Published on 07/12/2022 12:30 Speeches - François Villeroy de Galhau, Paris
2022 Paris Europlace International Finance Forum – Paris, 12 July 2022
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Ladies and Gentlemen,
It is a great pleasure to be with you today, thanks to Paris Europlace. In light of the current geopolitical context, the theme of this session appears particularly relevant: European strategic autonomy is not absent from our sight as central banks. We notably ensure that our banking system remains robust in times of great uncertainty – namely the war in Ukraine, and its economic consequences: the spur in inflation, the deterioration of the macroeconomic outlook, and the normalisation of interest rates. In this context, let me pay tribute to the solidity and performance of the French banking system: French bank’s CET1 amounts to 14.9% in Q1 2022; while their RoE increased over a rolling 12-month period at 7.6% in Q1 2022, and corporate risk remains manageable for sure. However, this collective strength should not mean any complacency, especially in the face of the triple digital revolution unfolding before our eyes in the financial sector;1new tokenised assets, new players, and new “decentralised” market infrastructures aim to remodel the financial system from the ground up.
Against this background, central banks are increasingly considering the creation of a digital form of their currencies. And let’s face it: the idea sometimes raises doubts, and even fears, among commercial banks. The part of the project which is quasi-consensual, with strong use-cases, is the one which raises little public interest – which does not mean that it is not key: wholesale CBDC. I will come back to this later. But let me start with the other face of the CBDC mountain: retail CBDC; this one, by contrast, is the focus of both public excitement and private questions.
I. A ‘retail’ CBDC for a renewed intermediation in the digital age
Let me suggest three hopefully shared principles to climb together this face of the mountain.
1. Our means of payment are and must remain a partnership between central bank money and commercial bank money
Until now, the coexistence and partnership of central bank and commercial bank money has structured the retail payment landscape and preserved the stability of the monetary system. Their respective roles are clearly assigned: central bank money anchors the stability of the financial system while the multiplicity of issuers of commercial bank money preserves competition and innovation. Their interplay and their interchangeability at par value ensures the safety and efficiency of the monetary and financial system. Neither one is better than the other, but in a joint venture each partner needs the other: a digital euro should never mean disappearance of commercial bank money; conversely, digitalisation cannot mean the disappearance of central bank money.
Indeed these foundations – and especially the role of central bank money – are increasingly threatened by the digital revolution of the financial sector. First, it results in the decline in the use of cash in transactions, which calls into question the availability of central bank money for the public. Increased reliance on digital payment solutions also shows how our European ecosystem has become critically dependant on non-European players (eg international card schemes and Bigtechs). Meanwhile, the emergence of crypto-assets and so-called stablecoins may compete against both commercial and central bank money, even though they do not offer the same guarantees in terms of credit risk and safety: the recent collapse of the Terra-Luna ecosystems or the sudden liquidity shortage of Celsius Network are necessary wake-up calls. I strongly welcome here, on the last days of a fruitful French Presidency of the EU, the successful trilogues on Transfer Fund Regulation (Travel Rule) and Markets in Crypto-Assets (MiCA).
2. Even if the precise use cases are not yet definitively fixed, there are several material reasons to consider the issuance of a digital euro
The main rationale for a digital euro is therefore to preserve the role of public money in a digital economy. Such means of payment, adapted to the demand of users in the digital age, would (i) preserve the accessibility and usability of central bank money, (ii) support our monetary sovereignty, and limit the risk that “external” digital assets – be they cryptos or non-European CBDC – would be used as settlement assets in the euro area, (iii) support the strategic autonomy of the European continent – and hopefully contribute to the emergence of a pan-European payment solution e.g. the European Payments Initiative, which could be used as a vehicle for the distribution of a digital euro. In the light of these challenges, and under the leadership of my Board colleague Fabio Panetta, the Eurosystem wisely decided on a two-year investigation phase on the issuance of a digital euro, before taking a decision about whether to go further by the end of 2023 / early 2024.
I don’t say it’s done yet; but it’s our strategic – and yes, sovereign – responsibility to study the issue seriously, and then to decide. I would hence suggest we don’t focus too much our discussion on this “why” question, but on the “how”, together. And here I come to my third principle.
