Interpretation of the US Economic Research Institute "Who should issue CBDC" report: ignoring the consequences of wholesale digital legal currency

Author: Cai Weide

Editor's Note: The original title is “Ignoring the Consequences of Wholesale Digital Law Currency – Interpretation of the US Economic Research Institute “Who should issue CBDC” report”


This article "Who Should Provide CBDC" (Who Should Provide Central Bank Digital Currency?) was released by the American Economic Research Institute (AIER) on September 1, 2019. This is a post-reading impression of The Raise of Digital Money [2] issued by the International Monetary Fund (IMF). The rise of digital currency has a great influence, and the concept of synthetic digital currency (sCBDC) is proposed in the text, that is, the central bank and technology companies cooperate to issue digital legal currency. When the author spoke to the bankers in the UK in September 2019, most of them read this article. They disagreed, agreed, and strongly opposed.

Of course, commercial banks strongly oppose these views. For them, this is a question of the survival of banks. A Bank of America also immediately stated that if someone can provide a solution that can compete with Libra, they will immediately arrange 20 employees to help complete the project (about 6 million US dollars per year). They believe that if the project like Libra gets the support of the central bank, it will be the beginning of a commercial bank disaster.

Author Corning agrees with the IMF's "Rise of Digital Money", in which CBDC is issued under the supervision of the central bank, with the cooperation of technology companies and central banks. The author has studied digital currency for a while, and in this article, he puts forward a sharp point that the central bank is not ready to release its own retail retail digital currency (rCBDC). He also cited the articles of famous American economists to discuss these issues, and proposed that retail digital currency will cause competition between the central bank and commercial banks.

In the article, he mentioned CBDC, but the content is rCBDC in practice, and does not mention the concept of Wholesale Central Bank Digital Currency (wCBDC) [1,3,4,14], and the function and operation of wCBDC The way is very different from rCBDC. The concept of wCBDC was proposed by the Bank for International Settlements (BIS) in 2018. BIS is an international financial institution that cooperates with central banks including the People's Bank of China. It is now the oldest international financial organization in the world. The original CBDC (or more accurate rCBDC) was proposed by the Bank of England in 2015. Because the wholesale digital legal currency is not considered, the author naturally draws different conclusions. Several international frontier central banks began to distribute wholesale digital currency in 2018, and commercialization began in 2019 [19]. Because there is no commercial operation, digital legal currency projects cannot be successful.

Introduction to the author unit

The author's unit is the American Institute for Economic Research (AIER), an economic research institute based in Barrington, Massachusetts. Founded in 1933 by the 20th century economist Edward C. Harwood, it aims to protect individual rights and continue to produce high quality content in disciplines such as policy, philosophy and economic science. Obviously, this organization attaches great importance to personal privacy.

About the Author

Author JP Koning is a financial writer and blogger interested in monetary economics, economic history, finance, and financial technology. He has worked as a stock researcher at a Canadian brokerage firm and as a financial writer and publisher at a large Canadian bank. Recently, he has authored several papers for R3 (a distributed ledger company) on the subject of central bank cryptocurrency and cross-border payments. He founded the popular blog Moneyness in 2012. He is in financial charts and art design economics and financial wall charts. Corning received a BA in Economics from McGill University.

JP Koning

Should central banks issue their own versions of digital cash? Historically, the interaction between the central bank and the public has been limited to the provision of banknotes. By introducing the central bank digital currency (CBDC), the central bank will also provide us with electronic money. The CBDC may be in the form of people opening an account with the central bank, or it may be a blockchain token issued by the central bank to the public.

In the past five years, CBDC has become a hot topic for money economists and central bankers. Although no central bank has actually implemented this plan, some central banks, including the Bank of Sweden and the People's Bank of China, are seriously considering this possibility.

A related concept has recently emerged: the synthesis of central bank digital currency (sCBDC). Tobais Adrian and Tommaso Mancini Greifley pointed out in a new International Monetary Fund (IMF) report that financial technology companies and other electronic money are allowed to provide When the business opens an account with the central bank, it is possible to synthesize a CBDC version. Customers will in turn hold accounts with these financial technology companies. As long as the fintech company always has a dollar in the central bank to support each customer's dollar (or yen or pound), it is as if the customer is holding the dollar in the central bank. Hey, we have effectively synthesized CBDC.

