Central Bank Digital Currency: A Global Outlook · 2019-07-26 · Popescu, and Celine Rochon, 2018,...
Transcript of Central Bank Digital Currency: A Global Outlook · 2019-07-26 · Popescu, and Celine Rochon, 2018,...
INTERNATIONAL MONETARY FUND 1
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