cbdc interoperability

CBDCs would exist in interoperable systems where the multiple roles and responsibilities would need to be coherent and support policy goals. This report outlines the considerations for central banks in designing systems that benefit from private-public collaboration and interoperability. Doing so highlights the importance of payment data and privacy in driving choices on infrastructure architecture, messaging standards and the role of a central bank. The next steps for this work will be to review the impact of financial stability safeguards and user requirements on system designs. 1. Introduction and general overview This report explores central banks’ considerations for designing a potential general purpose (retail) central bank digital currency (CBDC) system. This includes an overview of the potential functions in a broad ecosystem, the different possible roles in a private-public collaboration, how interoperability could be a core feature and a central bank’s options in how an interoperable CBDC system could be implemented. Key messages: • The central banks contributing to this report anticipate any CBDC ecosystems would involve the public and private sectors in a balance to deliver the desired policy outcomes and enable innovation that meets users’ evolving payment needs. Depending on the priority motivations for a CBDC, there would be multiple considerations involved in allocating roles individually and collectively, requiring extensive dialogue with users and stakeholders. Yet a theme that cuts through almost every consideration is interoperability. Domestic interoperability would be key to ensuring a CBDC system coexists with other national payment systems and contributes to broader accessibility, resilience and diversity. • For CBDC systems, domestic interoperability would need to be sufficient to achieve an easy flow of funds to and from other payment systems and arrangements. Central banks would have options in how they achieve interoperability, from use of established messaging, data and other technical standards to building technical interfaces to communicate with other systems. Yet barriers to interoperability would likely exist, covering technical, commercial and legal aspects. Dialogue with stakeholders would be key in addressing these. • Regardless of the design, developing and running a CBDC system would be a major undertaking for a central bank. Operating CBDC ecosystem functions would be a significant undertaking and any outsourced functions would need to be carefully managed to deliver public trust in a CBDC system. Likewise, individual and collective oversight of those functions and services provided or operated by private intermediaries would be required. • Access to and treatment of payment data would play a significant role in any ecosystem design. Privacy considerations could create a series of other design and interoperability challenges, ranging from the messaging standards used, how to create incentives for diverse intermediaries to offer services and how to interoperate with traditional systems that require detailed account and transaction information. • Further exploration will further review the practicalities of interoperability with existing payment systems; while also considering how financial stability safeguards and user requirements (including privacy) might influence the design of a CBDC system that enhances monetary and financial stability, co-exists with robust private money and offers users an innovative and efficient means of payment. Section 2 sketches the elements, functions and possible roles in CBDC systems as well as considerations for central banks. Section 3 then narrows its focus to interoperability, including a technical introduction, options and considerations. Section 4 concludes and outlines possible next steps. 2 Central bank digital currencies: system design and interoperability 2. System design • A CBDC ecosystem would comprise multiple elements and functions. A core ledger with supporting infrastructure and rules would underpin a broader ecosystem of processing infrastructure, processing providers and user services with business and technical rules. • The central banks contributing to this report anticipate ecosystem functions divided among the public and private sectors in a balance that delivers the desired policy outcome. • To deliver that outcome, a central bank would have to consider the motivations or goals driving the implementation of CBDC. Yet, in any CBDC system, the central bank would face additional operational or oversight tasks and accompanying challenges regardless of the division of responsibilities among the various actors. Interoperability • Interoperability is a broad term. For a CBDC system, it would encompass characteristics sufficient to achieve an easy flow of funds to and from other payment systems. This would help ensure the coexistence of a CBDC system within a wider payment ecosystem. • Central banks have options in how they could achieve interoperability, from use of established messaging standards, data and other technical standards, to building technical interfaces to communicate with other systems. • Significant domestic and international consultation and dialogue to understand the practical impact of any choices would likely be required, both prior to launch and during the life of any CBDC system. Concluding thoughts and next steps Designing an interoperable CBDC system, allocating roles and striking the right balance between the responsibilities of the central bank, the public sector and the private sector would be complex. Many of these complexities would arise from coexisting with a jurisdiction’s current payments systems while providing a novel, innovative and efficient service for users. Both would be necessary conditions for the success of a CBDC and would likely change with time. The pace of change in private payments arrangements is increasing (BIS (2021)) and consumer expectations for what constitutes innovative, efficient and convenient payments are not static either. Any CBDC ecosystem would need to be flexible to accommodate future user demands and interoperate with new and existing systems and arrangements while at the same time safeguarding policy goals and system resilience. Therefore, when allocating roles across a system, a central bank would need the power to change the system, either through how it operates or through using oversight powers. In any CBDC system the central bank would play an important role and would have to allocate resource accordingly. Operating any ecosystem functions would be a significant undertaking and any outsourced functions would need to be carefully managed to ensure resilience and public trust in CBDC as a public good. To keep up with these changes in a highly technical and practical capacity, central banks issuing CBDCs may need to broaden their skills (Carstens (2020)). And supporting these efforts, a central bank’s involvement in private-public payments fora may need to significantly increase. The fora themselves may also need to adapt to incorporate a broader range of issues. For example, personal data governance, with its potentially significant impact on interoperability, user confidence and participant business models, may require central banks to engage in extensive dialogue with a broader set of stakeholders outside the traditional payment ecosystem. Interoperable system designs would be significantly influenced by idiosyncratic domestic circumstances. This would also be true for the user demands and necessary safeguards that would drive the desirability and policy viability of a CBDC (Group of central banks (2021a and 2021b)). The next steps for this work will include reviewing the practicalities of interoperability with existing payment systems. It will also consider how financial stability safeguards and user requirements (including privacy) might influence the design of a CBDC system that enhances monetary and financial stability, co-exists with robust private money and offers users an innovative and efficient means of payment