The main difference between CBDC and sCBDC is who is maintaining the ultimate relationship with customers. Is it central bank or financial technology? As Adrian and Mancini Griffith pointed out (and I agree), it makes sense to choose sCBDC. First, the central bank may have better things to do than managing customer relationships:

Synthetic CDBC outsources several steps to the private sector: technology selection, customer management, customer screening and monitoring, including “know your customers” and AML/CFT (anti-money laundering and counter-terrorism financing) purposes, compliance, and data management— – the source of all significant costs and risks.

Adrian and Mancini Griffith of the International Monetary Fund are not the only ones who have come up with the idea of ​​sCBDC. There is a separate but related dialogue on the issue of several US banks trying to open an account with the Fed to provide "Narrow Banks" services. These narrow banks do not want to hold risky assets and loans, but rather want to deposit all their assets in the Fed’s interest income account and return most of the interest to deposit customers.

The economist John Cochrane often writes on the subject of narrow banking, and he recently linked narrow banking to CBDC:

The central bank cannot operate retail digital currency. Who do you call when you forget your password? But Narrow Bank is the ideal institution to offer digital currency for the retail industry. The sooner the better.

The author mentioned here that “the central bank cannot operate the retail digital currency” and the reason, mainly because the central bank does not need to directly serve the public, and now the central bank does not have such a responsibility, which should be provided by a narrow bank.

The author does not mention a concept here, which is the concept of wholesale digital legal currency proposed by BIS in March 2018. The central bank can issue digital legal currency, but only issue wholesale digital legal currency, and these problems can be solved. Because of the use of wholesale digital currency, the public must be indirectly exposed to CBDC through commercial banks, which greatly reduces competition.

Cochran's ideas are the same as Adrian and Mancini Greifley's sCBDC. Like them, his point is that narrow banks can better handle the problems of owning retail customers.

Economists Michael Bordo and Andy Levin in a recent paper entitled "Improving the Monetary Regime: The Case of US Digital Cash" The same conclusion was reached. They write that the Fed can produce digital cash on its own, but there is a conflict of interest between the central bank and commercial banks in vying for deposits:

It seems unlikely that central banks will begin to compete directly with commercial banks in attracting deposits, especially if the central bank also regulates and supervises these banks.

Bordo and Levin believe that digital cash should be provided by private providers that offer special accounts to the public. In turn, these institutions will deposit depositors' funds in the “independent reserve account” of the central bank. The benefit of this is that many digital money providers will compete rather than having a major CBDC issuer (ie, the central bank) that may offer a better product.

Bordo and Levin's views are correct, but they do not take into account wholesale digital currency, which is greatly reduced in the wholesale digital currency environment. This is also why the European Central Bank proposed in May 2019 that wholesale digital legal currency should go ahead, not other digital legal currency projects.

One reason I can think of why a central bank might want to enter the business of issuing CBDC is to provide privacy protection. Anonymous payment is a controversial topic. Anonymity allows good people to protect their personal information. But it allows the bad guys to do the same. Still, I think there are good reasons for a widely used anonymous payment option.

From this point of view, the author, Corning, apparently did not have an in-depth conversation with the Bank of England. The reason why the Bank of England has to do digital legal currency is to take back the regulatory power, especially to take back the third party’s payment supervision, instead of "Providing privacy protection." Because of the need to strengthen supervision, the privacy of customers before the central bank has become less.

The author has this cognitive error because he believes the reason why the Bank of England was previously open to the public. In fact, in 2019, the Bank of England Governor has publicly disclosed the real reason for issuing digital legal currency [6].

Anti-money laundering regulations have largely prevented the private sector from providing anonymous sCBDCs. Even if they can provide it, bankers may be too concerned about the risks involved in anonymous banking. Since central banks have issued the world's most popular anonymous payment medium, banknotes, they may play a natural role in providing a digital version of anonymous cash directly.

The author believes that only the central bank's legal currency provides privacy protection, while commercial banks do not. Isn't commercial banks not protecting customer privacy?

The author’s view actually seems to be relatively old. It is true that the banknotes issued by the central bank provide privacy protection, but the money that most people get is actually generated by commercial banks through currency multipliers. Therefore, we have always believed that after the issuance of digital legal currency, the banknotes still exist and will not disappear. It is like a paper book will still exist after the e-books come out; similarly, after the invention of the car, the bicycle will still exist.

