Highlights
- CBDC could be token or account-based
- If attract deposits away from banks, who grants loans?
- If tokenized, limited supply of CBDC could attract premium
- Managing monetary policy using CBDC will be unpredictable
- Central banks could have high demand for government securities, bank loans, currencies
On Friday in Dublin, Agustín Carstens General Manager of the Bank for International Settlements (BIS) gave a speech about Central Bank Digital Currencies (CBDC). The BIS is owned by central banks. During the talk, he explained why central banks are so hesitant to adopt CBDCs in the near term despite 70% of central banks exploring digital currencies. (See more details of BIS survey).
If considering retail CBDCs offered to the public, there are multiple potential differences between cash and CBDCs. These include a possible lack of anonymity and the ability to charge interest.
Carstens pointed out that a CBDC could be either a token or account-based. While account-based currently exists for institutions, he said “it would be easier to replicate the attributes of cash” with tokens. Presumably, that could in part refer to anonymity which may be undesirable for central bankers.
One attribute that is close to cash is that the outstanding amount of tokens could be fixed. That, in turn, raises the risk that a CBDC could attract a valuation premium. It’s possible to address that with commercial banks offering higher interest rates, but in times of instability, there will be a rush to safety.
Which leads on to perhaps the biggest issue with CBDCs. If consumers choose to deposit money with central banks that will result in commercial banking contracting. But banks offer loans which are crucial to the economy and providing retail loans is not a key skill set of a central banker.
The other significant uncertainty relates to the management of monetary policy. A CBDC could alter the demand for money and the sensitivity to changes in interest rates. It would be unpredictable during any transition which makes central bankers nervous.
Plus if a central bank holds more money its balance sheet needs to expand by investing in government securities, commercial bank loans and foreign currency reserves. This, in turn, could move markets.
Key drivers
The General Manager pointed to a driver for CBDCs being the decline in the use of cash in countries like Sweden where mobile payments and cash payments are used in roughly equal frequency. However, for many countries cash is still in high demand and cash in circulation has increased over the last decade. Hence there’s a lack of urgency to come up with a substitute for cash.
