The Bank for International Settlements (BIS) announced a Renminbi (RMB) Liquidity Arrangement, which has been developed with the People's Bank of China (PBC), to provide liquidity to central banks through a new reserve pooling scheme. In addition, the BIS Innovation Hub set out lessons learned from the practical experiments on the cross-border use of the central bank digital currencies (CBDCs). BIS also published its Annual Economic Report for 2022, which includes a special chapter that sets out the blueprint for a future digital monetary system and examines the structural limitations of crypto-assets and decentralized finance.
RMB liquidity arrangement. This liquidity arrangement aims to provide liquidity support and can be utilized by participating central banks during future periods of market volatility. Each participating central bank contributes a minimum of RMB 15 billion or USD equivalent, in RMB or USD, placed with the BIS, creating a reserve pool. The arrangement initially includes a group of central banks in Asia and the Pacific, including Bank Indonesia, Central Bank of Malaysia, the Hong Kong Monetary Authority, the Monetary Authority of Singapore, the Central Bank of Chile, and PBC. The reserve pooling provides additional features, as participating central banks would not only be able to draw down on their contributions, but would also gain access to additional funding through a collateralized liquidity window operated by BIS, up to an amount equivalent to the central bank's share of the collateralized liquidity window.
Lessons learned on CBDCs. The BIS Innovation Hub is leading practical experiments on the CBDCs, wherein three cross-border CBDC projects have been completed with central banks and private-sector partners worldwide (Inthanon-LionRock2, Jura, and Dunbar), one project is in progress (mBridge), and yet more projects are being planned. This latest BIS publication outlines the similarities and differences of the four projects, with a view to setting out the insights and lessons learned. Collectively, the projects show that platforms with two or more CBDCs are technically feasible and offer a range of benefits that can lead to faster, cheaper, and more transparent payments across borders. However, certain concerns that remain to be tackled relate to policy considerations, legal and regulatory frameworks, and basic operational economics that might call into question the viability of multi-CBDC platforms. Hence, many avenues still remain to be explored by both the public and private sectors, individually and in collaboration. The publication notes that collaborative efforts are necessary to answer the questions ahead and that the BIS Innovation Hub is uniquely positioned to bring central banks together to explore how cross-border payments can be improved.
Annual Economic Report for 2022. The report contains a chapter that examines the structural limitations of crypto and decentralized finance (DeFi), outlining the inherent risks in their design. The chapter highlights that a digital version of money issued by a central bank could provide many of the same features offered by cryptocurrencies and stablecoins. The chapter includes a summary of the structural limitations that prevent blockchains from processing a high volume of transactions per second, like other public and private payment systems and provides an outline of the best regulatory approaches to crypto and decentralized finance risks. It also features a discussion on how permissioned distributed ledger technology systems can use central bank money, along with the insights on how to design retail CBDCs that support financial inclusion. The chapter notes that recent advances in wholesale and retail CBDCs and retail fast payment systems could form the basis of an adaptable future monetary system that fosters private-sector innovation, while enabling greater financial inclusion and user control over data. It is highlighted that the future monetary system should be the fusion of new capabilities around the core of trust provided by the central bank. The private sector will provide customer-facing activities with new functions such as the tokenization of money and financial instruments and instant retail payments through new interfaces. This combination could bring about lower costs, greater financial inclusion, more user control over financial data, improved integrity, and seamless cross-border activity, helping to overcome shortcomings in today's arrangements.
- Press Release on RMB Liquidity Arrangement
- Notification on Using CBDCs Across Border
- Annual Economic Report 2022
- Press Release on Future Digital Monetary System
Keywords: International, Asia Pacific, China, Banking, Liquidity Risk, RMB Liquidity Arrangement, CBDC, Digital Currencies, Suptech, Basel, Regtech, Decentralized Finance, BIS Innovation Hub, BIS
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