The issue of digital currency is not intended to protect customer privacy, but for high-speed trading, for regulation, for security, and for anti-money laundering. If you want to protect your privacy, continue to use the banknotes.

We believe that privacy protection is divided into four types:

  1. The participants are open to the whole process, such as the medical blockchain, and the pharmaceutical manufacturer can see which hospital or pharmacy is being manufactured.
  2. Both parties to the transaction are open, and the supervisory unit has the same information;
  3. The parties to the transaction are not open, only know the transaction information, but do not know who to trade with, but the supervisory unit knows the complete information;
  4. Both parties to the transaction and the supervisory unit do not know who is doing the transaction.

The central bank's digital legal currency system can only adopt the second or third method, otherwise it will be unable to carry out activities such as anti-money laundering. The first one maintains high traceability, but the privacy is poor and cannot meet the CBDC requirements. Similarly, the fourth one cannot meet the CBDC requirements.

The current digital currency element is speed first, second is security, then regulation, not privacy.

In fact, many of today's Privacy Computing are slow and can't meet the high-speed requirements. If users demand high privacy, they need to endure slow transactions.

The point of this paper is to put the demand for banknotes in the current digital legal currency, just the opposite of the basic principle of issuing digital currency. If you want to maintain high privacy, it is recommended to use banknotes instead of CBDC.

Banknotes were an ancient technique that was first introduced in the 16th century, long before people worried about money laundering, tax evasion and drug smuggling. The role of banknotes as a payment medium is accompanied by anonymity. In a sense, the production of banknotes has been given to this system – it is hard to imagine that they were introduced from scratch today. However, if the bank voucher is exempt from the money laundering rules, then the new digital version of the bank voucher will certainly qualify for this exemption. Therefore, the central bank may be a natural anonymous provider.

Unfortunately, most formal discussions about CBDC avoid anonymous topics, or hurried mentions, or total negation. My feeling is that central bankers neither adapt nor have the ability to engage in important discussions about financial privacy and its role in providing anonymous payments to society. If so, an anonymous CBDC seems unlikely.

With this in mind, central banks should support sCBDC. Let private suppliers compete in providing some kind of central currency-approved digital currency version to the public. The central bank can limit its own behavior, only maintain the back end, and provide a certain degree of supervision. If sCBDC does not work, the reputation of the central bank will not be damaged. Moreover, if sCBDC really takes off, the central bank does not have to worry about its attention being diverted by daily concerns about interaction with retail customers.

“With this in mind, central banks should support sCBDC. Let private suppliers compete in providing some kind of central currency-approved digital currency version to the public. The central bank can limit its behavior, only maintain the back end, and provide a degree of supervision. If sCBDC doesn't work, the central bank's reputation will not be compromised. And if sCBDC really takes off, the central bank doesn't have to worry about its attention being diverted by daily concerns about interaction with retail customers."

Note that if sCBDC does not work, the reputation of the central bank will not be compromised.

This public-private partnership to issue sCBDC is also our model, and digital currency does not need to be completely processed by the central bank. Just as the legal currency is not entirely out of the central bank, many legal coins are generated by commercial banks.

The problem is not in sCBDC, but sCBDC can be rCBDC or wCBDC. Now wCBDC is already on the sCBDC route (5 central banks are considering this [1]), and rCBDC does not yet know when it can become sCBDC, and it may not be possible until the Libra event stabilizes. wCBDC is a partnership with five central banks, Fnality and 15 commercial banks (both global systemically important banks, GSIB). On September 17, 2019, the European Central Bank said it would consider issuing Eurocoin (CBDC of the European Central Bank) against Libra, which is equivalent to the European Central Bank's position that it will not support Libra to become the ECB's sCBDC (now, only two central banks have this possibility) ).

The author does not consider the wholesale digital currency, although the concept was issued by the important financial institution BIS in March 2018, and later in November 2018, it was supported by the central banks of the three countries (BBC, Bank of Canada, and Singapore Central Bank) [15], In May 2019, it was supported by the European Central Bank, but many scholars have not noticed this important concept. We have been publishing articles on this important concept in the last month [1, 3, 4], and we will continue to discuss this topic in depth in the future.

