The Bank for International Settlement (BIS) recently completed work on central bank digital currencies (CBDCs), analysing their potential implications for payment systems, monetary policy implementation and transmission as well as for the structure and stability of the financial system. We summarize here the main findings of the survey.
CBDC is a potential new form of central bank money which stays separated from reserves held by commercial and/or central banks. It can be designed by blending a different shade of several characteristics, including access (more or less restricted), degree of anonimity, operational availability and the possible bearing of interest.The report concentrates on two “prototype” CBDC, a wholesale (accessible by a restricted and predefined group of users) and a general one accessible to the majority of people.
Traditionally, central banks have, for various reasons, tended to limit access to digital account-based forms of central bank money to banks and to other financial or public institutions, while physical central bank money is widely accessible. This approach has, in general, served its scopes: the (currently) proposed implementations for a wholesale CBDC would then look similar (and not superior) to existing infrastructures.
Some central banks are analysing a CBDC that could be made widely available to the general public and serve as an alternative safe, robust and convenient payment instrument. In circumstances where the traditional approach to the provision of central bank money – in physical form to the general public and in digital form to banks – was altered by the disappearance of cash, the provision of CBDC could bring substantial benefits.
Issuance of a CBDC would probably not alter the basic mechanics of monetary policy implementation, including central banks’ use of open market operations. CBDC introduces a new type of central bank money whose demand – like cash – would need to be accommodated. CBDC would also not necessarily affect the discretion that central banks have in choosing their monetary policy implementation techniques (eg reliance on purchases of securities or credit operations with banks) as well as the maturity, liquidity and credit risk of their assets.
CBDC could enrich the options offered by the central bank’s monetary policy toolkit, eg by allowing for a strengthening of pass-through of policy rate changes to other interest rates or addressing the zero lower bound (or the even lower, effective bound) on interest rates. Other more conventional tools and policies can to some extent achieve similar outcomes without introducing new risks and challenges (such as implementing negative interest rates on public holdings of a general purpose CBDC).
Implications are more pronounced for monetary policy transmission and financial markets, especially if a CBDC was to be designed as, or de facto became, an attractive asset. As a liquid and creditworthy asset, a wholesale variant available to institutional investors that would be akin to interest-bearing central bank reserves or reverse repo facilities, yet widely tradeable, could function as a safe asset comparable in nature to short maturity government bills. A general purpose variant could compete with guaranteed bank deposits, with implications for the pricing and composition of banks’ funding.
Introducing a CBDC could also result in a wider presence of central banks in financial systems. This, in turn, could mean a greater role for central banks in allocating economic resources, which could entail overall economic losses should such entities be less efficient than the private sector in allocating resources. It could move central banks into uncharted territory and could also lead to greater political interference.
A general purpose CBDC could however give rise to higher instability of commercial banks deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations.
The report concludes that any steps towards the possible launch of a CBDC should be subject to careful and thorough consideration. Further research on the possible effects on interest rates, the structure of intermediation, financial stability and financial supervision is indeed warranted. The effects on movements in exchange rates and other asset prices remain largely unknown and also deserve further exploration.
As a general judgment, digital currencies’ volatile valuation and inadequate investor and consumer protection, make them unsafe to rely on as a common means of payment, a stable store of value or a unit of account.