IMF Paper Studies Optimal Design of a Central Bank Digital Currency
IMF published a working paper that studies the optimal design for a central bank digital currency (CBDC) in a given environment. This is an environment where agents sort into cash, CBDC, and bank deposits according to their preferences over anonymity and security and where network effects make the convenience of payment instruments dependent on the number of their users. In this paper, the authors build a theoretical framework geared at analyzing the relationship between CBDC design, the demand for money types, and financial intermediation. This paper relates the effects on cash, deposits, and bank intermediation to two key design choices involved in developing a CBDC: the degree to which the CBDC resembles cash and whether it is interest-bearing.
The paper states that CBDC can be designed with attributes similar to cash or deposits and can be interest-bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC helps the central bank alleviate trade-offs. In a world where network effects have no material impact, nothing is lost by limiting CBDC design to non interest-bearing CBDCs. However, when network effects pose a threat to the variety of payment instruments, an interest-bearing CBDC becomes optimal. An optimally designed interest-bearing CBDC hits the aims of safeguarding bank intermediation and protecting the trio of payment instruments against network effects, irrespective of the role of financial frictions in the economy. This finding provides an economic counterweight to the political economy considerations that may otherwise drive central banks to opt for a non-interest-bearing CBDC, such as concerns about the possibility of negative rates on publicly accessible central bank liabilities.
Related Link: Working Paper
Keywords: International, Banking, Fintech, Digital Currency, CBDC, Research, Interest Bearing CBDC, IMF
Previous Article
OSFI Issues Amendments to Assessment of Pension Plans RegulationsRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.