3. Our possible future digital euro must be designed and developed altogether, and be as decentralised as possible
I stressed it here last year: a CBDC will be created with banks, not against them nor in spite of them.2I don’t have any word to change to this commitment. Accordingly, I strongly encourage all financial intermediaries to actively participate in the dialogue the Eurosystem has established, both at the European level through the Euro Retail Payments Board and at the national level. We just decided to set up a CBDC working group within our French payments committee (the CNPS). Concerns have emerged that the issuance of a CBDC would threaten the role of banking intermediaries in client relationships, while draining banks’ deposits through a massive conversion into risk-free CBDC accounts, especially in times of stress. These outcomes are not foregone conclusions, to say the least.
The Eurosystem is currently looking at the possible scope and design of a digital euro. Let me just share my personal thoughts about the general framework that should see light: in my opinion, similarly to the current intermediation model, as many functions as possible should be delegated to intermediaries.
- Obviously, some functions should remain the exclusive privilege of the Eurosystem because they are at the core of its mandate and cannot, by definition, be outsourced. This is the case specifically for the issuance of a potential digital euro.
- The Eurosystem should entrust banks with the distribution of digital euros to final users, while setting technical, functional and commercial rules like for example the branding, logo, and fee structure. We would thus build on their experience as intermediaries to offer means of payment to end users and develop value-added services. The Eurosystem could also outsource parts of the settlement, such as recording or validation, to intermediaries.
- Moreover, it is clear that some functions should remain under the sole responsibility of intermediaries. In particular, I believe that the Eurosystem should not have the role of managing digital euro holdings: the Banque de France closed its last private customer accounts over 20 years ago, and does not intend to reopen any. Customer relationship management is best handled by financial intermediaries, as they have the experience in this field. They would also ensure compliance with the related regulatory requirements, including KYC and AML/CFT. Such a design would allow them to preserve the role of financial intermediaries in the retail payment system, and would ensure the high level of privacy required by the public.
- Finally, regarding the possible risks of banks’ deposit conversions, we must and will ensure that a digital euro remains a means of payment rather than a saving/investment asset. This could be achieved by capping the maximum amount of digital euro in circulation, at a low enough level. In a completely other field, regulated savings, ceilings for the Livret A have proven an efficient tool, without requiring the intervention of a Big Brother to check on them.
II. Building on our experiments with the private sector on a ‘wholesale’ CBDC to be ready for the future
By comparison, the topic of a wholesale CBDC is less contentious and of less concerns to stakeholders; but it should not be perceived as less important. We central banks have been very proactive here, as demonstrated by the “wholesale CBDC focus” of the BIS Innovation Hubs. The Banque de France is at the forefront here, and we have especially identified two critical use cases for improving the payments ecosystem.
- First, the tokenisation of securities. A wholesale CBDC could be used for the settlement of such securities issued on DLT, which is essential to prevent market and liquidity fragmentation. This technology also streamlines the information flows in financial markets, from trading to exchange procedures and settlement.
- Second, a wholesale CBDC could enhance cross-border and cross-currency settlements.
Over the past year, we have successfully completed the first phase of our experimentation programme, comprising 9 experiments, hand in hand with the private sector and with other public actors.
Thanks to these experiments, we have developed a direct technical expertise including two key innovative assets born in the Banque de France:
- A proprietary DLT technology, called DL3S. This blockchain has been entirely designed by the Banque de France in order to meet the needs and expectations of market participants as a permissioned blockchain with efficient delivery and settlement services, using CBDC.
- An automated market maker (AMM) platform inspired from the DeFi markets, which could serve as the basis of a multi-CBDC platform where different central banks come together to enable fast, automated and transparent settlement across currencies.
I announce today that we engage the second phase of our experimentations program with 4 or 5 additional ones starting this semester. We want to get closer to a viable prototype, testing it in practice with more private actors and more foreign central banks in the second half of 2022 and in 2023. This work ensures that we stand ready to bring central bank money as a settlement asset as early as 2023, with the implementation of the European pilot regime. This pilot regime will offer a regulatory framework to support the financial asset tokenisation trend. Finally, these experiments conducted by the Banque de France contribute directly to the Eurosystem's existing task force, and future Governing council’s decision, on improving our services to the wholesale market.
This leads to the key outstanding issue of the articulation of a CBDC with existing infrastructures, such as Target Services in the EU. Both must be made interoperable: on the one hand, distributed ledger technologies are still not mature enough to handle large volumes of transactions, and therefore will not replace conventional systems from one day to another; they will rather complement them. Centralised and distributed systems will thus have to coexist securely and efficiently. On the other hand, we must make a CBDC available on these infrastructures to match market demand for tokens, so that our settlement asset is not substituted by private assets – which would be riskier.
