Retail CBDC Operational Considerations

Retail Central Bank
Digital Currency
Operational Considerations
MARCH 31, 2021
John Kiff
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A retail CBDC is a widely accessible digital
representation of a sovereign currency that is
issued by, and a liability of, a jurisdiction’s
central bank or monetary authority.
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Where Do Retail CBDC Fit in the Money Matrix
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Jurisdictions Where Retail CBDC Is Being Explored (as of March 17, 2021)
Where central banks have launched or piloted (or soon will)
Bahamas (fully launched) Eastern Caribbean (03/31/21 pilot launch) Uruguay (pilot completed)
China (pilot launched)
Ecuador (pilot done & project discontinued)
Where central banks have done proofs of concepts (or soon will)
Jamaica (see also here and here)
Sweden (proof of concept started)
Korea (proof of concept started)
Ukraine (proof of concept done)
Where central banks are in advanced stages of research and development
Canada Japan United States
Euro Area
United Kingdom
Where central banks are still in the exploratory stages
Australia India Norway
Brazil Indonesia Philippines
Chile Israel Russia
Curaçao en Sint Maarten Kenya South Africa
Denmark Kuwait Switzerland
Eswatini Madagascar Thailand
Finland Malaysia Trinidad and Tobago
Ghana Mauritius Tunisia
Hong Kong SAR Morocco Turkey (update)
Iceland
New Zealand
Where central banks have explored or are exploring issuing retail CBDC
(according to reputable news sources)
Bahrain Iran Pakistan
Egypt Kazakhstan Palestine
Haiti Lebanon Rwanda
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Central Bank Motivations for Issuing CBDC
Emerging Market & Developing
Economies
Financial digitalization and
inclusion
Reducing physical cash costs and
risks
Reducing dollarization
Advanced Economies
Enhancing payment system competition
In face of declining cash usage
Distributing stimulus payments
Improving monetary policy effectiveness: targeted policy, accessing granular
real-time payments data, breaking through lower zero bound on policy rates
Attempting to derail global stablecoin adoption
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Risks of Issuing CBDC
• CBDC could affect financial stability and banking intermediation if it
competes with bank deposits.
• Banks could also increase their reliance on wholesale funding, with
implications for funding cost and stability, and market discipline.
• Several suggestions have been put forward to control potential banking
sector disintermediation, including holding/transaction limits, variable
interest rates/fees, and restricted conversion modalities.
• CBDC may increase bank run risks by offering a readily available, safe,
and liquid alternative to deposits, depending on the CBDC’s design.
• CBDC could affect the transmission of monetary policy.
• CBDC of reserve currency countries available across borders could
increase currency substitution (“dollarization”).
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Analysis and identification of all
risks (macroeconomic, monetary
policy, financial stability, cyber).
CBDC Decision-Making Process Flow
Clarifying objectives provides a framework for balancing pros and cons of CBDC
issuance and guiding design options. The decision-making process starts with
understanding thoroughly the problem to be solved and the full array of solutions.
Foundational capacity assessment to determine if appropriate legal, regulatory/
supervisory frameworks in place, CB’s governance, organization and risk management
up to challenge of managing CBDC? If not, capacity building may be in order.
Identification of user and payment ecosystem preferences/requirements including
via surveys and focus groups will drive design choices, and feasibility of CBDC.
Key design choices include operating model, degree of anonymity/privacy, availability/
limitations, renumeration, and platform (centralized v decentralized database)
Technology solution assessment vs
design, risks and adoption criteria via PoCs.
Public acceptance, impacts and use cases
assessment with pilots.
Issue CBDC?
If PoC reveals gaps, further research
on technology and design required.
If pilots reveal gaps, further research on
use cases, design and impact.
Exit/postpone CBDC project at least temporarily.
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To CBDC or Not To CBDC
Objective: Support financial
digitization & inclusion and/or
reduce cash usage
Is digital infrastructure robust
& widely available? If not
upgrade and/or expand.
Regulatory and policy levers
are unable to incentivize
private PSPs to step up?