European Central Bank Governing Council Vasiliauskas said, “[A value-based wholesale CBDC] will replace or supplement the central bank’s reserve with restricted access digital tokens. The tokens will be bearer assets, which means that during the transaction, send The value will be transferred to the recipient without the need for an intermediary. This is fundamentally different from the current system in which the central bank does not transfer actual value on debit and credit accounts."[21]

"[A value-based wholesale CBDC] would replace or complement reserves at the central bank with a restricted-access digital token. A token would be a bearer asset, meaning that during the transaction the sender would transfer value to the receiver, without intermediaries This is something fundamentally different from the current system in which the central bank debits and credits the accounts without transferring actual values."

He added, “Therefore, assessing the balance between risk and return from a generally conservative central bank, wholesale CBDC seems to be a more viable option.” “Therefore, assessing the balance between risks and benefits from the perspective of generally conservative central Banks, the wholesale CBDC seems like a more viable option going forward".

The development of digital currency has emerged today as an important watershed: retail digital currency and wholesale digital currency. It is clear that wholesale digital currency is now the choice of the central bank.

Retail digital legal currency is a cooperation between technology companies and central banks, and competes with commercial banks, and also with other retail digital legal, stable and legal currencies; wholesale digital legal coins are cooperation between central banks, commercial banks and technology companies, and others (wholesale or retail) Digital legal currency, stable currency or legal currency competition. The European Central Bank Vasiliauskas talks that wholesale digital currency may lead first. If so, the scenarios predicted by the IMF's "Rise of Digital Money" may be delayed, which is good news for commercial banks.


[1]. Cai Weide, Jiang Xiaofang, “Reconstruction of Global Financial System Based on Wholesale CBDC Digital Currency”, 2011.10.01.

[2]. Cai Weide, Jiang Xiaofang, "The ambush on ten sides, commercial banks really want to be embattled? – Interpretation of the 2019 IMF's 'Rising of Digital Money' report", 2010.09.21.

[3]. Cai Weide, Jiang Xiaofang, “W-CBDC-based payment system architecture: Fnality white paper interpretation (on)”, 2019.10.06.

[4]. Cai Weide, Jiang Xiaofang, “Wholesale Digital Legal Currency Restructuring Financial Market: Interpretation of Fnality White Paper (Part 2)”, 2019.10.

[5]. Cai Weide, "The Three Principles of Digital Law: The Important Information Brought by Facebook Libra", 2010.08.24.

[6]. Cai Weide, Jiang Xiaofang, “The Bank of England pays for third-party payments and digital tokens – in the form of a British gentleman”, 2010.06.27.

[7]. Cai Weide, Jiang Xiaofang, "The new currency competition is coming? Yes!", 2011.0.06.

[8]. Cai Weide, Jiang Xiaofang, “Analysis of Four Key Elements of New Currency Competition”, 2010.08.17.

[9]. Cai Weide, "Authentic and stable currency! Blockchain needs to be regulated",2019.05.28

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[13]. Cai Weide et al., “Panda-CBDC Central Bank Digital Currency Model”, 2016.11.05

[14]. BIS CPMI, Central Bank Digital Currency (CBDC), Mar. 2018.

[15]. The Bank of England, MAS, the Bank of Canada, Cross-Border Interbank Payments and Settlements: Emerging opportunities for digital transformation, Nov.2018.

[16].The Swiss Federal Government, Legal Framework for distributed ledger technology and blockchain – An overview with a focus on the Financial sector, Dec.2018.


[18].Oxera, The debate about blockchain: unclear and unsettled?Aug.2016.

[19].Fnality, The catalyst for true peer-to-peer financial market, June 2019.

[20].Tsai, Wei-Tek, et al. "A system view of financial blockchains." 2016 IEEE Symposium on Service-Oriented System Engineering (SOSE). IEEE, 2016.

[21]. Yogita Khatri, “ECB Official Says Whole Central Bank Digital Currency a 'Vialbe Option'” 2019, 5, 28.


Cai Weide

Director of Digital Society and Blockchain Laboratory of Beihang University, Chief Scientist of Tiande Technology, Major Project Leader of National Ministry of Science and Technology, Director of Blockchain Internet Lab of National Big Data (Guizhou) Comprehensive Experimental Zone, Tianmin (Qingdao) International Sandbox Research Dean of the Academy, Honorary Dean of the CCID Research Institute of CCID (Qingdao), President of the Blockchain Industry Professional Committee of China Asia Economic Development Association, Director of the North Mujin District Block Chain Committee

Jiang Xiaofang

Ph.D. student of Beihang University of Computer Science, Chartered Financial Analyst (CFA), member of Beijing Financial Analyst Association