{
  "title": "Central Bank Digital Currencies: 4 Questions and Answers",
  "publication": "IMF Blog, December 12, 2019",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2019/12/12/central-bank-digital-currencies-4-questions-and-answers",
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  "summary": "Authors: Tobias Adrian, Tommaso Mancini-Griffoli; date: December 12, 2019.",
  "sections": [
    {
      "heading": "IMF’s role around CBDCs",
      "content": "- Authors: Tobias Adrian, Tommaso Mancini-Griffoli; date: December 12, 2019.\n- The IMF can help in three ways:\n  - Informing the policy debate: investigating implications of CBDC available across borders; drawing on in-house experts; examining cross-border payments and international monetary system questions that relate to the IMF’s mandate.\n  - Convening parties: fostering cooperation across countries and stakeholders (central bankers, regulators, investors, entrepreneurs, academics) using its universal membership and public-institution status; examples include bi-yearly meetings, yearly “fintech roundtable,” and ad-hoc research events.\n  - Helping countries develop policies: through surveillance work, Financial Sector Assessment Programs, and technical assistance; IMF teams have worked with countries to modernize payment systems, advise on legislation related to digital payments, and review plans to issue CBDC; support can include regional workshops and bilateral technical assistance missions.\n- Guiding principle: each country must weigh pros and cons of CBDC depending on its particular circumstances."
    },
    {
      "heading": "How the IMF views global development and implementation of CBDC",
      "content": "- Country approaches vary across three broad groups:\n  - Active pilots and preparation: countries running pilot projects, increasing central-bank resources for CBDC and fintech research, partnering with private advisors, revising legislation, studying competing CBDC designs, and engaging publics and legislatures.\n  - Scaled-up analysis and limited testing: countries that have increased resources for CBDC and payment-systems work but focus primarily on analysis and limited hands-on technology testing; CBDC remains an option but alternatives are also explored.\n  - No immediate need: countries focusing on improving existing payment arrangements and strengthening regulation rather than pursuing CBDC now.\n- Recent stimuli for increased interest: announcement of Facebook’s Libra initiative and reports of possible CBDC launch by the People’s Bank of China."
    },
    {
      "heading": "Potential benefits of CBDC (as highlighted by central banks)",
      "content": "- Cost of cash: CBDC could lower costs associated with providing a national means of payment in countries with high cash-management costs due to vast territory or remote areas (including small islands).\n- Financial inclusion: CBDC may provide a safe and liquid government-backed means of payment that does not require a bank account, useful where cash use is diminishing and banking penetration is low.\n- Stability of the payment system: CBDC could enhance resilience where payment systems are concentrated among a few large (sometimes foreign) companies.\n- Market contestability and discipline: CBDC could offer competition to large payments firms and cap rents they extract.\n- Countering private digital currencies: domestically issued CBDC denominated in the domestic unit of account could reduce adoption of privately issued currencies denominated in foreign currencies.\n- Support for DLT-based markets: DLT-based CBDC could facilitate automatic “payment-versus-delivery” or “payment-versus-payment” using smart contracts; some central banks may provide CBDC only to institutional participants to develop DLT-based asset markets.\n- Monetary policy transmission: academic views include that an interest-bearing CBDC could increase response to policy-rate changes and could be used to charge negative interest rates in prolonged crises, potentially breaking the “zero lower bound” constraint if cash is made costly."
    },
    {
      "heading": "Key challenges and risks (and design considerations)",
      "content": "- Banking-sector disintermediation: large-scale CBDC holdings could prompt deposit withdrawals from commercial banks, forcing banks to seek more expensive runnable wholesale funding or raise deposit rates, compress margins, or raise loan rates; competition with deposits in normal times depends in part on interest paid on CBDC.\n- “Run risk”: in crises, depositors could shift to CBDC seen as safer and more liquid; credible deposit insurance, existence of safe liquid alternatives (government bond funds, state banks), and historical evidence suggest limited systematic runs toward such alternatives, but context matters; central banks would find it easier to meet withdrawals in CBDC than cash; in many countries, bank runs coincide with runs from the currency, so local-currency CBDC may not change flight-to-foreign-currency behavior.\n- Central bank balance sheet and credit allocation: high CBDC demand could expand central bank balance sheets; central banks may need to provide liquidity to banks facing rapid funding outflows, taking on credit risk and making allocation choices that could open doors to political interference.\n- International implications: reserve-currency CBDC available across borders could increase currency substitution (“dollarization”) in countries with high inflation and volatile exchange rates; these implications require further study; IMF staff are investigating.\n- Costs and reputational risks: providing full-fledged CBDC can be costly and operationally complex—front-end wallets, customer interfacing, technology maintenance, transaction monitoring, AML/CFT responsibilities—with cyber, technological, and human-error risks that could harm central bank reputations.\n- Design mitigation: some challenges can be attenuated by appropriate CBDC design choices."
    },
    {
      "heading": "Synthetic CBDC and public-private arrangements",
      "content": "- Synthetic CBDC model described by IMF staff:\n  - Private firms issue digital coins to the public (accounts or tokens leveraging DLT) and manage innovation and customer interfacing.\n  - Central bank provides trust by requiring coins to be fully backed with central bank reserves and by supervising coin issuers.\n  - Outcomes: preserves comparative advantages of private firms and central banks, induces competition among private firms, limits costs and some operational risks to the central bank."
