The Future of Money and the Central Bank Digital Currency Dilemma

Abstract

In this paper we set out a three-pillar monetary-financial framework to (i) analyze, categorize and compare past, current and emerging means of payment; to (ii) capture their creation and destruction processes through sectoral balance sheet dynamics; and to (iii) identify the inherent risks to the current monetary-financial system, also known as the fractional reserve banking system. These risks, which stem from sudden shifts in money demand and supply, are as follows: (I) risk of a cashless society; (II) risk of structural bank disintermediation; (III) risk of systemic bank runs; (IV) risk of currency substitution; and (V) risk of economic and financial bubbles. This framework will guide the assessment of the central bank digital currencies (CBDC), which are considered as the next step in monetary evolution. We will analyze two large groups of CBDC proposals: (i) proposals aimed at complementing cash and bank deposits; and (ii) proposals aimed at replacing all bank deposits with CBDCs. We find that once CBDCs are issued in both sets of proposals, there is always a trade-off between low levels of (I), (IV), (V), risks and high levels of (II) risk. This trade-off could also be defined as the CBDC dilemma, which states that in most CBDC proposals it is impossible to have both of the following at the same time: (1) low levels of (I), (IV) and (V) risks; and (2) low levels of (II) risk. Finally, we suggest that further research on CBDCs should focus on the second group of proposals on a phase-in basis in order to also mitigate the structural bank disintermediation risk and hence to overcome the CBDC dilemma.

Privacy and Transparency in CBDCs: A Regulation-by-Design AML/CFT Scheme

“…act as intermediaries for market placement, compliance, distribution or settlement. Accordingly, CBDC architectures have been labelled as direct, hybrid, intermediated or indirect/synthetic [16], and they may involve varied public and private stakeholders [9], [17].…”

Rethinking Monetary Sovereignty: The Global Credit Money System and the State

“…Accordingly, states face difficult choices in how to maintain their monetary sovereignty in the face of new private moneys (Hayes 2021; Murau 2017a; Viñuela, Sapena, and Wandosell 2020). One policy is to pursue a ban of private money forms, forcing non-bank financial institutions to give up par clearance or prohibit their operations entirely (Bindseil, Papsdorf, and Schaaf 2022).…”

“…Governments face global bond markets and the realpolitik of the IMF and the World Bank (Roos 2019). Regulators and supervisors across the globe struggle with cryptocurrencies, stable coins, and shadow banking instruments (Fama, Fumagalli, and Lucarelli 2019; Viñuela, Sapena, and Wandosell 2020). Meanwhile, even local banks in low-income countries seek to comply with some version of the standards set at Basel’s Bank for International Settlements (Jones 2020).…”

The Central Bank Digital Currency in Malaysia: A Literature Review

“…Another example of a later stage implementation is in Sweden where they are experimenting with the Swedish E-Krona. The Swedish E-Krona system is based on DLT with a central ledger run by the Riksbank (Swedish Central Bank) and on which authorised private payment providers record all transactions of CBDC account holders [20]. The Riksbank would issue digital currency to banks who would distribute it to end-users.…”