The two projects of a wholesale and retail CBDC are two faces of the same “mountain”, which is the ambition to offer a digital form of central bank money to combine innovation and trust in the payment system. I spoke at the start about the 'existential' monetary partnership between central banks and commercial banks. The trust/innovation nexus is just as existential. It does not entirely coincide with the former: commercial banks can rightfully inspire confidence; central banks are capable of innovation, the CBDC is proof of that. But one thing is for sure: it is together that we can succeed in strengthening Europe's strategic autonomy. Thank you for your attention.
1 François Villeroy de Galhau, Central banks and finance in the face of a triple revolution, speech, November 2021.
2 François Villeroy de Galhau, Roads for the future: central bank digital currency (CBDC) and innovative payments, speech, June 2021.
Central banks are exploring whether CBDC could help them to achieve their public good objectives, such as safeguarding public trust in money, maintaining price stability and ensuring safe and resilient payment systems and infrastructure.
CBDCs, backed by a government and controlled by a central bank, would provide households, consumers, and businesses with a stable means of exchanging digital currency.
A CBDC is virtual money backed and issued by a central bank. As cryptocurrencies and stablecoins have become more popular, the world's central banks have realized that they need to provide an alternative—or let the future of money pass them by. Hover over a country to see their status. Click on a country to learn more.
A CBDC is a digital payment token which is issued and fully backed by a central bank and is legal tender. Blockchain or Distributed-Ledger-Technology (DLT) is one technology that can facilitate a CBDC and it is a key feature that CBDCs share with other cryptoassets, such as Bitcoin.
A CBDC would provide consumers and business with a digital alternative to cash that is free of credit and liquidity risk, unlike bank and nonbank money currently available.
For central banks themselves, CBDCs represent a huge shift in operations. They can significantly reduce the costs of printing, transporting and managing cash, freeing up resources to meet the new challenges of CBDC management.
In short, CBDC is just the digital form of the legal currency used in the country and is not a private currency. “A cryptocurrency is a decentralised digital asset and a medium of exchange based on blockchain technology.
A US CBDC wouldn't replace cash or paper currency. "The Federal Reserve is committed to ensuring the continued safety and availability of cash and is considering a CBDC as a means to expand safe payment options, not to reduce or replace them," the Federal Reserve said.
CBDC is sometimes thought of as equivalent to a digital banknote, although in some respects it may have as much in common with a bank deposit. Any UK CBDC would work alongside - not replace - cash and bank deposits. We will continue to provide cash for as long as the public still want it.
Unlike dollar bills and coins, cryptocurrencies are not issued or backed by the U.S. government or any other government or central bank. The lack of a physical token to count and hold may confuse some.
Most widely used consortium blockchain in CBDC are Ethereum, Corda, Hyperledger Fabric and Quorum. The main application scenarios of these projects include inner-bank payments, inter-bank payments, cross-border payments and settlements.
Bitcoin is not backed by any asset. This should be intuitive because Bitcoin is not controlled by any person or organization. Therefore, nobody is in a position to make this promise, and they would not gain anything by taking on the massive liability associated with ensuring the backing.
Blockchain technology bring unique advantages to a CBDC. Ethereum in particular is the most production-ready blockchain to support CBDC requirements in terms of scalability and privacy.
The only major economy that has already launched a CBDC is China, which unveiled trials of the e-CNY at the end of 2021.
- The Bahamas.
- The Marshall Islands.
- European Union.
- Other CBDCs.
