Central Bank Digital Currency — CBDC
The directional next step towards digitalized fiat currency?
A Summary of the Staff Discussion Note from the International Monetary Fund
Source-Official-Disclaimer:
„DISCLAIMER: Staff Discussion Notes (SDNs) showcase policy-related analysis and research being developed by IMF staff members and are published to elicit comments and to encourage debate. The views expressed in Staff Discussion Notes are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.“
Source: Casting Light on Central Bank Digital Currencies
— Disclaimer:
As this Source is a „Staff Discussion Note“ from the International Monetary Fund, details might differ from the real usecase and adoption.Nevertheless it allows great insight in the thought process of discussion about adoption and integration from the perspective of the International Monetary Fund (IMF) and thus gives us the opportunity at the direction we are heading with Crypto , Blockchain and the idea of adopting Blockchain and digitalization of money by Central Banks.This Article is meant to be a pure summary of the Original 39 Page long Staff Discussion Report about Central Bank Digital Currency from the International Monetary Fund and serves to provide the information and directions provided in the Note itself.
Some Quotes are directly taken from the Discussion Note,
signaled with: “text”[PageNumber/Paragraph.]
This article serves solely as DYOR-Material (Do Your Own Research)
“Overall, it is too early to draw firm conclusions on the net-benefits of Central Banks Digital Currency (CBDC). Central banks should consider their specific country circumstances, paying careful attention to the risks and relative merits of alternative solutions. Further analysis of technological feasibility and operational costs is needed.” [Page5/4.]
1. Introduction, what is this all about?
The impact of digitalization is widespread and profound
Millennials now outnumber baby boomers and are steering the economy towards their world.
Digital platforms are central and nearly second nature thus
changing the nature of jobs, education, commerce, innovation, and product life-cycles itself.
Payments, and more fundamentally money itself, is also undergoing tremendous change.
Technology, new employment arrangements, and the growing decentralized service economy, as well as evolving social attitudes.
“Even cryptocurrencies such as Bitcoin, Ethereum, and Ripple — still early in their development cycle — offer competing forms of money.”[Page6/2.]
Deep and pressing questions arise;
Is there a role for Cash, or Cash-like form of money in the digital world?
Namely Questions of:
* Forms?
* Intermediation ?
* Stability ?
* Integrity ?
“Central banks are taking these questions seriously. Several are actively investigating the possibility of a central bank digital currency (CBDC). This new central bank liability would be a widely accessible digital form of fiat money, intended as legal tender. One day, it could fully replace physical cash. CBDC seems to be a natural next step in the evolution of official coinage (from metal-based money, to metal-backed banknotes, to physical fiat money).”[Page6/4.]
“This note offers a conceptual framework to evaluate the case for CBDC.
The approach aims to answer a simple question: Does CBDC offer benefits?”[Page6/5.]
Discussing Questions like:
Demand — would CBDC satisfy end user better than other forms of money?
Supply — would CBDC benefit Central banks in (*1):
* more effectively satisfy public policy goals,
* including financial inclusion & operational efficiency
* financial stability
* monetary policy effectiveness
* financial integrity
Short:
Is CBDC a desirable form of money given existing and rapidly evolving alternatives?
Info:
“[…]a final decision requires careful evaluation of country-specific circumstances, including a review of technological feasibility and costs.
These factors are beyond the scope of this note.“[Page6/5.]
“This note contributes to a growing body of literature on CBDC
Others have already explored this topic, including international organizations such as the Bank for International Settlements and several central banks” [Page6/7.]
Centralbanks and Countries exploring this field will be displayed under:
CENTRAL BANK RESEARCH AND EXPERIMENTS
— as the closing point of this summary.
The Research makes 3 main contributions to consider,
First:
* desireability on CBDC of Central Bank and its users
Second:
* possible policy responses to CBDC adoption mitigate ensuing risks
Third:
* reference views and ongoing and future plans of some central banks regarding CBDC
The Research is Split up in 6 Sections
1 — Introduction, what is this all about
2 — Basics of Central Bank Digital Currency (CBDC)
3 — Conceptual framework to compare different money forms from a user — Bank perspective
4 — Is there a Role of CBDC from the user perspective
5 — Is there a Role of CBDC from the Bank perspective + different CBDC design possibilities, covering points of (*1)
6 — overview of central bank investigations + questions of future research regarding CBDC and cross-border payments
[Crown Notes Regarding the continued Text]
This is based on, and some is directly taken from, the IMF Staff Discussion Notes, details and points made will probably vary in the real usage and Adoptions. See the Disclaimer at the Top.
