’s research, the key drivers for CBDC development may be found mainly in digitized and innovative economies like China – which has taken the lead when it comes to developing or working on a CBDC or digital currency electronic payment system.

The BIS has learned that retail-focused CBDC work is “more advanced where the informal economy is larger.” Notably, none of the projects surveyed by the BIS are planning to replace cash payments or transactions, but all intend to provide a digital alternative or complement.

The BIS notes:

“On the technical designs, we find that more and more central banks are considering ‘hybrid’ or ‘Intermediated’ architectures, where the CBDC is a cash-like direct claim on the central bank but the private sector manages all customer-facing activity. Only a few jurisdictions are considering ‘Direct’ designs, in which the central bank takes on some or all of the customer-facing side of payments. At present, no central bank reports that it is pursuing a ‘Synthetic’ or ‘Indirect’ CBDC design.”

The BIS states that although reserve banks are looking into different technical infrastructures, current proofs of concepts (PoCs) are usually based on some type of distributed ledger technology, instead of more traditional IT infrastructure. The BIS reveals that access frameworks are often based on account identification, instead of using “token-based anonymity.”

The organization adds that the majority of retail CBDC initiatives have “a domestic focus.”

The BIS recently noted that as financial technology, or financial innovation and digitalization, begin to transform the financial sector, it also opens up “data gaps” in central bank statistics.

These gaps are created because new financial products and services are introduced, which may not be as easy to examine as more traditional platforms.

BIS explains that data gaps are currently prevalent as (internationally comparable) information on Fintech is lacking in official statistics. The organization states that “to understand innovation, qualitative information on evolving structures, and harmonized time series are needed.”

Last month, the BIS confirmed that cross-border payments and market infrastructure issues or challenges will be addressed at the upcoming G20 meeting.

As reported in April 2020, CBDCs were increasingly being considered by governments, as AML/CFT regulations tighten.

The team at New York-based BitOada, a digital asset and Fintech firm, had stated (in April 2020):

“We’ve noted an uptick in dialogue and action related to national digital currencies… These developments are moving forward amid a global environment that is increasingly focused on tightening anti-money laundering (AML) rules to meet new standards.”

They added:

“Amid these calls and actions toward the pursuit of CBDCs, we also noted several indications that global AML rules are tightening, or at least that regulators want to move toward established standards such as those of the Financial Action Task Force (FATF) or Europe’s new AMLD5.”

Elsa Madrolle, General Manager, International at CoolBitX, an international blockchain security company, recently shared her perspective on the pan-European framework with Crowdfund Insider.

Elsa says she’s regularly in touch with regulators and key Fintech industry participants, so that she can better understand implementation concerns globally as part of her role at CoolBitX.

Elsa noted:

“If … new EU-wide Regulation is expected to be released, and that it is believed that it might incorporate specific AML provisions, there could be further delays in implementing AMLD5 (which was a Directive) while national regulators await the announcement and AMLD6 which was due before the end of the year. In theory new regulation around virtual assets should not derail existing AMLD efforts but rather build on them, but given the complexity of European legislation, countries may prefer to wait to ensure none of their existing efforts get superceded by new regulation.”

Elsa continued:

“Additionally, any new regulation is going to need to at least align with FATF from an AML standpoint as the EU is an active member of FATF whose current president is himself a member of an EU state.”

She added:

“The EU legislative system is generally far more time-consuming than national systems as it is consensus-driven, multi-lingual and multi-cultural and new legislation often highly debated for extended periods of time, sometimes including lengthy delays, before being published. Factoring in unprecedented potential COVID-related delays, it is possible that these timelines get pushed back … This [could be] a unique chance for the EU to create a robust but open framework to become truly competitive at a crucial time as the UK steps out at the end of 2020.”

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