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Central bank crypto is rapidly becoming a thing. Governments have obviously realised that digital currencies are here to stay, and have duly tasked central bank governors with the task of finding out how they can continue to exercise some degree of control over the burgeoning market.

How will central bank cryptocurrencies work in practice?

The International Monetary Fund, the Committee on Payments and Market Infrastructure, the BIS Innovation Hub and the World Bank have been putting their heads together to work out what cross border payments are going to look like in the post fiat currency world. Central bank digital currencies – CBDCs – are in the frame as the best solution, but right now there is little international cooperation going on.

A joint report from these august institutions has urged closer cooperation – e.g. the establishment of common standards, basic compatibility, and international payment infrastructure. The new report reckons that central banks need to have some form of interoperability in place for their CBDCs.

“Reforming cross-border payments to make them cheaper, faster and more reliable is a priority and the G20 has endorsed a roadmap to address the key challenges,” said Sir Jon Cunliffe, chair of the CPMI and deputy governor for financial stability at the Bank of England. “Our work on CBDCs is one part of this comprehensive programme. While many of the roadmap’s actions seek to improve the existing cross-border payments ecosystem, CBDCs offer the opportunity to start with a ‘clean slate’.

Sir John believes it is “crucially important” that central banks take the cross-border dimension of CBDCs into account. It is easy to see how all kinds of legacy issues could be created with the future cross-border payments infrastructure in the future if this is not addressed soon.

How soon before you can trade CBDCs?

So where are we with the CBDCs at the moment? No major central bank has yet launched one and we get the distinct impression that these are at varying levels of development behind closed doors. After all, the infrastructure underpinning digital currencies generally is still a fast-evolving beast. Many design and policy issues around CBDCs have yet to be addressed. Too many central banks are still coming at this issue from a domestic market perspective, and the whole international dimension looks like it is being routinely booted into Phase 2.

The concern of the likes of the World Bank and IMF are understandable in this context. The BIS Innovation Hub is known to be working with some central banks to establish prototypes and is trying to establish some form of blueprint that will demonstrate how CBDCs will work.

The risks of CBDCs

“Central bank digital currencies are a potential pathway to improving international payments, but they bring risks for emerging market and developing economies and require a lot of work on regulatory and policy conditions to be successful,” said Indermit Gill, who is involved with the equitable growth and finance practice group at the World Bank.

We can see why BIS and its peers want to get involved at as early a stage as possible: the risks of interoperability problems within the digital markets infrastructure in the future are high if there is not a concerted effort to establish some form of accepted international playing field for these future currencies.


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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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