[SUMMARY]
2. BASICS OF CENTRAL BANK DIGITAL CURRENCY (CBDC)
- as stated in the IMF Staff Discussion Notes
CBDC:
* New form of Money — No physical form
* Issued digitally by the central bank
* Intended to serve as some sort of legal tender
* Accessible to country’s residents + potentially to individuals and organizations abroad
CBDC could be used for at least 3 transactions types(*2):
* Person-to-Person [P-t-P]
* Person-to-Business [P-t-B]
* Business-to-Business [B-t-B]
Furthermore CBDC could be account- (intangible property) or token- (tangible property) based.
Differences:
Account-based CBDC,
would require both persons to have an Interface (Via Website/App/Device) to Claim, request and approve transfer of funds.
Person A where to send the request claim to the Central ledger (the Central Bank as Middlemen) which checks ownership and approves liquidity, then fast forwards the transaction claim to Person B, checkin their account authenticity.
“The central bank would ensure settlement by updating a master ledger, but only after verification of the payer’s authority to use the account, sufficient funds, and authenticity of the payee’s account. The exchange of information would therefore be substantial.“[Page8/10.]
Token-based CBDC:
Person A has a Wallet, he sends tokens over the settlement (either Centralized or Decentralized) and Person B would receive it in their Wallet
“Settling a transaction using tokenbased CBDC would require external verification of the tokens. As a result, transactions might not be entirely anonymous, like cash. The extent of anonymity would depend on whether wallets are registered and transaction information is recorded.”[Page8/11.]
“Verification of the tokens and settlement could be centralized or decentralized, depending on the technology used. Decentralized settlement is possible via the use of distributed ledger technology (DLT). However, although the technology is evolving, it currently falls short in scalability, energy efficiency, and payment finality. DLT could be used over a closed (“permissioned”) network managed by the central bank. But there are other types of centralized settlement technology that may prove more efficient. These would check the validity of the tokens’ serial numbers, then reassign numbers once tokens change wallets to avoid the risk of double spending.”[Page9/12.]
3. A CONCEPTUAL FRAMEWORK TO COMPARE DIFFERENT FORMS OF MONEY
Central Question:
Does CBDC offer net benefits on both sides, Supply and Demand ?
Money needs to have three functions:
* Unit of Account, thus not losing its value over time.
* Means of payment, thus facilitating transactions.
* Secure store of value, thus providing refuge from risk.
These properties are not entirely independent as for the definition
Money =/= Currency
The difference between money and currency:
While money stores intrinsic value within itself, fiatcurrency possesses buying power bestowed upon it by the government.
And as such: If money is not a store of value it affects the other two and vice verca.
The Demand Side:
Users will seek a form of money that maximizes private benefits and minimizes associated costs and risks
this is explained as the following:
There are three categories of:
Maximizing benefits
Minimizing costs
Minimizing risks
Where [MoP] represents the Means of Payment and [SoV] the Store of value aspects
that includes:
Maximizing benefits
* Liquidity — [MoP]– Payment on demand
* Scalability — [MoP] — Payment of any size
* Acceptance — [MoP] — From any device without network limitations (*2)
* Extra services –[MoP] — Access to other financial services (loans, advice, etc.)
* Returns — [SoV] — Risk-Free returns
Minimizing costs
* Transaction — [MoP] — Ease of use; fees
* Disclosure — [MoP] — Degree of anonymity
Minimizing risks
* Settlement — [MoP] — Lag between agreeing to a transaction and actual receipt of funds
* Theft — [SoV] — Ability to reverse fraudulent transactions, exposure to fraud/cyber risk
* Loss — [SoV] — Ability to claim ownership or recover access if lost
*Default — [SoV] — of the money issuer
The research discussion, notes a certain weight on Anonymity;
“There are legitimate reasons people may prefer at least some degree of anonymity — potentially when it comes to everyone except the government, and regarding the government unless a court order unlocks encrypted transaction information. […] Moreover, anonymity is often associated with privacy — widely recognized as a human right (as stated in the Universal Declaration of Human Rights [Article 12] and elsewhere).”[Page10/16.]
