Central bank digital currencies (CBDCs) are moving from concept to practical design and renew the institution of money in a new form, writes the Bank for International Settlements in its Annual Economic Report 2021.

The Report lays out the design choices for CBDCs, which, alongside cash, would be issued and backed by a central bank.

CBDCs would build on the central bank's traditional roles in the payment system, to ensure that payments are final and certain; that there is enough liquidity for the payment system to function; and that central bank money is available on an equal basis to all parties.

BIS analysis finds that CBDCs would best function as part of a two-tier system where the central bank and the private sector work together. The central bank would operate the core of the system and ensure its safety and efficiency, while banks and payment service providers would use it to serve customers. From a practical perspective, the BIS says the most promising CBDC design would be one tied to a digital identity, requiring users to identify themselves to access funds. 

In addition, the BIS says international cooperation on design will be vital if central banks are to harness the full benefits of CBDCs, and to improve cross-border payments while countering foreign currency substitution.

"CBDCs are a concept whose time has come. They open a new chapter for the monetary system by providing a technologically advanced representation of central bank money. In doing so, they preserve the core features of money that only the central bank can provide, anchored in the foundation of trust in the central bank," said Hyun Song Shin, Economic Adviser and Head of Research of the BIS.

BIS also includes analyses on:

• The architecture of CBDCs and how they would fit into the financial ecosystem;
• The international dimension of CBDC issuance and the implications for cross-border payments;
• Project Helvetia, which demonstrated the feasibility of integrating tokenised assets and central bank money;
• Application programming interfaces and how they could act as a bridge between different providers and simplify transactions.