François Villeroy de Galhau: Central bank digital currency (CBDC) and bank intermediation in the digital age ›
Our means of payment are and must remain a partnership between central bank money and commercial bank money. Until now, the coexistence and partnership of central bank and commercial bank money has structured the retail payment landscape and preserved the stability of the monetary system.. Their respective roles are clearly assigned: central bank money anchors the stability of the financial system while the multiplicity of issuers of commercial bank money preserves competition and innovation.. Neither one is better than the other, but in a joint venture each partner needs the other: a digital euro should never mean disappearance of commercial bank money; conversely, digitalisation cannot mean the disappearance of central bank money.. Such means of payment, adapted to the demand of users in the digital age, would (i) preserve the accessibility and usability of central bank money , (ii) support our monetary sovereignty , and limit the risk that "external" digital assets – be they cryptos or non-European CBDC – would be used as settlement assets in the euro area, (iii) support the strategic autonomy of the European continent – and hopefully contribute to the emergence of a pan-European payment solution e.g. the European Payments Initiative, which could be used as a vehicle for the distribution of a digital euro.. Concerns have emerged that the issuance of a CBDC would threaten the role of banking intermediaries in client relationships, while draining banks' deposits through a massive conversion into risk-free CBDC accounts, especially in times of stress.. The two projects of a wholesale and retail CBDC are two faces of the same "mountain", which is the ambition to offer a digital form of central bank money to combine innovation and trust in the payment system.. It does not entirely coincide with the former: commercial banks can rightfully inspire confidence; central banks are capable of innovation, the CBDC is proof of that.. 2 François Villeroy de Galhau, Roads for the future: central bank digital currency (CBDC) and innovative payments , speech, June 2021.
In this context, let me pay tribute to the solidity and performance of the French banking system: French bank’s CET1 amounts to 14.9 % in Q1 2022; while their RoE increased over a rolling 12-month period at 7.6 % in Q1 2022, and corporate risk remains manageable for sure.. Our means of payment are and must remain a partnership between central bank money and commercial bank money. Until now, the coexistence and partnership of central bank and commercial bank money has structured the retail payment landscape and preserved the stability of the monetary system.. Their respective roles are clearly assigned: central bank money anchors the stability of the financial system while the multiplicity of issuers of commercial bank money preserves competition and innovation.. Neither one is better than the other, but in a joint venture each partner needs the other: a digital euro should never mean disappearance of commercial bank money; conversely, digitalisation cannot mean the disappearance of central bank money.. Indeed these foundations – and especially the role of central bank money – are increasingly threatened by the digital revolution of the financial sector.. Such means of payment, adapted to the demand of users in the digital age, would (i) preserve the accessibility and usability of central bank money , (ii) support our monetary sovereignty , and limit the risk that “external” digital assets – be they cryptos or non-European CBDC – would be used as settlement assets in the euro area, (iii) support the strategic autonomy of the European continent – and hopefully contribute to the emergence of a pan-European payment solution e.g. the European Payments Initiative, which could be used as a vehicle for the distribution of a digital euro.. Concerns have emerged that the issuance of a CBDC would threaten the role of banking intermediaries in client relationships, while draining banks’ deposits through a massive conversion into risk-free CBDC accounts, especially in times of stress.. The Eurosystem should entrust banks with the distribution of digital euros to final users, while setting technical, functional and commercial rules like for example the branding, logo, and fee structure.. Finally, regarding the possible risks of banks’ deposit conversions, we must and will ensure that a digital euro remains a means of payment rather than a saving/investment asset.. The two projects of a wholesale and retail CBDC are two faces of the same “mountain”, which is the ambition to offer a digital form of central bank money to combine innovation and trust in the payment system.. I spoke at the start about the 'existential' monetary partnership between central banks and commercial banks.. It does not entirely coincide with the former: commercial banks can rightfully inspire confidence; central banks are capable of innovation, the CBDC is proof of that.. 2 François Villeroy de Galhau, Roads for the future: central bank digital currency (CBDC) and innovative payments , speech, June 2021.
Throughout history, money and payments have been constantly evolving.And this also holds true in the digital age.. Our monetary system is based on the complementarity of private money with public money – which is available for retail payments in the form of banknotes.. Confidence in private means of payment is determined by our ability to convert private money into safe public money.. In times when various forms of private money coexisted in the absence of sovereign money – such as the free banking era of the 19th century – the notes issued by banks often traded at variable prices [ 5 ] and instability risks [ 6 ] required dominant banks and clearinghouses to act as quasi-central banks [ 7 ] .. The consensus among central banks on the coexistence between public and private money was summarised 20 years ago as follows: “ The composite of central and commercial bank money, convertible at par, is essential to the safety and efficiency of the financial system and should remain the basis of the singleness of the currency.. In other words, central banks would accept neither an outcome in which central bank money crowds out private initiative, nor an outcome in which central bank money is phased out by a market mechanism .” [ 8 ]. [ 9 ] Central banks must therefore consider how to ensure that their money can remain a payments anchor in a digital world.. Some have suggested that innovative private payment solutions such as stablecoins could, if properly regulated, make CBDCs superfluous.. [ 10 ] However, confidence in stablecoins would also depend on the ability to convert them into central bank money, [ 11 ] unless stablecoin issuers were allowed to invest the reserve assets in risk-free deposits at the central bank.. A system of this kind may not have sufficient safeguards against external threats, including cyber threats.. But a CBDC could generate even more benefits for users.. We are cooperating with the relevant European authorities on this issue.. Some estimates suggest that Europeans pay about 1.4% of GDP for payments services.. [ 28 ] Although financial inclusion depends on several factors, such as financial and digital literacy, the cost of financial services is likely to play a role.. We take both risks seriously.
