Bank for International Settlements report reinforces Mastercard’s principles for central bank digital currency development

October 13, 2020 | By Raj Dhamodharan

Around the world, central banks, financial institutions, commercial banks, tech brands and consultancy firms are absorbing the details of the Bank for International Settlements’ (BIS) recent report identifying the foundational principles and core features for any publicly available central bank digital currency (CBDC), which, at its simplest, is a digital form of cash.

The report, published October 9, is a joint effort by the Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, Board of Governors of the Federal Reserve, and the BIS. It outlines three key principles for the creation of CBDCs, stating that they must be in “co-existence with cash and other types of money in a flexible and innovative payment system … Any introduction (of a CBDC) should support wider policy objectives and do no harm to monetary and financial stability, and features should promote innovation and efficiency.”

The report also outlines the role for the public and private sectors in creating a safe, efficient and accessible system. CBDC payments should be as easy to use as existing mechanisms – for example, transacting by tapping with a contactless enabled card or scanning a mobile phone – and must offer sufficient interactions with private sector digital payment systems to allow interoperability between systems.

Mastercard welcomes this report; we strongly believe the key requirements and foundational principles outlined by the BIS are a promising next step in the industry as central banks make decisions for their jurisdictions about issuing CBDCs.

CBDCs fueling innovation

As a pioneer and leading patent holder in the digital payments space, Mastercard continues to drive the market in the safe, secure and compliant development of digital payments technologies. We strongly believe providing cash to the public is a core responsibility of central banks, and we are committed to supporting countries on their chosen path to payment system modernization, including the development of CBDCs.

We also strongly believe that for CBDCs to serve the needs of consumers, preserve the health of the financial system, and ensure that consumers continue to have access to robust and innovative payment options, they must adhere to a set of common principles. Mastercard’s principles include:

  • Embracing innovation. Mastercard’s more than 50 years of expertise running retail payment infrastructure around the world has provided us with deep insights into what it takes to deploy safe, resilient, and sustainable payment networks. We continue to invest in innovative approaches to payment infrastructure and services – including the use of blockchain technology – and we are eager to leverage that expertise to support the design, testing, and deployment of new payment infrastructures around the world.
  • Finding the right tools for the job. CBDCs are an exciting new tool in the central bank’s toolbox, but that does not mean they are the right tool to fix every problem, nor that every country needs a CBDC. In some cases, a CBDC may be the right tool for the job, while in others tried and tested methods, such as a real-time payment system, may be a better fit. Policymakers should compare the suitability of a CBDC with other forms of new payment infrastructure – such as real-time payment systems – in order to find the approach that best fits their unique payment needs.
  • Private sector participation. Open and competitive payment ecosystems are critical to enabling access, adoption, and use of a comprehensive suite of payment options that serve a wide range of user needs and preferences. Ongoing payments innovation, expanded financial inclusion, and the efficiency of national and international payment flows all depend on vibrant private sector competition in payments. A CBDC should seek to preserve those functions through the inclusion of the private sector in its design and distribution.
  • Interoperability. Interoperability between payment systems avoids closed-loop networks that reduce the fungibility and portability of money; fragmenting liquidity and limiting competition. A growing chorus of economists argue that ensuring interoperability between a CBDC and other forms of domestic payments can play an important role in both strengthening the domestic payment ecosystem and reinforcing the role of central bank money at its core. Interoperability also allows consumers and businesses the chance to embrace the CBDCs in a meaningful way. Consumers will be more likely to adopt a CBDC if it can be used on existing acceptance infrastructure and is supported by known and identifiable payment methods (physical and digital) that are linked to the user’s existing devices and accounts.
  • Consumer protection. Consumer trust is at the heart of payments. Individuals must have confidence that they are getting what they pay for and that they are protected in the event of fraud, disputes, refunds, or data misuse. Gaining and keeping that trust requires a framework of standards and rules that safeguard the security of every transaction while ensuring that all parties are treated fairly and equitably.

Launch of CBDC testing platform

In September this year, we announced a proprietary virtual testing environment for central banks to evaluate CBDC use cases and experiment with the simulation of issuance, distribution and exchange of CBDCs between banks, financial service providers and consumers. Central banks, commercial banks, and tech and advisory firms are invited to partner with us to assess CBDC tech designs, validate use cases and evaluate interoperability with existing payment rails available for consumers and businesses today.

The BIS report argues that the next steps in exploring CBDCs must be “cautious, incremental, and collaborative.”  Our CBDC testing platform provides an environment for just the kind of collaboration the BIS recommends – a place where central banks and the private sector can work together in a controlled environment to transform the way people and businesses transact. As a leader in operating multiple payment rails and convening partners, we look forward to continuing our engagements with central banks around the world on our mission to modernize payments.