Peter Bofinger argues that introducing central-bank digital currencies would need to be subject to very careful consideration.
Peter Bofinger
While Facebook’s Libra is confronted by
ever stronger headwinds, a new competitor, the so-called central-bank
digital currency (CBDC), is entering the arena of digital money. While
this idea has been discussed by several central banks for some time now,
it has been boosted by recent announcements by Chinese central bankers.
On August 10th Mu Changchun, deputy chief of the payment and settlement
division of the People’s Bank of China, said: ‘People’s Bank digital currency can now be said to be ready.’
Different types of CBDC have been mooted (see table). Account-based CBDCs
would make it possible for private households and corporations to open
an account with the central bank. This could be designed as an
all-purpose account for anyone, with unlimited uses (retail CBDCs). But
CBDCs could also be designed as a pure store of value, which
would only allow transactions between the central-bank account and a
designated traditional bank account. Such accounts could be organised as
retail CBDCs but access could be restricted to large investors and
providers of payments platforms (wholesale CBDCs). Token-basedCBDCs
(‘digital cash’) are imagined as an alternative to cash for
peer-to-peer transactions. They could be designed as prepaid cash cards
issued by the central bank, without the user having an account with the
central bank.
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A typology of CBDCs
These CBDC variants challenge existing money, financial-assets and payments providers:
Token-based
CBDCs would compete above all with private providers of
digital-payments products (such as credit-card companies, Paypal and
Alipay).
All-purpose CBDCs would compete with traditional bank accounts.
Store-of
value, account-based CBDCs would compete with time deposits of
commercial banks but particularly with ‘safe assets’ and above all
government bonds.
With the issuance of token-based CBDCs,
but also with all-purpose CBDCs for anybody, central banks would compete
with private suppliers of payments networks and commercial banks.
Such
a change in the competitive environment could only be justified were a
significant market failure to be identified. The Swedish Rijksbank argues:
‘If the state, via the central bank, does not have any payment services
to offer as an alternative to the strongly concentrated private payment
market, it may lead to a decline in competitiveness and a less stable
payment system, as well as make it difficult for certain groups to make
payments.’
Effective competition policy
But
the solution to these problems is not necessarily that the central bank
becomes a provider of retail-payments services. Rather, this calls for
an effective competition policy and comprehensive supervision of
payments providers. And one has to ask whether the central bank would be
an adequate institution for screening, monitoring and supporting
customers, as well as developing new retail-payment technologies.
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In
addition, all-purpose CBDCs for private households and companies could
raise serious problems for the financial-intermediation mechanism. If
bank customers decided to shift significant parts of their deposits to
the central bank, the deposit base of commercial banks would be reduced.
This gap would have to be filled by the central bank, which would in
turn require sufficient eligible collateral on the part of the banks.
If
such accounts were to gain in popularity, the central bank would
increasingly find itself in a situation in which it would have to
refinance private loans and decide, indirectly or directly, on the
quality of private borrowers. In the end a ‘full money’ (or 100 per cent
reserve) financial system could emerge, in which commercial banks would
lose the ability to create credit independently. Contrary to its
advocates, this would massively throttle or even eliminate a central
driver of economic momentum.
Safe assets
While
fully-fledged CBDCs for private households and firms would be
associated with serious challenges and risks for the whole financial
system, there are no obvious market failures which could warrant such
innovation. This raises the question of whether the introduction of
CBDCs should be limited to ‘store of value’ CBDCs (sov-CBDCs). Such
central-bank balances could not be used for payments to third parties
but only for transfer to one’s own account at a commercial bank.
With
store-of-value CBDCs the central bank would not compete with payments
providers. The competition with commercial banks would be limited to
short-term time and saving deposits, without depriving banks of their
liquid deposit base. Above all, such CBDCs would provide a safe asset,
which in this form could not be created by private actors. Sov-CBDCs
would be comparable to cash as they would provide a 100 per cent
guarantee of nominal value, which cannot be guaranteed by bank
accounts—according to the Bank Resolution and Recovery Directive,
depositors with assets in excess of €100,000 must be bailed in if their
bank gets into trouble—or government bonds.
The attractiveness of
this asset would be largely determined by its rate of return. Treating
it as a digital substitute for cash, a zero interest rate would be
appropriate. In this case, the substitution processes from traditional
bank deposits to CBDCs would be limited. In addition, a lower limit of
€100,000 for sov-CBDCs could be justified, as bank customers with lower
deposits are protected by national deposit-insurance schemes.
Overall,
such CBDCs would increase the stock of ‘safe assets’ that are of great
importance to the players in the financial markets. This is also not
without risks, however, as the introduction of a new safe asset could be
detrimental for countries with a poorer bond rating. Moreover, in
periods of crisis such CBDCs could lead to digital bank-runs, which
would further destabilise the system.
Synthetic CBDCs
The
narrowest version of CBDCs comprise store-of-value CBDCs restricted to
providers of payments services as a collateral for their depositors
(‘stable coins’). The designers of Libra plan to use bank deposits and
government bonds as collateral. But, as indicated, the stability of bank
deposits in a crisis is limited. As for government bonds, massive sales
by Libra would likely result in price losses. These problems could be
avoided if suppliers of stable coins could use CBDCs as collateral.
Adrian and Manicini-Griffoli speak ofsyntheticCBDCs (sCBDCS).This model is already being practised in China, where Alipay is obliged to keep its accounts with the central bank.
In
principle, this could result in ‘narrow banks’, which on their asset
side only maintained balances with the central bank and concentrated on
the function of payment-service provider. These would be opposed by
‘investment banks’, operating the traditional credit business and
offering longer-term, interest-bearing deposits. Compared with
all-purpose CBDCs, this arrangement has the advantage that the payments
system is operated by private suppliers and not by the central bank. But
there is also the risk that the banking system loses the ability to
generate loans and a full-money financial system develops.
The
introduction of CBDCs, in whatever form, should be subject to very
careful consideration. There is little to suggest today that central
banks should play an active role as payment-service providers, as would
be the case with the introduction of token CBCDs and all-purpose
central-bank deposits. Not least, there would be the danger that this
would be used by states to achieve even closer monitoring of their
citizens.
An interesting innovation, however, would be if CBDCs
could only be used as a store of value. Such an asset could only be
created by the central bank and it would be particularly interesting for
companies and investors who would be confronted with a bail-in in the
event of a bank insolvency. Such CBDCs could serve as collateral for
payment-service providers issuing a stable coin. But since this could
lead to considerable changes in the way the entire financial system
functions, no hasty steps should be taken here either. This article is a joint publication by Social Europe and IPS-Journal
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