The Big Choices When Designing Central Bank Digital Currencies

The Big Choices When Designing Central Bank Digital Currencies

The Bank Of England, London
(Peter Summers/Getty Images)

The increased interest in central bank digital currency (CBDC) has led to a surge in ideas and research about the topic, so much so that it’s all but impossible to keep up with everything that’s been published lately. All this information brings a welcome diversity of perspectives to the debate, but it also makes it more difficult to focus on the most important aspects of CBDC.

When it comes to designing a CBDC, we need to draw a crucial distinction between direct and indirect CBDCs. 

In simple terms, a direct CBDC makes it possible for everybody, from big banks to informal workers, to deposit their money with the central bank. It would be like having a central bank “checking account” for basic payment services: receiving, holding, spending and transferring money.

This direct model tends to , though. In times of crisis, people could move their money from banks to the central bank, creating bank runs that would worsen the trouble. Even in normal times, if a significant number of bank deposits moved to the central bank, banks would lose a cheap source of funding and might have trouble providing as much credit as demanded. This situation could, in turn, hamper economic growth.

Other critics say payment services directly offered by the central bank can only be as good as the services provided by a Department of Motor Vehicles – hardly a compliment. These critics add that a direct CBDC would kill payments innovation, as government institutions are not known for boundless creativity. 

To avoid displacing banks and stifling innovation, central bankers and scholars have been exploring models of .

Take, for example, the . In this model, a CBDC is issued to regulated and supervised institutions, which then distribute the CBDC to the public. Don’t we already have that? Most dollars circulating in the economy today are digital and made available through regulated intermediaries: the balances from bank accounts that we use to make payments and transfers. 

Consider now the synthetic CBDC, or sCBDC. The idea is that licensed private entities are authorized to issue “digital dollars” fully backed by central bank reserves, a type of central bank money used in transactions between banks and with the central bank. The sCBDC would certainly be a safe and stable type of money, but would it be a CBDC?

The synthetic CBDC looks a lot like e-money (aka prepaid debit cards) or its evil twin, the stablecoin, which is nothing but unregulated e-money. E-money issuers in the European Union, for example, are licensed and supervised institutions that are legally required to safeguard the funds of their clients, so that e-money balances can always be redeemed at their nominal value.   

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