Currently such concepts are being developed, either only for wholesale settlements between banks (e.g. Utility Settlement Coin jointly issued by Credit Suisse, Barclays, HSBC, Deutsche Bank and UBS) or individually for retail payments by Japanese banks – parallel initiatives of MUFG coin (Bank of Tokyo-Mitsubishi UFJ) and J-Coin (Mizuho Financial Group and Japan Post Bank).. Unlike traditional fiat currency systems, the CBDC system will be based on an asset class held outside of the traditional banking system.. It could be stored directly in accounts held at the Central Bank (where all retail clients have opened their personal accounts), in banks (it would work similarly as distribution of cash by banks, only the form of asset would be different) or at various third party providers (e.g. FinTechs , GAFA (Google, Amazon, Facebook, Apple)) as tokens in electronic wallets or combinations of the above options.. The most impactful one for banks would be a setup where various providers are entitled to keep CBDC and can offer additional payment services also related to fiat currency.. Opening this service to various providers would have the most serious impact on banks, however restricting it to the Central Bank only, will also deprive banks of profits from transaction processing due to outflow of deposits in fiat currency to CBDC.. Regulatory requirements Minimum requirements defined by local regulatory bodies in order to offer services related to CBDC (e.g. a wallet for CBDC storage, payments and exchange) will determine the entry barriers and thus the competition in the CBDC system.. As CBDC will have adverse effects on different participants of current payment systems (banks, settlement institutions, clearing houses, ATM operators, payment cards systems), we created a model to estimate the potential impact of CBDC issuance on bank’s revenues.. The key assumption of our model is that CBDC will be merely an alternative payment system and that it will therefore negatively impact the banks’ profitability for two reasons :. Here, inputs are: structure of current split of payments, CBDC replacement rate and its structure (i.e. what percentage of all transactions combined will be conducted in CBDC and which types of payments transactions (cash, card payments, credit transfers) would be replaced by it), value of average payments transactions in selected country and money circulation factors (i.e. ratios between volumes of different transactions types to overnight deposits volumes).. As we can see in the above chart, in specific circumstances, in countries where cashless transactions are more prevalent, and a given bank is more reliant on card transactions and financing from retail deposits, potential issuance of CBDC may have significant negative impacts on its revenues, assuming a do-nothing scenario, especially if transactions in a new system will be replacing mostly card transactions.. Since it would pose a serious threat for the banks’ profitability in the long run, the following set of options should be considered by banks as actions that would at least allow to mitigate adverse CBDC consequences – but could also enable leveraging on a new payment system:. Prepare for participation in CBDC system – design various services that could be offered within the CBDC system (e.g. for consumers: consolidation of classic account and means of payments and wallet; for payment recipients (retailers, etc.. Create an attractive offer and solutions for international payments that will allow to offset shrinking revenues from domestic payments Invest in domestic instant payments/RTGS systems that will allow to offer payment solutions able to compete with CBDC payment scheme Expand corporate banking services – in order to fill the revenues gap that will arise in retail banking Consider building a payment system based on a stable coin as a joint initiative of banks in a given market – thus creating an effective system that could significantly reduce needs for CBDC introduction, still ensuring a source of revenues from payments
Central bank digital currencies are digital tokens, similar to cryptocurrency, issued by a central bank.. Many countries are developing CBDCs, and some have even implemented them.. A central bank digital currency is the digital form of a country's fiat currency.. CBDCs could also decrease the maintenance a complex financial system requires, reduce cross-border transaction costs, and provide those who currently use alternative money transfer methods with lower-cost options.. Central bank digital currencies would also reduce the risks of using digital currencies in their current form.. Retail CBDCs are used by consumers and businesses, much like physical forms of currency.. Account-based retail CBDCs require digital identification to access an account .. Financial system stability. Though the idea for central bank digital currencies stems from cryptocurrencies and blockchain technology, CBDCs are not cryptocurrencies.. As of March 2022, there is no U.S. CBDC.