The Supply Side:
Central banks are essential here and for them their main points to focuse on are:
* Public accountability: it need to satisfy user needs (look above)
* Money must meet important Social criteria
“In Addition, Central banks will prefer forms of money that support, or at least do not undermine, three other public policy goals:
* financial integrity,
* financial stability, and
* monetary policy effectiveness.” [Page11/18.]
The last Point of the Conceptual Framework is determining the competitors of CBDC,
for those the research stated four categories, varying in individual weight from country to country:
* Cash
* Commercial bank deposits
* Narrow finance
* Cryptocurrencies
“All except cash are evolving and rapidly gaining market share.” [Page12/19.]
Commercial bank deposits are going through notable improvements:
Traditional moved over debit card networks, transactions now continued transforming onto Mobile device payments (like Venmo) and bank-provided fast-payment solutions (fast payments).
Narrow finance solutions are stored value facilities. (e-money and upcoming “Narrow Banks”)
This segment is gaining widespread and very rapid acceptance,
using private e-money such as:
* AliPay and WePay in China,
* PayTM in India,
* M-Pesa in Kenya, and
* Bitt.com in the Caribbean.
“[…]Narrow banks — [are] only beginning to materialize.
It covers institutions that invest client funds only in highly liquid and safe government assets — such as excess reserves at the central bank — and do not lend. However, they allow payments in their liabilities through debit cards or privately issued digital money.” [Page13/21.]
“Cryptocurrencies are different along many dimensions
and struggle to fully satisfy the functions of money, in part because of erratic valuations. Examples include Bitcoin, Ethereum, and Ripple. These currencies are not the liability of any institution and are not backed by assets. Their value is usually volatile, because most have rigid issuance rules. Some new cryptocurrencies attempt to stabilize their value by controlling issuance according to a function of price deviations from a fiat currency or commodity (as in an exchange rate peg). Examples are Basecoin and Stablecoin.20 In all cases, transactions are settled in a decentralized fashion, using distributed ledger technology.” [Page13/22.]
4. IS THERE A ROLE FOR CBDC? USER PERSPECTIVE
In Perspective — A List about:
Cash, Cryptocurrencies , Private e-money & Commercial bank deposits
Cash, in its current state;
is not an especially attractive means of payment.
Con:
*high transition costs
*vulnerability to theft
*lack in returns in form of interest
Pro:
* immediate settlement
* no default or cyber risk
* FULL anonymity
Cryptocurrencies (as stated in the Staff Discussions Note)
are the least attractive option.
Con:
*Current technological limitations “(which may eventually be overcome).”[Page14/23.]
Pro:
*anonymity
Private e-money provided by stored value facilities:
Pro:
* Widespread acceptance
* Low transaction costs
* User friendly interfaces
* Full-service bundling with other financial services including:
* Social services
“Narrow banks could further reduce default risk — and possibly enhance scalability by offering largervalue payments, although potentially lower ease of use, depending on design.” [Page14/23.]
Commercial bank deposits
Pro:
* Provide security from theft and loss
* Integration with additional services
* Deposits with fast payment are completely scalable & widely accepted
* No network limits
* No settlement risk
* Transaction costs are minimal
“CBDC would not strictly dominate any of these alternative forms of money […but rather compete closely] with evolving commercial bank deposits and e-money ”[Page14/24.]
There are two sets of features for Central Bank Digital Currency (CBDC);
Fixed- and Flexible Features
Fixed:
* on par with fast-payment solutions regarding acceptance
* settlement risk & transaction cost
* superior regarding default risk (although in many jurisdictions only marginally)
*scoring poorly in terms of offering additional services
“[…]banks could provide the front-end applications to manage CBDC and could cross-sell services” [Page15/24.]
Flexible:
*competitive interest returns
*protection from theft and loss
*scalability
*anonymity
“[…] though not all at once as these features depend on one another.” [Page15/24.]
“[…]CBDC could offer interest. If it paid the policy rate, it would be as attractive as narrow finance solutions […]” [Page15/24.]
“However, cash is unlikely to go away anytime soon, for political reasons.
Only over the longer term, if CBDC is adopted widely, would cash be eliminated, much as happened with metal coinage” [Page15/27.]
5. IS THERE A ROLE FOR CBDC? CENTRAL BANK PERSPECTIVE
„This section gauges whether central banks could benefit from CBDC to more fully achieve public policy goals. These include satisfying the social dimensions of money’s three functions, as well as financial integrity, financial stability, and monetary policy effectiveness.” [Page15/26]
Or in short:
Is the idea of CBDC, from a central bank point of view, reasonable to consider?