Comments

Post a Comment

Popular posts from this blog

ft

Image
Fed keeps wiggle room on rates No matter how hard the Federal Reserve has tried to give itself room for manoeuvre on monetary policy, by decision time that flexibility has become more limited. That is the view of central bank-watchers in the weeks since the Fed reduced its benchmark interest rate for only the second time since the financial crisis. It is widely expected to cut again at its October 30 meeting, but US central bank officials have gone to great lengths to brace investors for a pause following that cut — barring a dismal turn in the economic data. Investors have so far accepted this reality, with the odds of another rate reduction in December modest at 30 per cent, according to Fed funds futures contracts compiled by CME Group. But should investors ramp up their expectations for another interest rate cut later this year, the Fed could very well find itself pressured into action once more, or risk sparking a market sell-off. In the days before the Fed’s so-called “black...
Read more
Image
For most of the twentieth century, as David Edgerton shows in his vital and decisive book, “United Kingdom” was a technical term used by statisticians, diplomats and the army, but seldom in a wider context. It was not until the 1960s that historians seeking to foster a progressive national consensus began presenting the “United Kingdom” story in terms of an emancipatory and cohesive welfare state, while underplaying the extent to which it was a bundle of semi-unified nations. Most subjects of Elizabeth II associated the phrase “United Kingdom” with broadcasts of the Eurovision Song Contest: “Royaume-Uni, nul points”. The first three country code top-level domain names allotted in 1985 – .us, .uk and .il – and the spread of email traffic and internet shopping finally brought “uk” into common currency among people living in the British Isles. As to the noun “Britain”, it became the standard usage in politics and historical writing only after 1945. It was – and is – used promiscuously ...
Read more

gillian tett 1

What probability do you give that there might be a new financial crisis? This month, the number crunchers at Oxford Economics, a research group, asked 162 global businesses this question. Their average answer was 20 per cent over the next two years. That is twice as high as the perceived risk of a second global wave of the Covid-19 pandemic and also, sadly, the probability of an early effective vaccine arriving.  These fears already have tangible consequences: they pushed down business sentiment more in this month’s Oxford survey than hard data justified. “Our analysis suggests that financial crisis fears account for much of the gloom,” said Jamie Thompson, the poll’s lead economist. This should concern investors, although not because a financial crisis is likely to explode right now — at least not in the headline-grabbing style of 2008. At least two factors mitigate that risk.  First, the US Federal Reserve and other central banks have made it clear that they will do “whatever it...
Read more