The Future of Money and the Central Bank Digital Currency Dilemma (original) (raw)
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Central Bank Digital Currencies: considerations for a not-too-distant future
Brazilian Keynesian Review
The central bank digital currencies (CBDC) are subjects of the rising interest of central banks from advanced and emerging economies. Given the relevance and topicality of the subject, this paper seeks to organize the debate that encompasses what is understood as CBDC in the recent international literature, as well as to analyze the possible implications of its implementation. Given that CBDC may assume various forms, there’s still high uncertainty regarding its potential costs and benefits. The decisions concerning the features of the CBDC may have deep implications on various aspects such as the resilience of the domestic financial system, monetary policy effectiveness, functioning of the credit system, and means of payments, among others. Despite the uncertainty associated with the range of possible CBDC architectures, we argue that the strategies of the central banks regarding CBDC may be seen as defensive, as a way to keep up with the technological and cultural changes whilst m...
Many central banks and policymakers have discussed the possibility of central banks issuing new forms of money called "central bank digital currencies" (or CBDCs) while new actors and private initiatives have emerged to propose new means of payment. Many discussions centered on whether these initiatives could compete with traditional monies, such as cash and banknotes. Now, central banks wish to understand how they can respond. One possibility to innovate would be to issue digital money, called CBDC. These changes could have widespread consequences on the financial sector and the real economy, which is why CBDC has been widely discussed by both academics and central banks. That being said, these discussions remain theoretical for now, as central banks are yet to issue the first CBDC. This paper proposes to investigate those discussions and assesses the risks and opportunities of Central Bank Digital Currencies using evidence from the literature and from historical data on past financial crises.
Central Bank Digital Currency - A Macro-Financial Perspective
2018
The dissertation aims at performing an analysis of latest trends concerning Central Bank Digital Currencies. To put this in concrete terms, it is questioned whether the public would welcome such an initiative and which risks it would entail. To date, privately issued cryptocurrencies feature high volatility and uncertainty on future developments due to the low scalability. Furthermore, privacy and anonymity features favour illegal usages of such currencies. The paper will also analyse the possible implications of a new sovereign digital currency, which is available to the public, on the current monetary policy instruments, with reference to the latest paper currency’s demand trends in developed countries. Moreover, as far as such new CBDC can be interest bearing, perhaps could address the zero lower bound issue. From a banking policy perspective, it is understood that in case of a banking crisis a bank run would be somewhat more probable. The paper will also focus on the role of trust in environments characterized by information asymmetries such as the financial market. However, it is worth recalling that the lending role of commercial banks should be taken into proper consideration, assuming central banks would not want to involve in such area, especially in the scenario whereby central banks would directly compete with private banks collecting deposits from private agents.
Designing New Money -The Policy Trilemma of Central Bank Digital Currency
The prospect of central banks issuing digital currency (CBDC) immediately raises the question of how this new form of money should co-exist and interact with existing forms of money. This paper evaluates three different scenarios for the implementation of CBDC in terms of their monetary policy implications. In the ‘money user scenario’ CBDC co-exists with both cash and commercial bank deposits. In the ‘money manager scenario’ cash is abolished and CBDC co-exists only with commercial bank deposits. And in the ‘money maker scenario’ commercial bank deposits are abolished and CBDC co-exist only with cash. The evaluation is based on an adaption of the classical international monetary policy trilemma to a domestic monetary system with multiple forms of money. Our proposition is that a monetary system with two competing money creators, the central bank and the commercial banking sector, can simultaneously only pursue two out of the following three policy objectives: Free convertibility between CBDC and bank money, parity between CBDC and bank money, and central bank monetary sovereignty, which is the use of monetary policy for anything else than support for commercial bank credit creation. This means that the decision on the design of a monetary system with CBDC implies a crucial political decision on the prior-ities of the central bank.
Central Bank Digital Currency: Benefits and Drawbacks.
Central Bank Digital Currency: Benefits and Drawbacks., 2019
Prompted by technological advances and a decline in cash usage, many Central Banks are investigating whether it would be possible to issue a digital complement to cash, a so-called Central Bank Digital Currency (CBDC). Despite ongoing research and occasional pilots, Central Banks have shied away from introducing a CBDC for public use. Even though CBDCs would have the potential to counteract some of the problems that could arise for the payment system in the future when the use of cash is rapidly declining, they also present significant risks for financial stability. This article contributes to the discussion by setting out a CBDC framework and formulating broad design principles for CBDC in line with the central bank´s function as Lender of last Resort (LOLR). The attributes and functionality of a CBDC are highly determinative of the architectural design and technical solution chosen, particularly in the context of LOLR. Therefore, we argue in favour of a solid coin for e-emergency liquidity assistance, available 24 hours a day and seven days per week, anonymous, interest-bearing and unlimited, to prevent bank runs and restore financial stability in times of financial distress.
