Thursday, December 12, 2019 / 05:46 PM / by Tobias Adrian and Tommaso Mancini-Griffoli of IMFBlog / Header Image Credit: Bank Underground
Central Bank Digital Currencies (CBDC) is a complex and multidisciplinary topic requiring active analysis and debate. It raises questions related to monetary policy, central banking operations, and payment systems-as well as financial stability and legal foundations and regulation.
Below are some of the most pressing questions and
answers on the topic.
What is the IMF's role around CBDCs now and in the future?
The IMF can help in three
ways: by informing the policy debate, by convening relevant parties to discuss
policy options, and by helping countries develop policies. Because CBDC is a
novel topic, the IMF has mostly been active in the first two areas, but it is
gradually moving into the third area as member countries consider CBDC options
and seek advice.
First, the IMF can help inform the policy debate. The IMF is currently investigating implications of CBDC available across borders. Other institutions, such as the Bank for International Settlements and the Committee on Payments and Market Infrastructure, among others, have also contributed to the topic. The IMF is well-placed to study CBDC, because it can draw on its in-house experts. Moreover, a potential world with multiple CBDCs could raise important questions about cross-border payments and the international monetary system, which are at the core of the IMF's mandate.
Second, the IMF is well-positioned to help foster cooperation across countries and relevant parties. The IMF can draw on its universal membership to share information about rapidly evolving developments across advanced and emerging market economies. Moreover, because the IMF is a public international institution, it can bring together central bankers and regulators, as well as investors, entrepreneurs, and academics from around the world for an open dialogue. It has done so repeatedly at its bi-yearly meetings, in its yearly "fintech roundtable," and in its ad-hoc research events.
Third, the IMF can help countries evaluate policies regarding CBDC as well as investigate alternative means to improve payment systems. The IMF can do so through its surveillance work, its Financial Sector Assessment Programs, and its technical assistance, which it has a long tradition of providing. IMF teams have already worked with countries to modernize payment systems, advise on legislation related to digital payments, and review plans to issue CBDC. The IMF can help countries think through the implications of CBDC and its attendant potential benefits and risks, including through regional workshops leveraging knowledge in central banks at the frontier of CBDC development, and bilateral technical assistance missions.
How does the IMF view global development and implementation of CBDC?
Countries differ substantially in the extent to which they are actively exploring digital currencies and in their proximity to issuing such currencies.
Some countries are actively running pilot projects to explore the feasibility of CBDC. To do so, they have increased resources allocated to CBDC and fintech research at the central bank, sometimes in partnership with private sector advisors. Several countries are also reviewing and revising legislation to support CBDC in case it were issued, and are actively studying the potential implications of competing CBDC designs. Some authorities are also engaging with the public and their legislatures to discuss the potential to issue CBDC.
Some other countries have also scaled up resources dedicated to CBDC and payment systems, although they mostly focus on undertaking analysis and more limited hands-on testing of technology. Although CBDC remains an option for these countries, they are also actively exploring alternative solutions.
A third set of countries do not see an immediate need to issue CBDC, and focus instead on improving existing payment arrangements and strengthening regulation.
Recently, we have seen an increase in central banks' interest in CBDC following the announcement by Facebook of its Libra initiative as well as reports of a possible launch of CBDC by the People's Bank of China.
What are the potential benefits and challenges related to CBDC implementation?
Central banks highlight a number of potential benefits of CBDC. These include:
Despite these potential benefits, various challenges could emerge. Some of these can be attenuated by the appropriate design of CBDC.
In summary, each country will have to weigh the pros and cons of the case for CBDC depending on its particular circumstances.
Countries may consider the option of public-private partnerships that may achieve many of the same benefits of CBDC, while potentially reducing central bank involvement and operational risks. IMF staff have coined this solution "synthetic CBDC."
More specifically, the synthetic CBDC model envisions private sector firms issuing digital coins to the public (which can either be accounts or tokens leveraging DLT). These firms would thus be responsible for doing what they do best: innovating and interfacing with customers. The central bank, instead, would provide trust to the system, by requiring that coins be fully backed with central bank reserves, and by supervising the coin issuers. This arrangement preserves the comparative advantage of each participant-whether it is a private-sector firm or a central bank-and induces competition among private-sector firms to offer attractive coins and interfaces. At the same time, it limits costs to the central bank, as well as some of the risks.
What are the alternatives to CBDC?
Several countries are working on improving existing payment systems to match the speed and convenience of digital currencies. For example, we understand from published sources that the Federal Reserve is developing so-called fast payments, allowing nearly instantaneous and low-cost settlement of inter-bank retail payments (the Federal Reserve's "FedNow" initiative). In other countries, similar systems have improved payment services and injected competition in payments, especially if paired with other reforms, such as public digital identities, common communication standards, open application programming interfaces ("APIs," which allow banking applications to interoperate and to be extended by third-party developers), and data portability and protection standards.
While improved inter-bank payment systems will bring many of the potential benefits discussed above, CBDC could be complementary, especially in some jurisdictions. Central banks have raised the following arguments: First, CBDC (or its synthetic version) can be DLT-based and thus potentially help spur the development of DLT-based asset markets. Second, CBDC can be designed to work outside the banking system and may thus favor financial inclusion. Third, CBDC could provide competition to banks and induce these to fully leverage the advantages of fast payment systems. Fourth, DLT-based CBDC could facilitate cross-border retail payments, thereby complementing the not-so-easy task of linking traditional inter-bank payment systems.
We generally think that central banks should remain engaged in examining the full range of issues associated with CBDC, including the potential to offer synthetic CBDC, and deepen their familiarity with new technologies.
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