Design choices for central bank digital currencies need to follow customer needs: BIS report

A new report from the Bank for International Settlements (BIS) calls for potential issuers of central bank digital currencies (CBDCs) to keep consumer needs in mind when making technological choices. 

The BIS is an international financial institution owned by 62 central banks. In the latest report that focused on the topic of CBDCs, the group visited the much-debated question of whether central banks should issue digital currencies at all.

The report approached the topic by outlining six core consumer needs – privacy, ease of use, cash-like safety, universal access, across-border payments, and cash-like peer-to-peer usability. The authors then analyzed the design choices that would address these needs and make such CBDCs useful. 

Indirect or direct claims?

The basis of the CBDC infrastructure concerns the legal structure of claims.

The report presented three design options:

1. An indirect CBDC model where the central bank only tracks wholesale accounts and consumers have a claim on intermediaries
2. A direct CBDC model where the claim falls directly on the central bank
3. A hybrid CBDC model where there is a direct claim on the central bank but intermediaries handle payments.

The report did not offer a clear recommendation but merely outlined the advantages and disadvantages of all three models. 

The indirect CBDC model does not require the central bank to handle dispute resolution and offers "the convenience of today's systems based on intermediaries."

Nevertheless, the central bank would have no records of individual claims and there would be no direct proof of the claim. The direct CBDC model is rid of intermediaries but falls short when it comes to reliability, speed, and efficiency. The hybrid model combines the other two options’ problems. 

DLT-based or conventional central bank infrastructure? 

According to the report, both options have benefits and drawbacks when it comes to achieving cash-like safety. With conventional infrastructure, where data is stored across multiple physical nodes, the system is vulnerable against a hacking attack targeted at the top node. With a DLT-based system, on the other hand, there is risk associated with the consensus mechanism in the case of, for instance, a denial-of-service attack.

"The consumer's need for cash-like payment safety means that a CBDC must be secure not only from the insolvency or technical glitches of intermediaries, but also from outages at the central bank," the report noted. 

"When it comes to achieving resilience, neither a DLT-based system nor a conventional one has a clear-cut advantage," it continued. "This decision can only be made once the architecture has been decided upon, as DLT is only feasible for some operational setups."

Account or token-based access technology?

The third key issue is how and to whom access should be given. The conventional model follows the account model where claims are operated the way a bank account works. Alternatively, there can be a token-based system where anyone can get a digital signature. 

While the second option enables universal access and security, users can introduce risks to the system if they reveal their private keys.

As a result, the report favors a system where "a CBDC should preserve its users' privacy vis-à-vis their transaction partners."

"In such a system, a merchant is presented with a proof that the payment for a specific invoice has been made, but no information about the payee is revealed," the report said.

Wholesale or retail interlinkages?

Cross-border payment and the ability to participate in the flourishing international e-commerce constitute another central consumer need that the report sought to address.

Hence, the report recommended central banks to implement novel retail linkages from the start to let consumers hold more than one currency.

At the same time, however, the exact way to set up these retail linkages would depend on the access model. A token-based national system would automatically enable international access. But an account-based system would require international coordination to establish interoperability.