Author: Tobias Adrian & Tommaso Mancini-Griffoli
Production: Planet Daily Odaily
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Central bank digital currency (CBDC) is a complex and multi-disciplinary issue, such as monetary policy, central bank operations, payment systems, and financial stability and legal foundations and regulations, so full analysis and discussion are needed. Recently, the International Monetary Fund (IMF) published a paper discussing the four most pressing questions and answers related to the central bank's digital currency. Let ’s take a look at the Odaily Planet Daily with everyone.
Question 1: What role will the IMF play in central bank digital currencies now and in the future?
The IMF can help in three ways:
1. Provide information for policy debates;
2. Convening parties concerned to discuss policy plans;
3. Help countries formulate policies.
As the central bank digital currency is a completely new theme, the IMF is currently active in giving information on policy discussions and convening parties to discuss policy options. The IMF will help them when seeking advice.
First, the IMF is currently studying the impact of cross-border central bank digital currencies, which can inform the policy debate. Other institutions, such as the Bank for International Settlements and the Committee on Payments and Market Infrastructure, have also contributed to this issue. With many industry experts, the IMF is well-suited for researching central bank digital currencies. In addition, since the central banks of different countries will launch their own digital currencies, important issues such as cross-border payment of digital currencies by different central banks and the international monetary system will be involved, and this is exactly the core work of the IMF. In addition, each country needs to weigh the advantages and disadvantages of the central bank's digital currency according to its own circumstances.
Second, the IMF's position is also very favorable, which can help promote cooperation between countries and relevant parties. With a unified membership, the IMF can share information about the rapid development of advanced and emerging market economies. In addition, as the International Monetary Fund is an international public institution, it is possible to bring together central banks and regulators, as well as investors, entrepreneurs and scholars from all over the world for an open dialogue. In addition, the International Monetary Fund meets every two years, a "fintech round table" is held every year, and ad hoc research activities are needed.
Third, the International Monetary Fund will help countries evaluate policies on central bank digital currencies, and study alternative means of improving the payment system, including supervision, "financial field evaluation plan", and long-term technical assistance. The IMF team has worked with countries to modernize payment systems, provide advice on legislation related to digital payments, and review plans for central banks to issue digital currencies. The IMF can help countries consider the impact of issuing central bank digital currencies and the potential benefits and risks that accompany them.
Question 2: How does the IMF view the global development and implementation of central bank digital currencies?
Different countries have great differences in actively exploring digital currencies and issuing similar currencies. such as:
- Some countries have actively launched pilot projects to explore the feasibility of central bank digital currencies. To this end, the central banks of these countries sometimes cooperate with private companies to expand the resources of central bank digital currency and fintech research;
- Some countries are reviewing and revising legislation aimed at supporting the issuance of digital currencies by central banks and studying the potential impact of the design of competitive central bank digital currencies;
- Some authorities have also approached the public and its legislature to jointly study and discuss the potential of issuing central bank digital currencies;
- Some other countries are trying to expand resources dedicated to central bank digital currencies and payment systems. Although central bank digital currencies are still the choice of these countries, they are also actively exploring alternative solutions;
- There are still some countries that do not have the need to issue central bank digital currencies, but instead focus on improving existing payment systems and trying to strengthen supervision.
Facebook recently announced the launch of the digital currency project Libra, the People's Bank of China may also issue central bank digital currencies, and the IMF's interest in central bank digital currencies is increasing.
Question 3: What are the potential benefits and challenges associated with central bank digital currency implementation?
Central banks in some countries have highlighted the benefits of issuing central bank digital currencies, including:
1. Cash cost: In some countries / regions, because the territory is particularly broad or remote (including island countries), the cost of cash management is very high, and the central bank digital currency can reduce the costs associated with national payments;
2. Financial inclusion: Central bank digital currencies can provide the public with a secure, liquid, and government-backed payment method, without even requiring individuals to have bank accounts. The central banks of some countries believe that in a world where cash is being used less and less, central bank digital currencies will play a very important role, especially in some countries where bank penetration is low;
3. Stability of payment system: Some central banks are worried that the payment system will become more and more centralized in the hands of a few large companies (some may be overseas companies). In this case, these central banks use the central bank's digital currency as an enhancement. A means of resilience of own payment system;
4. Market competitiveness and principle: Some central banks believe that central bank digital currencies can compete with large payment companies, and that central bank digital currencies can become a means to limit rent-seeking by those payment giants;
5. Competing with privately issued digital currencies: Some central banks believe that central bank digital currencies need to compete healthyly with privately issued digital currencies (which may be very necessary). Some private digital currencies do not use domestic currencies to price, so these The Central Bank believes that government-backed digital currencies denominated in domestic account units and issued in the country will help reduce the use of privately issued digital currencies, which is also difficult to regulate;
6. Support for distributed ledger technology (DLT): Some central banks have found that digital currency based on distributed ledger technology has advantages because it can be used to pay for assets based on distributed ledger technology. If these assets increase in value, then the distributed ledger-based currency will help to automatically pay when assets are delivered, which is called "delivery-to-payment" or "payment-to-payment", and these can be automated through smart contracts. Some central banks are considering providing central bank digital currencies to institutional market participants only to develop asset markets based on distributed ledger technology;
7. Monetary policy: Some scholars believe that central bank digital currency is a means to strengthen the transmission of monetary policy. They believe that interest-bearing digital currency can effectively respond to changes in policy interest rates. These scholars also suggested that as long as the cost of cash is high, it is possible to use negative interest rate central bank digital currencies during long-term crisis periods (thus breaking the "zero interest rate" constraint).