Central Bank Digital Currency: A New Instrument of Monetary Policy
Pénzügyi Szemle = Public Finance Quarterly
Central bank digital currency is a claim on the central bank, which is accessible by a wide range of customers, digital, flexible and potentially interest-bearing. The new asset is being researched in many countries, and widening the accessibility of financial services, creating the digitalized form of cash with monetary policy considerations being among its motivations. An interest-bearing central bank digital currency could make the central bank’s monetary transmission direct, which could improve the efficiency of monetary policy. Furthermore, the asset could help to strengthen competition among banks and could support the spread of financial innovations. Risks related to the instrument, such as disintermediation, can be counterbalanced by the increasing deposit volumes due to higher interest rates after the introduction of the instrument, and by limits set on the maximum holdings of the asset. An interest-bearing central bank digital currency can make targeted monetary policy pos...
Central Bank Digital Currency: Central Banking For All?
SSRN Electronic Journal, 2020
The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bank's contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endangered maturity transformation.
Central bank digital currencies: An agenda for future research
Research in International Business and Finance
Central bank digital currencies are engendering concern. As understanding of CBDCs is very limited, further research is warranted which will focus not only on the economic rationale of CBDCs but also on how they will impact monetary policy transmission, financial and price stability, inflation targeting, unconventional monetary instruments, central banks as lenders of last resort, and provision of forward guidance. There are also unsettled questions regarding ethics, privacy and environmental and technological constraints. With the imminent implementation of CBDCs, it is vital to explore these issues.
Central Bank Digital Currencies: A Framework for Assessing Why and How
Digital currencies have attracted strong interest in recent years and have the potential to become widely adopted for use in making payments. Public authorities and central banks around the world are closely monitoring developments in digital currencies and studying their implications for the economy, the financial system and central banks. One key policy question for public authorities such as a central bank is whether or not to issue its own digital currency that can be used by the general public to make payments. There are several public policy arguments for a central-bank-issued digital currency. This paper proposes a framework for assessing why a central bank should consider issuing a digital currency and how to implement it to improve the efficiency of the retail payment system.
Central Bank Digital Currencies: The Motivation
Emerald Publishing Limited eBooks, 2023
A growing number of central banks are considering the issuance of central bank digital currencies (CBDCs). Upon their introduction and depending on their exact design, CBDCs may have considerable consequences for deposit insurers as well. In the first of a set of papers, this Fintech Brief sets out four of the main motivations for issuing CBDCs. Acknowledging considerable divergences across jurisdictions, we find: • CBDCs for the general public ("retail CBDCs") would constitute a central bank liability and a form of digital cash. To the public, they would be an alternative to central bank issued cash and private money, such as bank deposits. • A large and growing share of central banks are experimenting with retail CBDCs. Some 20% of central banks indicate that they are likely to issue a retail CBDC by 2026, 40% indicate this is "possible". • Short-term monetary policy considerations are unlikely to play a significant role in central banks' motivation for CBDCs. • Whereas central banks in emerging markets and developing economies note that CBDCs may contribute to promoting financial inclusion, in advanced economies, CBDCs are not the most straightforward instrument in doing so. • The evolution of payments plays a pivotal role in developing CBDCs. Given the declining role of cash in some jurisdictions, CBDCs as a new form of central bank money may contribute to safeguarding trust in the public currency. However, the available CBDC amounts necessary for that purpose may cause conflicts with likely and financial-stability-related limits on the volume of CBDCs that individuals may hold. • As CBDCs would offer an alternative payment solution, they would contribute to resilience in future payment markets that may be privately dominated. However, given their digital nature, CBDCs may well be subject to similar cybersecurity and other digital risks that apply to private payment systems. • CBDCs may contribute to competition and efficiency in an otherwise oligopolistic market for payment services, dominated by BigTechs. While potentially challenging to implement, a regulatory or competition-law-based response may be possible and would be less intrusive than introducing a CBDC. • Central banks face the risk of large-scale use by the public of private or public (i.e. CBDC) digital currencies, not denominated in the domestic currency. These currencies may play a decisive role in the economy, and if foreign-based, largely out of reach of domestic legislation. CBDCs and/or private payment solutions in the domestic currency may assist in mitigating this risk, given sufficient demand for these.