Since 2020, the Bank of International Settlements (“BIS”) has collaborated with a group of central banks (the “Working Group”)[1], including the Bank of Canada, to study the policy implications and technical potential of “general purpose” or “retail” central bank digital currencies (“CBDCs”). On May 25, 2023, the Working Group released a white paper to share their collective perspective on CBDCs. The white paper defines core strategic considerations for central banks and other authorities tasked with issuing CBDCs, while addressing the jurisdictional and policy challenges associated with launching a CBDC.

Central Themes

The paper focuses on themes critical to the development of a CBDC: engagement with a wide range of stakeholders, encouraging participation of stakeholders in creating and managing CBDCs, careful consideration of potential risks, CBDC design and use cases such as cross-border payments.

1. Stakeholder Engagement

The Working Group commented that effective public engagement and consultation strategies for CBDCs vary depending on the purpose of the consultation and stakeholders involved. The importance of a “two-way communication approach”, which includes bilateral exchanges, forums, and open consultations, was also noted as helpful in raising awareness, gathering diverse perspectives and obtaining practical insights.

The BIS recommended the following approaches to public engagement and consultations concerning CBDCs:

• Stakeholder forums – two-way exchange of information through meetings with stakeholders and topical forums that invite feedback on a range of issues.
• Public consultations – to highlight issues important to stakeholders, with the caveat that results may not provide an accurate reflection of public opinion if responses are not part of a balanced sample.
• Surveys of payment behaviour – useful for documenting the decline in cash payments and information on individuals’ access to bank accounts and various payment instruments.
• CBDC-dedicated user studies – central banks may use online communities together with focus group research for high-impact participant interactions.
• Case studies – useful in drawing inferences about users’ needs and preferences, and helpful in studying go-to-market strategies.

In their paper, the Working Group emphasizes the importance of private sector innovation to the long-term success for CBDCs. Central banks may require tailored approaches guiding private sector propositions for CBDC services in their respective jurisdictions. These approaches include, for example, allowing the private sector to innovate within a set of principles and objectives set by the central banks.

2. Legal Issues

The Working Group identified a number of potential legal issues related to retail CBDCs, including “(i) the legal classification of a retail CBDC; (ii) the authority of the central bank to issue one; (iii) the concepts of settlement and payment finality in a retail CBDC system; (iv) data governance, privacy and anonymity in a retail CBDC system; (v) the potential imposition of restrictions on holdings; (vi) non-resident access to a retail CBDC; and (vii) the potential liabilities of participants in a retail CBDC system”, as well as anti-money laundering and competition law issues.

The Working Group commented that the solutions to these legal issues depends on policy development and national law, and that it is crucial to ensure legislative and governing bodies remain involved in the legal design and development process of a CBDC. In addition, the Working Group noted “legislation may need to be enacted or adjusted to specifically authori[z]e the issuance and distribution of a retail CBDC.”

3. Stakeholder Participation

The Working Group notes that the BIS and participating central banks recognize the need for participation from both the public and private sectors in the CBDC ecosystem due to the range of digital products and solutions that affects the CBDC value chain. When designing the CBDC system, the Working Group recommended central banks carefully consider which services to procure from the private sector and which services to develop internally, and align those considerations with policy objectives.

4. Thoughtful Deliberation Regarding the Design and Implementation of CBDCs

CBDC design must account for wide ranges of demand in the introductory stages of a CBDC as well as other extraordinary market scenarios. The Working Group discussed potential approaches to managing stressed conditions, such as intermediation and transaction costs:

• Quantity holding limits: A policy to directly limit the extent of potentially harmful levels of disintermediation (e.g. structural changes resulting from CBDC adoption that increase the cost or availability of credit across the economy). Alternatively, the policy may make CBDC transactions less convenient, limiting adoption rates.
• Priced-based measures: A flexible application of fees and tiered remuneration could be used to allow any size of transaction or holdings, subject to increasing costs, which would reduce the likelihood that small transactions become too expensive to process. Price and quantity control approaches may also serve as tools to manage stressed conditions, such as to dissuade runs or promote inflows.

The paper also emphasizes that CBDCs must be interoperable with other forms of money and existing payment systems, with specific consideration toward how CBDCs can connect with instant payment infrastructure and how CBDC transactions are processed at point-of-sale systems. The Working Group suggests international standardization would enhance the CBDC ecosystem.

The Working Group does not currently consider blockchain technology to be essential to the functioning of a potential CBDC system, arguing that while holders of a CBDC implicitly trust the central bank as its issuer, this concept contradicts the core organizing principle of blockchain technology, which assumes the absence of trusted parties within a system. According to the white paper, the need to proxy trust in systems leads to inefficiencies that adversely affect performance and scalability.

Nonetheless, the Working Group discussed ancillary uses for blockchain technology that could extend the functionality of a CBDC, such as programmable payments allowing automation or conditions set around a transaction; and micropayments that allow small-value payments which are largely considered unfeasible within the existing infrastructure.

5. Wholesale and Cross-Border Use Cases

The paper notes that enabling cross-border payments through retail or wholesale CBDCs will necessitate collaboration between central banks, which will require a policy framework to address matters of inter-jurisdictional connectivity and non-resident access.

The Working Group also highlighted the need for further research on the advantages of implementing wholesale CBDCs for financial institutions against the task of upgrading and improving existing infrastructure.

Canadian Perspective

In November 2017, the Bank of Canada first released a white paper evaluating whether a central bank should issue a digital currency for general public use. We summarized key takeaways from that white paper in this blog post. The white paper concluded that many of the reasons suggested for introducing a centrally-controlled digital currency with government oversight were not compelling enough to warrant issuing a CBDC.

On May 8, 2023, the Bank of Canada launched a public consultation on a potential CBDC, asking Canadians for their input on questions such as how a CDBC would be used, which security features are important and what concerns exist regarding accessibility and privacy. The goal of this consultation is to assist in design choices and ensure a CBDC is secure, reliable and meets the needs of Canadians. The public consultation is in the form of a survey and will be available on the Bank of Canada’s website until June 19, 2023.

To learn more about the Bank of Canada’s ongoing work on digital currencies, you can visit their website here.

For more information about our firm's Fintech expertise, please see our Fintech group page.

The authors would like to thank Christopher Yam for his contribution to this article during his articling term.

[1]       The group includes the Bank for International Settlements, the Bank of Canada, the European Central Bank, the Bank of Japan, Sveriges Riksbank, the Swiss National Bank and the Bank of England.