Lets have a look.
- CBDC is unlikely to offer near-term assurance of price stability,
but has a long-term possibility if it is widely adopted - CBDC could help to ensure equal access to means of payment for all citizens, yet it is not a viable solution if access to technology is limited in some parts of the civilization
- CBDC may help reduce costs associated with cash handling,
ensuring efficient handling from a public policy perspective - CBDC would not serve as the bridge between; offering a secure store of value and promoting financial intermediation,
“[…]as CBDC is also, after all, a form of money that requires full prefunding.”[Page17/30.]
“Other potential benefits of CBDC must be seen against the backdrop of a reduction in the use of cash. The trend is already evident in some countries and is expected to become more widespread.” [Page17/31.]
“The use of cash is subject to habit, increases with age, and decreases with education and income. It is generally lowest in countries with the most developed payment systems.”[Page18/Graphic]
There is a new problem emerging about security, if the sector of the payment system is dominated by private firms.
“CBDC could offer a backup solution if disruptions in the digital infrastructure materialize, unless there are large-scale natural disasters and power outages.
(Cash is similarly at risk since its infrastructure also requires electricity.)”[Page19/32.]
Central Bank Digital Currency might aim as a monopoly limiter for private business to get the control back from central companies, yet so could the deployment of low-cost fast payments.
“In summary, while central banks could benefit from CBDC to more fully satisfy some of the social criteria of money, in many countries there are also other solutions”[Page20/34.]
Can CBDC Balance Privacy and Financial Integrity Concerns?
The task to design money is an act of balancing the legitimate user preferences and mitigating financial risks.
While providing the best experience for both sides of Supply and Demand, while avoiding criminal transactions such as:
* money laundering,
* financing of terrorism,
* corruption and
* tax evasion
“Most of the cash in circulation is in the top two largest denominations, often associated with illicit payments or store of value.” [Page20/35.]
“Eliminating cash would undermine privacy. Moreover, it is unlikely to improve financial integrity since illicit transactions would presumably migrate to another form of money.
Ironically, those seeking anonymity for legitimate purposes might even adopt the parallel money, contributing to its liquidity and attractiveness for criminal use. This pattern may be visible in the adoption of cryptocurrencies.” [Page20/36.]
The Question is how one would design something like CBDC,
because it could either strengthen or undermine financial integrity.
“Whatever design is chosen, it should accommodate the implementation of effective AML/CFT measures.” [Page21/37.]
(AML/CFT: The Anti-Money Laundering and Countering Financing of Terrorism Act 2009)
[Editors Note]//Start
Page 21 starting Paragraph 38, the International Monetary Funds Staff Discussion Notes go into theory crafting about the Question:
“Would CBDC Undermine Financial Stability and Banking Intermediation?”Where two hypothetical scenarios are considered.
Scenario one is: the slow change and adaptation for banks from cash to CBDCScenario two is: the consideration in stability of the current system, in a financial crisis, and the adaption and replacement withj a CBDC system.
As this is theory crafting and and I personally love to look at possibilities,
they are not actual facts and so I will skip summarizing the scenarios.For everyone interested in them tho, there will be a shorter summary of this Staff Discussion Note INCLUDING the scenarios + my personal opinion on it shortly after this Summarization goes live,
on my Personal Telegram Channel.
t.me/CrownInsights
so feel free to join and share.
[Editors Note]//End
Judged by those two Scenarios the Staff Discussion Note comes to this Question:
Would Monetary Policy Transmission Remain Effective?
“The introduction of CBDC is unlikely to significantly affect the main channels of monetary policy transmission under plausible CBDC designs.” [Page25/51.]
The Channels are fourfold:
- The basic interest rate channel may be the most affected and could strengthen
- The bank lending channel could also strengthen.
- The credit channel is unlikely to be affected much
- Likewise, the exchange rate channel is unlikely to be affected.
“This relatively benign view depends on the expectation that central banks would remain in a position to affect market interest rates relevant to the channels above” [Page26/52.]
“One scenario, however, would significantly test the standard transmission channels, but could be resolved with a change in operating framework.”
“If banks were no longer involved in intermediating payments, having lost the business to CBDC (or stored value facilities, depending on how these are regulated), demand for reserves would disappear.”
