The latest Annual Economic Report of the Bank of International Settlements (BIS) examines the case for central bank digital currencies (CBDC), the features and implications of CBDC, potential design choices and their principles, and finally impacts in a cross-border context.

CBDCs provide an opportunity to contribute to an “open, safe and competitive monetary system that supports innovation and serves the public interest”.

Recently, digital currencies have gained increasing interest following technological developments such as cryptocurrencies, stablecoins and big tech advancement in the payment and financial services space. The exploration of CBDC is taken in the context of public interest -- for example, economic benefits, rights to data privacy, competition, innovation, good governance and equal access. Digital money is also viewed in the context of the Central Bank’s role to pursue safety, integrity, efficiency and access.

The success of implementing a CBDC relies on the architecture chosen, balancing the central bank and the private sector. The report presents alternative models, their merits and consequences, including the considerations on the monetary policy transmission process.

Data governance remains a top priority, particularly in the ability to provide effective identification while safeguarding data privacy. Various models of verification schemes are presented and one promising approach identified in the report is an account-based CBDC built on digital ID with official sector involvement. Lastly, the report discusses the international dimension of CBDC and challenges such as the use of digital ID information outside the originating country.

As payment innovations and technologies continue to develop, Central banks have opportunities to shape the payment system of the future. This report examines the potential of CBDCs in a rapidly changing financial sector and payment system.