Central Bank Independence and the Development of Payments and CBDCs

IMF News, January 10, 2023

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Bibliographic details

• Published: January 10, 2023

Overview

• Title: Central Bank Independence and the Development of Payments and CBDCs
• Event: International Symposium on Central Bank Independence, Stockholm
• Speaker: Tobias Adrian, IMF Financial Counsellor and Director of the Monetary and Capital Markets Department
• Date: January 10, 2023
• Key premise: Independence is a cornerstone of central banking, particularly for the monetary policy function, and must be preserved as central banks’ mandates expand to include payments and CBDCs.

Evidence on independence and monetary policy

• Numerous studies validate the critical importance of independence for monetary policies aimed at low and stable inflation.
• IMF’s Central Bank Legislation Database shows most countries’ central bank laws contain “anchors” to safeguard central bank independence.
• Rationale: Insulating monetary policy from political interference helps avoid long-term risks to economic and financial stability and prevents short-term political gains from producing long-term pain such as higher inflation.

Independence in the era of CBDCs

• Independence extends beyond monetary policy:
  • Basel Core Principles enshrine operational independence for the banking supervisor.
  • Principles for Financial Market Infrastructures encompass independence for payment systems and other financial market infrastructures.
• CBDC implications:
  • Operation of CBDCs—wholesale or retail—should in no case undermine independence.
  • Central banks must clearly communicate CBDC functions and interactions with monetary, payments, financial stability, and financial integrity policies; communications may evolve over time.
  • Additional safeguards for independence might be required depending on CBDC design and intended uses; amendments to existing legislation or new legislation may be needed.
  • Transparent and accountable arrangements are key.
  • The IMF’s Central Bank Transparency Code provides guidance through principles and best practices across central banking functions and promotes transparency to shape accountability and stakeholder dialogue.

Challenges in CBDC exploration

• No firmly established principles exist yet for deciding whether to issue CBDCs or how to design them.
• Technological uncertainty questions include:
  • Which technology is best suited for CBDC?
  • Should centralized or decentralized technologies be used?
  • How should data be managed?
  • What are the macro-financial implications of cross-border CBDC use?
  • How to manage cyber security and other risks related to CBDC?
• Emerging consensus areas:
  • “Tiered wallets” and “managed anonymity” designs: small-value transactions similar to cash; larger-value transactions require fuller identity information.
  • Two-tier operational model: private firms (e.g., commercial banks) act as intermediaries between central banks and end users.
• Operational and adoption concerns:
  • Ensuring sustainable business models for intermediaries (cost recovery, merchant adoption).
  • Designing incentives for intermediaries to secure sufficient CBDC adoption and promote policy goals such as financial inclusion.
• Policy design principle: No “one size fits all”; countries need flexibility to design CBDCs to meet particular policy objectives while learning from global experience to minimize repeated mistakes.

Role of the IMF

• IMF functions:
  • Facilitate information-sharing and capacity development on CBDCs to ensure member countries can access knowledge and build institutional capacity.
  • Integrate developments around digital money into regular surveillance: Article IV and FSAP missions consider potential effects from digital money.
  • Step up capacity development activities on digital money; work with authorities on risk mitigation and sound design principles.
  • Help ensure domestic CBDC decisions serve as a sound foundation for a stable global payments system.
• Multilateral cooperation:
  • IMF coordinates and cooperates with the World Bank, the Bank for International Settlements, the Financial Stability Board, and domestic authorities to achieve better outcomes.

Key takeaways and policy recommendations

• Preserve central bank independence across all functions, including new payments and CBDC roles.
• Communicate clearly and transparently about CBDC objectives, functions, and interactions with monetary, payments, financial stability, and financial integrity policies.
• Consider legal and institutional safeguards—amend existing legislation or introduce new legislation where necessary—to protect independence given CBDC design choices.
• Favor transparent and accountable arrangements, leveraging guidance such as the IMF’s Central Bank Transparency Code.
• Encourage international information-sharing and capacity development to:
  • Learn from other countries’ experiences;
  • Minimize the risk of repeating costly mistakes;
  • Support policy objectives like financial inclusion while managing macro-financial and cyber risks.
• Allow significant policy space for country-specific CBDC designs rather than advocating a universal template.

International Monetary Fund — Central Bank Independence and the Development of Payments and CBDCs (Tobias Adrian, January 10, 2023).

References

• Tobias Adrian
• Speeches
• PRESS CENTER
• IMF’s Central Bank Legislation Database
• Central Bank Transparency Code
• effectively manage risks
• https://www.imf.org/en/home