The Bank for International Settlements (BIS) expects the impact of the COVID-19 crisis on retail payments to have a ripple effect on the development of central banks’ digital currencies (CBDC).
The BIS is a Swiss-based organization comprising 60 of the world’s central banks, and has previously published several major reports focusing on both decentralized cryptomonies and CDBs. Unlike crypto-currencies, CDCIs are digital currencies issued by a central bank, whose legal tender depends on government regulation or law.
BIS advocates digital central bank currencies in the midst of the Coronavirus pandemic
COVID-19 and global payments
The latest BIS report, released on June 24, notes that the COVID-19 pandemic has caused far-reaching changes in retail payments, revealing both the strengths and weaknesses of existing systems.
First, the report notes the large decline in cash payments due to concerns by merchants and consumers about the transmission of the virus. Economic uncertainty has also led to “precautionary holdings” of cash, resulting in a decrease in daily cash transactions.
In parallel, restrictive measures imposed by national governments, such as the closure of physical stores, have led to an increase in e-commerce payments. The decline in mobility has triggered a decrease in cross-border visa transactions, as well as a large drop in migrant remittances.
All these changes, the BIS argues, reveal both the advantages and disadvantages of existing payment systems. On the one hand, digital payments have enabled many economic activities to continue despite major disruptions in daily life.
On the other hand, existing inequalities between social groups have been accentuated during the crisis, in part due to unequal levels of financial inclusion, which can negatively affect people’s access to government support:
“The crisis has amplified calls for greater access to digital payments by vulnerable groups and for more inclusive and lower-cost payment services in the future”.
Bank for International Settlements shows interest in CBDC
Potential for CBDC issuance
In this context, the report notes that the issuance of CBDCs is “at the frontier of policy opportunity” for central banks and “could represent a radical change”.
The report endeavours to separate the objectives and focus of any future CDB from the private sector landscape, arguing that
“The issuance of CBDCs is not so much a reaction to cryptomonkets and “stablecoin” proposals from the private sector, but rather a focused technological effort by central banks to pursue several public policy objectives at once.
The BIS argues that a successful Etoro could offer “a new means of secure, reliable and widely accessible digital payment. The report analyses both versions of CDMAs, both wholesale (institutional) and retail (publicly available), weighing their potential benefits and risks.
Importantly, the coronavirus crisis has come at a time when both central banks and policymakers are increasingly positive about the potential benefits of CDMAs, both in their wholesale and retail forms.