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A new report from the Bank for International Settlements (BIS) has recommended that central banks opt for an equal "division of labour" with the private sector when issuing retail central bank digital currency (CBDC).
After weighing up three potential designs for retail CBDCs, a new report has urged central bankers and other policymakers to take the middle path.
The report was authored by the BIS Consultative Group on Innovation and the Digital Economy (CGIDE), which answers to the heads of the central banks of the US, Canada, Brazil, Chile, Colombia, Mexico, Peru and Argentina.
Last month, the CGIDE published a study that considers the merits of direct, indirect and hybrid models of retail CBDC architecture.
Direct model – central bank-led
Under a direct model, retail CBDC tokens would be a direct claim on the central bank, in the same way that banknotes are a direct claim on central banks today.
The ledger of CBDC transactions would also be fully operated by the central bank, and the central bank would handle all functions within the CBDC payment system.
This would include issuing the CBDC, distributing it and interacting with end users.
However, the direct model would require substantial operational and technical capacity from the central bank.
For example, the central bank would be managing customer onboarding activities, including implementing know your customer (KYC) controls for individuals and businesses seeking to open accounts.
In addition, the CGIDE warned that a direct model would likely have detrimental impacts on payments innovation, due to reduced competition and limited private-sector engagement.
This is the main reason that other central banks have not pursued this model thus far, it added.
Indirect model – potentially efficient but largely unsupervised
Under an indirect model, the central bank would rely on private-sector participants as intermediaries, acting as gateways between individual CBDC users and the CBDC payment system.
CBDC tokens held by end users would be claims on intermediaries, while the central bank would keep track of wholesale accounts held by intermediaries.
In effect, an indirect model would be much like today’s financial system, where commercial banks provide money to end users in the form of deposits, but also maintain wholesale accounts with the central bank.
Similarly, under an indirect model, the central bank would not maintain a ledger of individual CBDC transactions.
Hybrid model – recommended
Under a hybrid model, retail CBDC would be a direct claim on the central bank and the central bank would maintain a full ledger of transactions.
However, many other functions within the CBDC payment system would be delegated to intermediaries.
The report recommends a hybrid model in which customer onboarding is the responsibility of private-sector intermediaries.
It also recommends a tiered know your customer (KYC) approach, meaning that wallets that use stricter KYC could unlock higher transaction and holding limits, while wallets that use basic KYC would be restricted to lower transaction and holding limits.
Under a hybrid model, although the central bank would maintain a full ledger of transactions, it could also guarantee privacy by separating transaction identity from customer identity in its data management framework.
The central bank would maintain records of transactions on a unified ledger, but only private-sector intermediaries would collect and store personal information that could be used to identify end users.
