Digital Currencies and Central Banks: What You Need to Know

The rapid advancement and development of digital currencies has extended its reach beyond the private sector- as governments are now involving themselves in integrating digital currencies into their formal policies and operations. A recently published report entitled Central bank digital currencies: foundational principles and core features was produced by the central banks of seven different nations (including Canada), together with the Bank for International Settlements (BIS). This bi-lateral collaboration identifies the foundational principles necessary for any publicly available central bank digital currencies (or CBDCs) to help provide a framework to meet their public policy objectives.

Firstly- it is worth noting that central banks are not the same thing as the banks you would visit to deposit or withdraw money- such as CIBC or TD. Those are known as retail banks. The Bank of Canada- Canada’s central bank- is a publicly-owned crown corporation whose primary objective is to conduct monetary policy on behalf of Canada’s government. Its main functions include keeping inflation rates low; thus promoting a healthy economy that attracts foreign investment; plus it also oversees printing money and ensuring the Canadian money supply is being properly managed. For more information on the numerous functions of The Bank of Canada- and especially how it relates to fintechs- check out this blog:

The Central bank digital currencies report highlights three core principles for a CBDC:

  • Coexistence with cash and other types of money in a flexible and innovative payment system.
  • Any introduction should support wider policy objectives and do no harm to monetary and financial stability.
  • Features should promote innovation and efficiency.

Based on these principles, the report identified four principal features that any future CBDC system must be:

  1. Resilient and secure to maintain operational integrity.
  2. Underpinned by appropriate standards and a clear legal framework.
  3. Have an appropriate role for the private sector, as well as promoting competition and innovation.
  4. Convenient and available at very low or no cost to end users.

Sir Jon Cunliffe, the group’s co-chair and Deputy Governor of The United Kingdom’s central bank, asserts that “this report is a real step forward for this group of central banks in agreeing the common principles and identifying the key features we believe would be needed for a workable CBDC system. As well as helping central banks to meet their public policy objectives, the report provides a useful framework for how central banks provide money and support payment systems in an ever-evolving digital world.”

Likewise, Bank of Canada Governor Tiff Macklem stresses that international co-operation is crucial to improve the quality of CBDCs and to also ensure that they support efficient and low-cost cross-border payments. Collaboration on all levels will be a key priority in the years ahead- as the respective leaders of all countries’ central banks certainly seem to agree.

Group chairwoman and President of the European Central Bank Christine Lagarde states that in tandem with technological developments that are changing pretty much every aspect of our lives, central banks have a duty to safeguard people’s overall trust in the financial system. She further states that this new report is convincing proof of the high degree of international cooperation that exists between the seven central banks who worked together to compile it.

The report in its entirety can be found here:

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