Central Banks ‘Waking Up’ to Digital Currency, Create New Framework for CBDC Deployment with World Economic Forum ›
· World Economic Forum and a community of over 40 central banks, international organizations, academic researchers and financial institutions have created a framework to help central banks evaluate, design and potentially deploy CBDC. · National Bank of Cambodia has already piloted a quasi-form of CBDC for its national payments system; Central Bank of Uruguay and the Bank of Thailand are applying the toolkit to its CBDC evaluation process; People’s Bank of China, Eastern Caribbean Central Bank are also early movers. Central bank digital currency (CBDC) has risen to prominence as a potential solution to multiple challenges such as financial inclusion and payment‑system efficiency.. “Given the critical roles central banks play in the global economy, any central bank digital currency implementation, including potentially with blockchain technology, will have a profound impact domestically and internationally,” said Sheila Warren, Head of Blockchain and Distributed Ledger Technology at the World Economic Forum.. The CBDC Policy‑Maker Toolkit provides high‑level guidance and information for retail, wholesale, cross‑border and private-sector issued “hybrid CBDC” as well as for large, small, emerging and developed countries.. “From our experience, we need to identify tradeoffs between benefits from the use cases and their associated risks across different dimensions.. “The toolkit can serve as a springboard as central banks progress with their CBDC investigation and development,” Warren said.
Central bank digital currency (CBDC) is fiat money—or money established/backed by a government through its central bank—in a virtual form.. If people see virtual currency issued by their banks, more people will be open to the idea of cryptocurrency; and if banks build the systems for holding and transacting with CBDCs, they’ll be able to handle non-central bank issued digital currency—cryptocurrencies like Bitcoin and Ethereum.. Contrast that to how, late in 2019, Philadelphia Fed President Patrick Harker told Reuters that the issuance of digital currency by central banks including the Fed and the European Central Bank (ECB) is “inevitable.” And while Harker himself said he was still “in the minority” on the issue, that doesn’t mean he’s wrong about CBDC’s inevitability.. In a 2018 study by the Bank of International Settlements, 70% of the central banks that responded reported that they are working on some form of digital currency research or implementation.. Now, with rollouts and plans for rolling out central bank digital currencies (CBDC) in several countries including Sweden, France, and even China, this idea has grown from a backroom research project into something with real world implications.. Understanding what CBDC is, how it compares with other nongovernmental cryptocurrencies, and what the future may hold is important for everyone to understand, even if you aren’t personally buying and holding digital currencies; the emergence of CBDC is going to become a hot topic, and will affect existing fiat currency.. Central bank digital currency, on the surface, is straightforward: it is a form of currency issued directly by a central bank to both supplement its paper currency and to compete with cryptocurrencies like Bitcoin.. While the dozens of central banks around the world are looking at different forms of CBDC to potentially implement, all versions of digital cash being considered all share some aspects:. Supplemental Currencies – Central banks around the world view digital currency as something with potential benefits to augment existing currency, not as a replacement.. Tool For Financial Stability – As we’ve seen in the past few decades, central banks have been using every tool at their disposal to prop up their currencies and economies, from drastic rate cuts to quantitative easing and even “ helicopter money .” CBDC would give them even more control over these types of programs, and another tool in their toolbox to help during an economic downturn.. Banking System – CBDC could potentially open up direct central bank accounts for millions of people all at once.. The country with the world’s largest population announced in 2019 that by early 2020, its central bank, the People’s Bank of China (PBOC), will be testing out its own “ Digital Currency Electronic Payment ” (DCEP).. Sweden – One of the early testers of CBDC, Sweden’s central bank, the Riksbank, has been monitoring its “e-krona.” In response to a rapid drop in the use of paper currencies, the Swedish government has now announced another pilot program for a new platform for its e-krona.
