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Central bank digital currencies: good in theory, less so in practice, says BIS

Central banks across the world are toying with the idea of issuing their own digital currencies as the use of paper money declines. But in practice, few see the value of venturing into such uncharted territory, according to a senior official from the Bank for International Settlements.

It is not the role of the central banks to take risks with financial innovations, Agustín Carstens, general manager at the BIS, said in a March 22 speech at the central bank of Ireland.

"Central banks do not put a brake on innovations just for the sake of it," he said. "But neither should they speed ahead disregarding all traffic conditions. We have to make sure that innovations set the right course for the economy, for businesses, for citizens, for society as a whole. This is what we are doing now."

The Switzerland-based BIS is a global financial institution that is widely seen as the "central bank of central banks."

As cash use falls in many developed economies, there is a growing argument for central banks to issue their own digital currency — that is to say, electronic versions of notes and coins, Carstens said.

But central bank digital currencies, or CBDCs, would create changes to the way that central banks carry out fundamental tasks such as managing money supply and setting interest rates.

"At least in a transitional period, all these changes have the potential to completely upend the way that monetary policy affects the economy. Such changes are not ones that central banks take lightly," he said.

According to a recent study carried out by the BIS' committee on payments and markets infrastructures on 60 central banks worldwide, about 70% said they were carrying out research into the possibility of issuing their own digital currency. But CBDCs remain largely theoretical for most central banks, with only five having progressed to running pilot projects at the time of the study.

These include Sweden's central bank, Sveriges Riksbank, which is actively looking at implementing the e-krona, and Banco Central del Uruguay, which recently completed a pilot of the e-peso as part of a wider government program to encourage financial inclusion, payment system efficiency and formalization of the labor market.

More than 85% of central banks describe themselves as either unlikely or very unlikely to issue their own digital currency in the short-to-medium term, according to the research.

As unexciting as it may seem, the role of the central banker is to be a guardian of stability rather than an innovator, Carstens said.

"James Joyce once said: 'a man of genius makes no mistakes; his errors are volitional and are the portals of discovery.' This is an inspirational guide for artists and writers; the cost of getting it wrong is just brief personal disappointment. But the upside is huge, and a masterpiece could follow. This gung-ho attitude is common in the fintech industry. 'Just do it!' is the mantra. To them, worrying about the consequences of mistakes is for wimps.

"But central bankers do not think of themselves as geniuses, and prefer to tread cautiously into new territory."