Central banks may take time to explore CBDCs

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The International Monetary Fund (IMF) published an article titled “Behind the Scenes of Central Bank Digital Currencies” on February 9, analyzing the experiences of six central banks in designing and issuing central bank digital currencies ( CBDC). There are some clear messages in the log. One of them is that each country may have a different need and a different architecture for a CBDC, and as technology evolves, it’s not clear which is the best option – and being the first may not be. be an advantage.

Over a hundred countries are exploring CBDCs. When private stablecoins were announced, with Facebook’s Libra likely acting as the trigger, central banks around the world looked to CBDCs as an alternative that could help digitize the economy and mitigate the risk of financial turbulence.

But now, as stablecoins do not yet appear to pose systemic risk and early experiences with CBDCs show the difficulties of getting it right, central banks may choose to continue learning and developing projects instead of launching a CBDC, even if they have the technology ready (i.e. Canada or Uruguay).

Policy objectives

The different policy objectives behind adopting a CBDC can impact the sense of urgency in the development and implementation of a digital currency in a country. For example, in the Bahamas, financial inclusion and access to payments are very important policy objectives for which a CBDC could greatly help, since many commercial banks do not serve a part of the population, which is scattered on different islands. .

Ensuring a resilient payment system in countries prone to natural disasters is also essential for some countries, and a digital currency could facilitate payments when needed. This political objective was important for the Bahamas, but also important for China – the Central Bank of China argued that if one of the two dominant companies in mobile payments, Alipay or WeChat Pay, were to fail, it could have serious consequences for the Chinese. Payment system.

This could explain why the Bahamas quickly set up a CBDC, but countries like Canada decided to devise a contingency plan for the CBDC but ultimately did not issue a coin, given other more important policy objectives. .

The fight against the illicit use of money, monetary sovereignty or competition in the payments sector are political objectives mentioned by the countries. These goals, while important, may not trigger the same sense of urgency in some countries, either because no other currency threatens their monetary sovereignty, or because the private sector has also developed tools to detect the illicit use of money and creating more efficient payment instruments. .

Operating model

The IMF has identified three common models for a CBDC: the first is a unilateral CBDC, where the central bank performs all functions of the payment system, from issuing the CBDC to distributing it and interacting with end users . The second model involves issuance by the central bank but includes a role for private sector firms to interact with the end user – this is an intermediated CBDC. In the third model, the digital currency is not issued by the central bank, but by private companies that support the issuance by holding central bank liabilities. This model is not a CBDC, but rather a stablecoin, and is called a synthetic CBDC.

An important question that almost no central bank has yet answered is who is going to cover the cost of infrastructure or whether private companies will charge fees for its use. If private companies are expected to serve a function in the CBDC ecosystem, as many central banks expect, they will have to make a profit, at least in the medium term.

Likewise, although central banks are not-for-profit organizations, they will have to decide whether or not to seek cost recovery for their expenses in building the CBDC system. Central banks may also decide to subsidize the use of CBDC to increase adoption if it is supported by a particular policy objective. The role of the central bank is seen as providing a free or low-cost platform on which private intermediaries can operate. Whether and how to cover the costs remains an open question, and the Bank of Canada is doing significant research in this area to understand it.

Technology

Choosing which technology to use to build a CBDC is, according to many central banks analyzed, one of the most difficult because the technology is still in development and remains relatively untested. The decision is not only between distributed ledger technology (DLT) and centralized technology. Even within DLT, the most popular option is blockchain, but there are more voices suggesting other alternatives. Technology continues to evolve and central banks are still hesitant to commit to just one option. A few of the central banks chosen by the IMF have expressed some skepticism about the suitability of DLT for central banking purposes, but recognize that DLT can support some important functions.

The paper not only summarizes the experiences of these six central banks, but also describes the challenges they face – which in many cases do not yet have a clear solution. The lack of resources, in terms of people and money, cybersecurity risks, technological uncertainty and the mistrust of a certain part of the population make this undertaking difficult. This analysis can provide good arguments to some central banks that seem skeptical, such as the Bank of England or the Federal Reserve, confirming their instinct to take more time before launching a CBDC.

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