Gareth Vaughan on the missing profits of nations, the last taboo in central banking, the CBDC threat to ticket clippers, China's 'mountain of non-performing loans,' & the multi-billion dollar global illegal mining industry. The governments of high-tax European Union countries appear to be the prime losers of global profit shifting, with a reduction in domestic profit of about 20%, as opposed to 10% in the United States and 5% in developing countries.. Starting with absolute numbers, in our preferred estimates $143 billion in profit was shifted out of the United States in 2015 (23% of the global total), $216 billion was shifted out of the European Union (36% of the global total), $76 billion out of other OECD countries (12% of the total) and the rest (29%) from non-OECD countries.. Through this LSAP, or quantitative easing (QE), the Reserve Bank bought $53.5 billion worth of NZ government and local government bonds on the secondary market from banks during 2020 and 2021.. I don't hold a lot of cash these days, but the other form of central bank money is reserves held by commercial banks.. Now, central bank digital currency really provides a new form of central bank money.. Dong He: Central bank digital currency is a new form of central bank money.. Tara Iyer [the interviewer]: ... in terms of credit cards and debit cards, when we pay by cards in supermarkets or anywhere else, the money goes directly from a bank account, what is going to be so different about CBDCs and how would CBDCs differ from either using physical cash, one, and by using credit cards, two?
How Could Central Bank Digital Currencies Be Designed?, SUERF Policy Notes .:. SUERF - The European Money and Finance Forum ›
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.. Many are exploring the idea of issuing central bank digital currency (CBDC) - a new type of fiat money that expands digital access to central bank reserves to the public at large, instead of restricting it to commercial banks.. As CBDC becomes even more cash-like, households with preferences on the margin between CBDC and bank deposits switch to the latter, thereby raising deposits and reducing CBDC use.. In particular, when network effects bind, optimal policy combines a (more) cash-like CBDC with a negative CBDC interest rate, thereby circumnavigating adverse network effects on cash use by making the CBDC less attractive, while simultaneously limiting the CBDC′s impact on financial intermediation and production.. When banks have more monopoly power, the central bank makes the CBDC compete harder with bank deposits, leading optimal CBDC rates to diverge from zero, regardless of network effects.. Greater focus on preserving bank intermediation instead drives the optimal design of a CBDC to be more cash-like, but only up to a point: concerns that cash may fall prey to network effects gives the central bank cause to limit the extent to which CBDC competes against cash.
Central Bank Digital Currency. Many governments are already exploring digital money – central bank digital currencies (CBDC), and the COVID-19 outbreak could accelerate the transition from physical cash to digital money.. CBDC, in simplest terms, is the digital form of fiat currency established by the government / central bank.. We will introduce 3 of them here: Wholesale vs Retail, Central bank-managed vs Synthetic and Centralized vs DLT-based.. Wholesale vs Retail Wholesale CBDC works like electronic central bank reserves, which only accept deposits from financial institutions.. In contrast to the opinions of many crypto enthusiasts, there is no inherent reason that CBDC cannot be built using more conventional centralized technology.. In our view, it is more likely that domestic CBDC will be implemented in a conventional centralized way.. Moreover, since CBDC will be created in pure digital form and likely to be interoperable with DLT technologies, we believe that CBDC will be interoperable with some popular cryptocurrencies as well.. Banks, payment service providers and crypto service providers are expected to support CBDC very soon after its launch.. Why CBDC?. By providing a new way to make payments via CBDC, it could diversify payment options and encourage more competition, thereby enhancing the speed and efficiency of the payments industry.. Another reason is to meet future payments needs in digital economy.. Banking-sector disintermediation could also interrupt the money creation process, which may reduce money supply and hurt the economy.. • There is a fundamental difference between CBDC as fiat money versus cryptocurrencies as decentralized money .. To put it another way, fiat money exists only insofar as the government continues to, while cryptocurrencies will survive as long as there are enough people who believe in it (visit here for more on fiat money vs decentralized money);
What is Central Bank Digital Currency (CBDC)?. Unlike physical cash, money in your bank account is typically not a legal tender.. The need to distribute these payments has fueled interest in a digital dollar.. Hong Kong dollar is pegged to US dollar enabling China to access global capital through its port city.. DCEP distribution is designed to mirror physical cash distribution.. Commercial banks first convert some of their deposits at central bank to digital currency and then release it to consumers.. Banks are expanding their balance sheets by providing new loans, which creates new assets (loan itself) and new liabilities (deposit for a loan).. Any physical cash that is removed from the bank is limiting the bank’s ability to provide new loans.. a) Although cash usage is decreasing, 76% of retail transactions in EU still take place through cash.. Diminishing the ability of commercial banks to provide loans, contracting their balance sheets.. In countries with weak institutions, access to CBDC could facilitate currency substitution.. After all, the innovative part of CBDC is not its digital nature, but broad access.