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Central Bank Digital

Currency: A Global

Outlook

JUNE 7, 2019

John Kiff

Monetary and Capital Markets Department

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The Case for Central Bank Digital Currency

The case for and against central bank digital currency

Central bank digital currency design and policy choices

Which central banks are exploring issuing central bank digital currency and why?

Central bank digital currency implementation considerations

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A Money Matrix (An Alternative to the BIS “Flower”)

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Central Banks Are Exploring Digital Currencies

• Diminishing cash usage

• Monopoly distortions

• Financial inclusion

• Cost efficiency vs cash

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Countries Where Retail CBDCs Are Being Explored (33 + 10 + 5?)

Australia (on hold) Jamaica

Bahamas Korea (and rejected)

Bahrain Lebanon

Canada New Zealand (on hold)

China Norway (ongoing)

Curaçao en Sint Maarten Palestine

Denmark (rejected) Philippines

Eastern Caribbean Russia

Ecuador (pilot complete) South Africa

Egypt Sweden

European Area (and rejected) Switzerland

Hong Kong Tunisia

Iceland (rejected) Ukraine

India United Arab Emirates

Indonesia United Kingdom

Iran Uruguay (pilot complete)

Israel (rejected)

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Diminishing cash usage

Financial inclusion Cost efficiency Monopoly distortions Operational risks

Bahamas √

CBCS √ √ √

ECCB √ √ √

Ecuador √

Senegal √

Tunisia √

Uruguay √ √

China √ √ √ √

Canada √

Norway √

Sweden √ √

Central Bank Rationales for CBDC Explorations

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• Legal tender but not CBDC (CB = central bank!) • Dual currency system raises macro issues

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Some Countries Are Exploring Cryptocurrencies

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• In advanced economies, there may be scope for the adoption of CBDC as a

potential replacement for cash for small-value, pseudo-anonymous transactions.

• In countries with limited banking sector penetration and inefficient settlement

technology, demand for CBDC may well be greater.

• CBDC may reduce costs and operational risks associated with the use of cash.

• CBDC may improve financial inclusion in cases of unsuccessful private sector

solutions and policy efforts, and geographic dispersion and remoteness.

• CBDC could bolster the security of, and trust in, the payment system and protect

consumers where regulation does not adequately contain private monopolies.

• But regulation and, where possible, synthetic CBDC and fast payment solutions

could offer compelling alternatives to a CBDC.

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There is no Universal Case for CBDC

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CBDC Could Impact Monetary Policy Transmission and

Interfere with Commercial Bank Intermediation

Aside from the run risk, the BIS

warns that CBDC could impact

monetary policy implementation

by changing the demand for

base money and its composition

in unpredictable ways, and

possibly modifying the sensitivity

of the demand for money to

changes in interest rates. Also,

CBDC could lead to a larger

central bank balance sheet,

which may require it to purchase

additional assets, which could

interfere with key markets

functioning or dry up liquidity.

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• Monetary policy transmission is unlikely to be significantly affected and may benefit.

• The interest-rate channel could strengthen if CBDC increases financial inclusion and

exposes more households and firms to interest-sensitive instruments.

• The bank lending channel could also strengthen if banks rely on wholesale funding.

• the credit and exchange rate channels are unlikely to be much affected.

• Although CBDC could increase funding costs for deposit-taking institutions and

intensify run risk in some jurisdictions, design choices can help ease such concerns.

• Limits on holdings and fees to convert to CBDC; recycling deposits back to the

banking system; outsource CBDC management (e.g., wallets) to banks.

• Deposit insurance may mitigate run risk, plus CBDC could allow the central bank to

offer liquidity faster to avoid the first-come-first-serve dynamics that fuels runs.

• Although it will not eliminate illicit activity, CBDC may in some situations enhance

financial integrity. However, it also entails risks for financial integrity if badly designed.

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But Design and Policies Should Help Mitigate These Risks

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Anonymity

Security

Interoperability

Interest

FPS

Will depend on competition… C

ash

, Cry

pto

Priv

ate

EMo

ney

Fast

Pay

men

ts

… and design features

CBDC Demand Will Depend on Competition and Design

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Full anonymity and large-value transactions allowed [or if strong AML/CFT measures are not implemented]

Transaction sizes are limited If there is appropriate customer due diligence in place & transactions recorded Identity revealed only if illicit activity suspected

CBDC can protect privacy without undermining integrity if…

CBDC can undermine integrity if …

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CBDC Design and Financial Integrity and Privacy

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• A CBDC could pay interest to incentivize its adoption

• An interest-bearing CBDC would eliminate the effective lower bound on interest-

rate policy, but only with constraints on cash usage.

• Paying interest would bring operational challenges to interest calculation and

have an adverse impact on the anonymity due to tax reporting requirements.

• Transaction fees could supplement financial control and prevent overload or

misuse of the system. Could vary depending on transaction types/volumes

• Digital currencies could unlock use cases that were previously impractical.

• Digital identity can be associated with specific usage. For example, age

restrictions could prevent using digital currency to buy certain goods.