    },
    {
      "heading": "Alternatives to CBDC and complementarities",
      "content": "- Improved payment systems: several countries are improving inter-bank payment systems to achieve speed and convenience similar to digital currencies (example referenced: the Federal Reserve’s “FedNow” initiative for nearly instantaneous and low-cost settlement of inter-bank retail payments).\n- Complementary reforms: public digital identities, common communication standards, open APIs, and data portability and protection standards can enhance payments and competition.\n- CBDC complementarities:\n  - DLT-based CBDC can spur DLT-based asset markets.\n  - CBDC can operate outside the banking system and promote financial inclusion.\n  - CBDC can provide competition to banks and encourage use of fast payment systems.\n  - DLT-based CBDC could facilitate cross-border retail payments, complementing efforts to link traditional inter-bank payment systems.\n- Recommendation: central banks should remain engaged in examining the full range of CBDC issues, including synthetic CBDC options, and deepen familiarity with new technologies.\n\nIMF Blog entry from IMF staff.\n\n---\n\n\n References\n\n- synthetic CBDC\n\nSource: https://www.imf.org/en/blogs/articles/2019/12/12/central-bank-digital-currencies-4-questions-and-answers"
    }
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    "Authors: Tobias Adrian, Tommaso Mancini-Griffoli",
    "Published: December 12, 2019",
    "Authors: Tobias Adrian, Tommaso Mancini-Griffoli; date: December 12, 2019.",
    "The IMF can help in three ways:",
    "Guiding principle: each country must weigh pros and cons of CBDC depending on its particular circumstances.",
    "Country approaches vary across three broad groups:",
    "Recent stimuli for increased interest: announcement of Facebook’s Libra initiative and reports of possible CBDC launch by the People’s Bank of China.",
    "Cost of cash: CBDC could lower costs associated with providing a national means of payment in countries with high cash-management costs due to vast territory or remote areas (including small islands).",
    "Financial inclusion: CBDC may provide a safe and liquid government-backed means of payment that does not require a bank account, useful where cash use is diminishing and banking penetration is low.",
    "Stability of the payment system: CBDC could enhance resilience where payment systems are concentrated among a few large (sometimes foreign) companies.",
    "Market contestability and discipline: CBDC could offer competition to large payments firms and cap rents they extract.",
    "Countering private digital currencies: domestically issued CBDC denominated in the domestic unit of account could reduce adoption of privately issued currencies denominated in foreign currencies.",
    "Support for DLT-based markets: DLT-based CBDC could facilitate automatic “payment-versus-delivery” or “payment-versus-payment” using smart contracts; some central banks may provide CBDC only to institutional participants to develop DLT-based asset markets.",
    "Monetary policy transmission: academic views include that an interest-bearing CBDC could increase response to policy-rate changes and could be used to charge negative interest rates in prolonged crises, potentially breaking the “zero lower bound” constraint if cash is made costly.",
    "Banking-sector disintermediation: large-scale CBDC holdings could prompt deposit withdrawals from commercial banks, forcing banks to seek more expensive runnable wholesale funding or raise deposit rates, compress margins, or raise loan rates; competition with deposits in normal times depends in part on interest paid on CBDC.",
    "“Run risk”: in crises, depositors could shift to CBDC seen as safer and more liquid; credible deposit insurance, existence of safe liquid alternatives (government bond funds, state banks), and historical evidence suggest limited systematic runs toward such alternatives, but context matters; central banks would find it easier to meet withdrawals in CBDC than cash; in many countries, bank runs coincide with runs from the currency, so local-currency CBDC may not change flight-to-foreign-currency behavior.",
    "Central bank balance sheet and credit allocation: high CBDC demand could expand central bank balance sheets; central banks may need to provide liquidity to banks facing rapid funding outflows, taking on credit risk and making allocation choices that could open doors to political interference.",
    "International implications: reserve-currency CBDC available across borders could increase currency substitution (“dollarization”) in countries with high inflation and volatile exchange rates; these implications require further study; IMF staff are investigating.",
    "Costs and reputational risks: providing full-fledged CBDC can be costly and operationally complex—front-end wallets, customer interfacing, technology maintenance, transaction monitoring, AML/CFT responsibilities—with cyber, technological, and human-error risks that could harm central bank reputations.",
    "Design mitigation: some challenges can be attenuated by appropriate CBDC design choices.",
    "Synthetic CBDC model described by IMF staff:",
    "Improved payment systems: several countries are improving inter-bank payment systems to achieve speed and convenience similar to digital currencies (example referenced: the Federal Reserve’s “FedNow” initiative for nearly instantaneous and low-cost settlement of inter-bank retail payments).",
    "Complementary reforms: public digital identities, common communication standards, open APIs, and data portability and protection standards can enhance payments and competition.",
    "CBDC complementarities:",
    "Recommendation: central banks should remain engaged in examining the full range of CBDC issues, including synthetic CBDC options, and deepen familiarity with new technologies.",
    "[synthetic CBDC](https://www.imf.org/en/Publications/fintech-notes/Issues/2019/07/12/The-Rise-of-Digital-Money-47097)"
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