Central Bank Digital Currency: One, Two or None?

Abstract

This paper considers the motives, modalities, and possible consequences of central bank digital currency (CBDC) issuance. It starts by drawing a distinction between a wholesale CBDC (WCBDC), accessible only to financial intermediaries, and a retail CBDC (RCBDC), accessible to the general public. The issuance of one could be dissociated from the other, implying the possibility of one, two, or no CBDC(s). The main motive for issuing a WCBDC could be to promote financial innovation and to lower transactions costs using a blockchain. The motives for issuing a RCBDC could be to supply the public with a digitalised monetary instrument without any liquidity or credit risks, easy to access and cheap to use. A CBDC would be created or destroyed only by the central bank and would be issued and exchanged at par with other forms of central bank money (banknotes and reserves). A WCBDC would have to be issued on a permissioned rather than a public blockchain. It would also have to be remunerated to keep reserves and the WCBDC at par. A RCBDC would not necessarily use the blockchain and would most likely involve intermediaries. The issuance of a CBDC would represent a supply shock, which would support economic growth in the medium to long run and could transitorily weigh on prices. One consequence of issuing a WCBDC could be the development of an intraday market, which could in turn lead to the adoption of a real-time monetary policy. Furthermore, the issuance of a RCBDC could put a floor to bank deposit rates and, if it is remunerated, raise them. If the RCBDC were not remunerated, the effective lower bound would be raised to zero and the effectiveness of asset purchases by the central bank could be diminished. If it were, the interest and exchange rate channels should be strengthened. The remuneration of the RCBDC would thus seem to create a trade-off between the effectiveness of monetary policy and the cost of bank intermediation.

The 100% Reserve Reform: Calamity or Opportunity?

“…-The CP and NB would create risks but these risks could probably be managed and accepted if the reform was undertaken on a voluntary basis, as in DC, and not on an imposed and generalized basis, as in the other proposals, also leaving aside the more "hands-on" aspects of DC, that can be separated from 100% Reserve. In fact, challenges similar to those raised by the 100% Reserve aspect of DC would arise if a CBDC were issued (Pfister, 2019(Pfister, , 2020). -LPB remains most likely unrealistic at the current stage.…”

“…In fact, these stablecoins could as well be dubbed "100% Reserve stablecoins". More simply, central banks could issue CBDC, as the central bank of Bahamas has already done and the People's Bank of China and the Riksbank among the other central banks more advanced in the project (Pfister, 2020). Libra (2020) also mentions the possibility to replace its single-currency stablecoins with the corresponding CBDC 4 .…”

“…In addition, as mentioned by Goodhart about the risk of increased pro-cyclicality created by 100% reserve plans (see above), runs on the banking system would be facilitated, since there would be no need to visit a bank's branch or a cash dispenser anymore in order to convert bank deposits into central bank money. As a countervailing argument, the provision of CBDC as a permanently safe and liquid instrument would better protect the economy in times of crisis (Pfister, 2019(Pfister, , 2020, whereas there would remain a residual risk on stablecoins (Melachrinos and Pfister, 2020).…”

Stablecoins: A Brave New World?

“…These initiatives refer to Global Stable Coins (GSCs) and call for specific responses, whether from major private financial and payment services players, regulators or central banks (see section 3); -Depending on the target market, wholesale (large-value transactions, typically between financial institutions or between financial institutions and large corporations) or retail (mass transactions between individuals or between individuals and merchants). This distinction echoes the distinction that can be made between the two forms of central bank digital currency (CBDC), with wholesale CBDC aimed at financial institutions and retail CBDC aimed at the public (Pfister, 2017(Pfister, , 2019(Pfister, , 2020. Furthermore, compared to the immediately preceding declination, any wholesale SC is potentially systemic; -Depending on the reference, which may be unique (most often the US dollar) or constituted by a basket as envisaged by the promoters of the Libra initiative (Libra, 2019).…”

“…However, this issue could be addressed by moving to a real-time monetary policy. 9 Finally, as in the case of wholesale CBDC (Pfister, 2019(Pfister, , 2020, the question of the remuneration of the assets backing the SCs backed by central bank money, compared with the remuneration of reserves, would also arise.…”