Despite the many potential benefits of central bank digital currencies, various challenges remain, including:
1. The importance of commercial banks may be weakened: if people decide to hold a large number of central bank digital currencies, it means that deposits in commercial banks may be "drawn", and they also have to raise funds at higher costs or increase deposits Interest rates to retain customers. As a result, commercial banks' profit margins will fall, or they will have to charge lenders higher loan interest rates. Under normal circumstances, competition between central bank digital currencies and commercial bank deposits depends in part on the central bank digital currency's payment interest rate (if any), and only non-interest-bearing central bank digital currencies are closest to cash alternatives;
2. "Operational risk": In the event of an economic crisis, bank customers may take out their deposits in commercial banks and choose central bank digital currencies, because generally speaking, central bank digital currencies are more secure and more liquid. But in many jurisdictions, trusted deposit insurance has not been used. In addition, many countries already have safe and relatively liquid assets, such as government bond funds and state-owned banks. If a run does occur, it is easier for the central bank's digital currency to meet the withdrawal requirements than to withdraw cash from a commercial bank. In addition, bank runs are often consistent with currency runs in many countries around the world. Therefore, no matter whether there is a local currency central bank digital currency, commercial bank depositors will seek foreign currency to hedge;
3. The balance sheet and credit allocation of the central bank: If the market demand for central bank digital currencies is high, the central bank's balance sheet may grow significantly. Not only that, the central bank may want to provide liquidity to those banks that need a rapid and large outflow of funds. As a result, central banks will assume more credit risk, and they will need to decide how to allocate funds among banks, which may open the door to political intervention;
4. International impact: For countries with reserve currencies, central bank digital currencies may increase the possibility of national currencies being replaced in countries with high inflation and exchange rate fluctuations (also what we often say that national currencies are "dollarized" "), This situation and its impact on the international financial system require further study, and IMF staff are currently investigating these issues;
5. Costs and risks of the central bank: Providing central bank digital currency may increase the cost of the central bank, and may also cause reputational risks to the central bank. If you want to provide a mature central bank digital currency, you need the central bank to remain active in multiple links in the payment value chain, including: interacting with customers, building front-end wallets, selecting and maintaining technology, monitoring transactions, and also responsible for counter-insurance. Money laundering and counter-terrorism financing. If any one of the links fails due to a technical failure, a cyber attack, or simply human error, it will seriously damage the reputation of the central bank.
In short, each country must weigh the pros and cons of issuing central bank digital currencies according to its own special circumstances, and can also consider choosing a "public-private partnership" solution to further leverage the advantages of central bank digital currencies, while minimizing central bank participation and operational risks — — IMF staff refer to this solution as "synthetic central bank digital currency" (synthetic CBDC). Specifically, this "synthetic central bank digital currency" issues digital currency to the public through private companies (which can be accounts or tokens using distributed ledger technology), and these companies will be responsible for what they do best: innovate and interact with Customer interaction. At this time, the central bank only needs to ensure that the digital currency is fully supported by the central bank's reserves, and trust can be provided by monitoring the currency issuer. Based on this, each participant (whether it is a private company or a central bank) can obtain a comparative advantage. On the one hand, private companies can provide the market with more attractive digital currency and transaction interfaces through competition; on the other hand, the central bank The cost and risk of issuing coins will also be reduced.
Question 4: What are the alternatives for central bank digital currencies?
Some countries are working to improve existing payment systems to accommodate the speed and convenience of digital currency development. For example, the IMF's public sources have learned that the Fed is developing a so-called fast payment system (the Fed's "FedNow" project) that uses almost instant and low-cost interbank retail payments. Some other countries are also using similar systems to optimize payment services in an attempt to increase payment competitiveness. If digital currencies are used in conjunction with other reforms, the effect may be better, such as public digital identities, common communication standards, open application program interfaces ("APIs" that allow bank applications to interoperate and allow third-party developers to expand), data Portability and protection standards.
Although the Fed's attempt to optimize the interbank payment system will also bring many benefits, the central bank's digital currency brings more complementarity, especially in some jurisdictions. For the central bank digital currency, the central bank basically holds the following four views:
1. Central bank digital currency (or synthetic central bank digital currency) can be based on distributed ledger technology, which may help stimulate the development of asset markets based on distributed ledger technology;
2. The central bank's digital currency can be designed to work outside the banking system, so it may be beneficial to financial inclusion;
3. The central bank's digital currency may compete with commercial banks, which will also encourage commercial banks to make full use of the fast payment system;
4. Central bank digital currency based on distributed ledger technology can promote cross-border retail payments. In the past, it was very difficult to connect traditional interbank payment systems, but the introduction of central bank digital currency has become an effective supplement.
The International Monetary Fund believes that the central bank should continue to study all issues related to central bank digital currencies and the so-called "synthetic central bank digital currencies" in order to deepen their understanding of new technologies.
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