• Assuming privacy and security are addressed, other personal data can in theory

be leveraged to implement monetary or fiscal policies.

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Design Features Could Exploit Digital Capabilities

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• Token-based CBDC transfer tokens directly between wallets. Prepaid values

would be stored locally on a card or a mobile wallet app

• Well suited for countries with large unbanked population. AML/CFT standards

may be met with holding/transaction limits and counterparty controls

• Account-based CBDC transfer funds between accounts and the ecosystem can

be run by the central bank or a designated financial institution

• Alternatively, an account-based system could be run on a distributed database, in

which the ledger is replicated and shared across several participants

• DLT platform access can be “public” (accessible by anyone) or restricted to a

group of users (“consortium) or just one (“private”). Ledger integrity can be

managed by all users (“permissionless”) or a selected group (“permissioned”)

• Permissioned networks allow for tighter governance over network participants,

full control over participants’ access to the network and visibility of transactions

• Permissionless lack scalability, and settlement finality.

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Account- versus Token-Basis and Scalability

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• Cybersecurity can be broken into multiple layers, each requiring

appropriate security controls and practices to minimize breach risk and to

build in resilience

• Business: People, process and technology decisions (eg access,

privilege escalation, abuse of privileged functionalities, excessive

permissions, source-code protection, coin issuance model/process, and

decommissioning process)

• Infrastructure: Network, servers, databases and data (eg whether to

deploy the CBDC network, servers, databases and data within their own

datacenter or within a cloud/third party provider’s network.)

• The main goal is to design the CBDC in a “defense-in-depth” fashion and to

consider security during the initial phases rather than later in the process

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Cybersecurity Considerations

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• Although a CBDC could be introduced without designating it as legal tender, its

acceptance would likely be weakened if it were not

• But legal tender is an elusive concept, and its meaning varies from country to

country.

• Central bank legal frameworks need to be examined closely to assess the

possibilities, as well as constraints for issuing CBDC

• Central banks need to consider governance, internal organization, and risk

management when examining the pros and cons of issuing a CBDC.

• Requires a clear understanding at the Board and operational levels of initial

considerations for issuance and operational considerations once design is set

• Regulations may need updating to accommodate new financial institution roles.

CBDC should be gradually developed through pilots or regulatory sandboxes

• They need to hire and retain experts in relevant areas, such as those focusing

on operational and cyber risk, and payment and settlement risks. 18

Legal, Governance and Regulatory Perspectives

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CBDC Cost and Operational Efficiency: No Free Lunch

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Current Currency Life Cycle

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Step User Actions System Actions

1. The CB produces the coins

and bank notes

The CB contracts with and pays third-party

firms to print finished banknotes.

2. The CB distributes the

physical cash.

The CB distributes the cash to commercial

banks, who pay for them with a debit to their

reserve account at the CB. The banks then

distribute the cash to the general public.

3. The CB destroys coins and

notes that have become too

worn out to be useful.

The commercial banks ship the cash to the CB,

the CB credits their accounts accordingly, and

the CB destroys the cash.

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Digital Currency Life Cycle

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Step User Actions System Actions

1. The CB produces the DC

using software provided by

third-party provider.

The CB manages the DC production, given that the

CB typically has the exclusive right of issuing legal

tender

2. The DC is transferred to a

virtual vault and digital

wallets.

This component provides the storage, security,

verification and certification of all transactions. It

could be managed by the CB or outsourced.

3. Mobile payment app for users

provided by third-party firm.

Users’ digital wallets in the virtual vault linked to

mobile phone numbers in the mobile payment app.

4. Store front operation operated

by licensed institutions

Users cash in and out of digital wallets at the store

fronts

5. Cloud storage facilities? Call

center?

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“The case for digital currency is not universal, we should

investigate CBDC further, seriously, carefully, and

creatively!”

“I believe we should consider the

possibility to issue digital

currency. This currency could

satisfy public policy goals, such

as (i) financial inclusion, and (ii)

security and consumer

protection; and to provide what

the private sector cannot: (iii)

privacy in payments. [But] the

case for digital currency is not

universal, we should investigate

it further, seriously, carefully, and

creatively.”

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• International Monetary Fund – World Bank, 2018, “Bali Fintech Agenda,” IMF Policy Paper,

October 11.

• LaGarde, Christine, 2018, “Winds of Change: The Case for New Digital Currency,” Speech

at the Singapore Fintech Festival, November 14.

• Carstens, Agustín, 2019, “The Future of Money and Payments,” Speech at Central Bank of

Ireland, March 22.

• Mancini-Griffoli, Tommaso, Maria Soledad Martinez Peria, Itai Agur, Anil Ari, John Kiff, Adina

Popescu, and Celine Rochon, 2018, "Casting Light on Central Bank Digital Currency," IMF

Staff Discussion Note 18/08, November 14.

• Barontini, Christian and Henry Holden, 2019, "Proceeding with Caution – a Survey on

Central Bank Digital Currency," BIS Papers No. 101, January.

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References