“This scenario resembles a cashless world” [Page 26/53.]
6. CENTRAL BANK RESEARCH AND EXPERIMENTS
„Several central banks, in both advanced and emerging market and developing economies, are considering the pros and cons of issuing CBDC.” [Page27/54.]
“Central banks are considering CBDC for two main reasons:
* Declining use of cash in advanced economies and
* financial inclusion in emerging market and developing economies.” [Page27/56.]
I will include not only them, but every Country involved in Past, Present or Future researches
regarding CBDC -IN ANY WAY-,
as listed in the Staff Discussion Note as of the Date of the Paper released:
Countries with “*” run research but didn’t disclose the information fully.
Countries with “**” researched digital currencies for their country, without the Central Bank aspect.
“Some central banks are reportedly no longer pursuing CBDC.“ [Page29/57.] Market with “***”
“In terms of design, most central banks seem to be contemplating forms of account-based CBDC, though with various levels of anonymity; some token-based solutions also exist.” [Page29/58.]
Marked with “T” (for token) and “A” (for account)
“A number of central banks surveyed indicated that CBDC should be available 24 hours a day, 7 days a week, to mimic the accessibility of cash.”[Page29/59.]
Marked with “O” (for Offline/ 24/7 service)
Australia(on hold), ***
Bahamas
Bahrain, *
Brazil
Canada, O
China, A, T, O
Curaçao and Sint Maarten
Denmark, ***
Eastern Caribbean, A, T
Ecuador (pilot complete)
European Union, * (European Central Bank, ***)
Hong Kong SAR, *
India, *
Indonesia, *
Israel
Jamaica, *
Marshall Islands, **
New Zealand, ***
Norway (ongoing)
Philippines
Senegal
South Korea, *
Sweden, O
Switzerland*
Tunisia
United Kindgom (on hold)
Uruguay (pilot)
Venezuela**
“Central banks are for the most part focused on CBDC applications for the domestic economy. Only Canada and China mentioned cross-border issues, but more as complications than opportunities. Canada seemed focused on accessibility by tourists. China cited cross-border capital management. Other projects focus more on intermediating wholesale payments across borders, such as a joint project between the Bank of Canada, the Monetary Authority of Singapore, and the Bank of England.” [Page30/63.]
CONCLUSION — As stated in the IMF Staff Discussion Note itself
[Page 30/64. — Page31/70]
CBDC could be the next milestone in the evolution of money
— The history of money suggests that, while the basic functions of money might not change, the form does evolve in response to user needs
CBDC is a digital form of existing fiat money, issued by the central bank and intended as legal tender.
— It would potentially be available for all types of payments and could be implemented with a variety of technologies.
This discussion note introduces a three-step conceptual framework to assess CBDC’s potential to create value both for end users and for central banks.
— First: Identify criteria with which users evaluate different forms of Money
— Second: Establish public policy and central banks goals, with respect to money
— Third: Lay out competitive landscape and compromising existing and evolving forms of money
Overall, the note finds no universal case for CBDC adoption as yet. From the perspective of end user needs, it finds that demand for CBDC will depend on the attractiveness of alternative forms of money
— In advanced economies, there may be scope for the adoption of CBDC as a potential replacement for cash for small-value, pseudo-anonymous transactions. But in countries with limited banking sector penetration and inefficient settlement technology, demand for CBDC may well be greater.
From a central bank perspective, the case for CBDC is likely to differ from country to country.
For countries that decide to introduce CBDC, appropriate design and policies should help mitigate ensuing risks.
Looking ahead, the cross-border implications of CBDC raise a multitude of new questions that merit investigation, such like;
trourists, foreigners use, KYC & AML/CFT compliance, country wide standards, policy, crisis and more.
“Research on CBDC should proceed resolutely given that the questions to be explored are deep and difficult and have far-reaching implications.”[Page31/39.]
As this article serves the sole purpose of information I will absent of any big personal opinion.
But to give it a small take tho:
The Global Community is researching digitalized Money possibilities, to follow the evolution of the digitalization, that now enters the infrastructure of society via Blockchain-technology and the concept of money itself.
Blockchain is here to stay and will probably be established in big parts of our societies infrastructure in the next 2–10 years.
I’m most certain on this.
The next 3 years will be especially interesting and promising for the technology, to say the least.
What do you guys think?
And as always~Thanks for your Time!
Stay safe, take care and DYOR my friends!