Objective: Enhance payment
system competition / reduce
monopoly distortions
Are platforms contestable &
interoperable? If not, develop
and encourage contestability
& interoperability
Regulatory and policy levers
are unable to increase
competition/ reduce monopoly
distortions?
Consider issuing CBDC
Objective: Offset declining
usage of cash, loss of
monetary sovereignty.
Policy levers cannot offset
declining use of cash or
central bank money? If yes,
put them in place.
Objective: Enhance monetary policy effectiveness? If yes, consider interest-bearing CBDC and making
cash more costly to hold.
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CBDC Business Model Considerations
Are there enough willing PSPs to run a
whole CBDC ecosystem?
Yes
Consider two-tier or synthetic CBDC
No
Does CB have capacity to (or want to) run a
CBDC ecosystem by itself?
Yes
Consider a single-tier CBDC?
Incentives
A CBDC ecosystem should create economic incentives for all participants to participate in ways that
serve central bank interests. In the case of a two-tier CBDC or sCBDC ecosystem, there should be a
cost-effective business model for such PSPs with enough revenues from interest spreads, fees, and
cross-subsidization, as well as controllable fixed and variable costs. Also, economic incentives for
users and merchants should leave room for enough users to reach critical mass and incentivize
network buildup while promoting PSP market competition. For example, regulations that encourage
interoperability of competing payment systems to encourage new entrants and reduce concentration
risk should take care not to adversely impact network build-up.
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Design Considerations
• Availability and limitations: Decisions have to be made about who can
hold CBDC, limits on holding/transaction size, offline availability and
convertibility limits.
• Privacy and transparency: Financial integrity, privacy and transparency
requirements need to be balanced.
• Interest-bearing: CBDC could be remunerated to modulate demand or
enhance monetary policy transmission. Even if not interest bearing at first,
capacity should be incorporated into design.
• Programmability: Point-of-sale tax payments, integration with physical
devices or IoT applications, or automate distribution of economic relief
based on specific demographic or other characteristics.
• Ledger (de)centralization: If a decentralized platform is chosen, decisions
have to made as to whether ledger maintenance is permissioned or public.
• Cross border functionality and inter-operability?
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Cyber Risk Management Workflow
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Discussion and Questions?
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References
Adrian, T., and T. Mancini-Griffoli. 2019a. “The Rise of Digital Money,” IMF Fintech Note 19/01.
----. 2019b. “Central Bank Digital Currencies: 4 Questions and Answers,” International Monetary Fund Blog,
December 12.
Auer, R. and R. Boehme. 2020. “The Technology of Retail Central Bank Digital Currency,” Bank for International
Settlements Quarterly Review, March.
Bank of England. 2020. “Central Bank Digital Currency: Opportunities, Challenges and Design,” Discussion Paper,
March.
Bindseil, U. 2020. “Tiered CBDC and the Financial System,” European Central Bank Working Paper No. 2351,
January.
Bossu, W., M. Itatani, C. Margulis, A. Rossi, H. Weenink and A. Yoshinaga. 2020. “Legal Aspects of Central Bank
Digital Currency: Central Bank and Monetary Law Considerations,” IMF Working Paper No. 20/254.
European Central Bank. 2019. “Exploring Anonymity in Central Bank Digital Currencies,” ECB In Focus, December.
Kiff, J., J. Alwazir, S. Davidovic, A. Farias, A. Khan, T. Khiaonarong, M. Malaika, H.K. Monroe, N. Sugimoto, H.
Tourpe, and P. Zhou. 2020. “A Survey of Research on Retail Central Bank Digital Currency,” IMF Working Paper No.
20/104.
Mancini-Griffoli, T., M.S. Martinez Peria, I. Agur, A. Ari, J. Kiff, A. Popescu, and C. Rochon. 2018. “Casting Light on
Central Bank Digital Currency,” IMF Staff Discussion Note SDN/18/08.
Shah, D., R. Arora, H. Du, S. Darbha, J. Miedema, and C. Minwalla. 2020. “Technology Approach for a CBDC,” Bank
of Canada Staff Analytical Note 2020-6.
Sveriges Riksbank. 2020. Economic Review: Second Special Issue on the E-Krona.
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