Modern Banking - Central Bank Digital Currencies (CBDC)

What is a Central Bank Digital Currency (CBDC)?

= digital form of central bank money that is widely available to the general public ex.: Digital euro

Why is there a need for CBDC?

Because growing and expanding digitalization of payments

Why not keep relying on deposit account money & commercial digital payment solutions?

→privacy concerns and fees

Digital payments market is highly concentrated and dominated by US companies, resulting in high interchange fees on merchants and no incentives for innovation. Moreover the opacity in the collection and usage of user data raise serious privacy concerns.

What are the main challenges facing stablecoins?

-              Lack of regulation, transparency & user protection

-              Despite their premise (willing to remedy to volatility), suffered from instability in many cases

-              Still the most plausible opponent to CBDCs

Overall, both fluctuate too much so difficult to made them a mean of payment and there is no monetary policy

What are the main challenges facing cryptocurrencies?

-              Lack of regulation and user protection

-              No mechanism in place to counteract price volatility

-              Transactions may also be subject to considerable fees (transaction, exchange, withdrawal, wallet fees)

Overall, both fluctuate too much so difficult to made them a mean of payment and there is no monetary policy

What potential impact could BigTech launching their own currencies have?

they could encourage people to stay within their platforms by making it easier or more rewarding to use their services, potentially leading to widespread adoption due to network effects.

what is the threat of dolarization?

Threat of dollarization → advantages to have its currency demanded (strong sovereign currency) ex.: U.S. dollars

-              Less subjected to exchange rates

-              You can borrow at cheaper terms ex.: with bonds because always someone to buy U.S. bonds

-              U.S. can print more money because the demand is growing for dollars and is not subjected to inflation as if there was less demand

-              But at risk of BigTechs that’s why policy makers prefer CBDCs because no economic fragmentation (instead of making the global financial system more connected and smooth, digital currency can divide it)

What challenges are associated with the implementation of CBDC?

• Use of CBDC for illicit activities

• Data security breaches, state surveillance

• Reduction in private innovation in payments

• Low use by certain people, especially vulnerable ones

• Financial disintermediation

What is financial disintermediation in the context of CBDCs?

occurs when depositors prefer central bank digital currency (CBDC) accounts over traditional bank deposit accounts, especially during times of economic uncertainty. This can increase banks' funding costs and lead to a higher risk of bank runs.

What are the pros and cons of an interest-bearing CBDC?

Pros: An interest-bearing CBDC could help central banks manage the economy better if physical cash disappears, particularly when interest rates are low.

Cons: It may lead individuals to withdraw funds from regular banks during crises, harming the banking system, a phenomenon known as financial disintermediation.

Should private intermediaries be involved?

Advantages

-              benefitting from the conveniences that intermediaries provide

-              encouraging diversity and competition

-              preventing the concentration of risks at the central bank

-              preventing the disintermediation of existing financial institutions

-              preventing the duplication or waste of the existing infrastructure, capital and know-how

 

Disadvantages

-              exposure to solvency and technical risks of intermediaries

-              maintaining sufficient regulatory standards for private service providers

-              risk of excluding smaller firms due to compliance requirements

→central bank don’t really want to hold the money of people so intermediaries are needed

Should there be a cap on individual holdings?

Advantage

-              mitigate financial disintermediation

 

Disadvantages

-              create friction in payments since the payer cannot know if her payments will be refused

-              limit the effectiveness of making a CBDC interest-bearing

-              what about financial inclusion?

Should there be a tiered CBDC remuneration?

Advantages

-              benefit from an interest bearing CBDC while avoiding its undesired consequences

 

Disadvantages

-              increase complexity and raise calibration challenges

Should foreigners be able to hold CBDC?

Advantages

-              facilitate trade, foreign investment, remittances and use by foreign visitors

 

Disadvantages

-              amplified systemic risk due to higher capital flow volatility

-              currency substitution/ loss of monetary sovereignty

-              weakened transmission of monetary policy

-              problems with countering illicit finance

what technology should be used for CBDCs?

• blockchain?

• deposit accounts?

• programmable money = receive money but expires i one week and can only be used to purchase specific things