Central Bank Digital Currency Adoption: A Two-Sided Model

IMF Working Papers, June 16, 2023

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For central bank digital currencies (CBDCs) to accomplish their intended objectives, it is necessary for both consumers to use them and for merchants to accept them.
The paper develops a dynamic two-sided payments model with both heterogeneous households and merchants/firms to study:
- (1) The adoption of CBDC by households and firms.
- (2) The impact of CBDC issuance on financial inclusion, informality, and disintermediation.

There is a feedback loop where more households will adopt CBDC if more firms accept CBDC and vice versa.
Incentivizing both households and firms will result in greater levels of take-up.

Firms are more likely to accept CBDC if:
- fees are low;
- there are tax exemptions or subsidies for transactions made in CBDC;
- and households who prefer to make payments with CBDC make up a large share of revenue.

Upon CBDC issuance, an economy can get stuck at a steady state with low CBDC adoption and small welfare gains if:
- the features of CBDC which do not rely on merchant acceptance (remuneration, efficiency of cross border and government payments) are not sufficiently attractive;
- or if the households benefiting from these features make up a small share of merchant revenue.
Temporary subsidies and using CBDC for government payments can spur initial take-up to transition an economy to a welfare improving steady state with high(er) CBDC usage.

Greater adoption of CBDC will result in greater financial inclusion and formalization.
Greater adoption may potentially lead to the disintermediation of banks and card payments.
There is a trade-off in designing CBDC for greater adoption.
The gains are more likely to outweigh the risks in lower income economies with larger unbanked populations and informal sectors.

Source: Central Bank Digital Currency Adoption: A Two-Sided Model, IMF Working Papers (Working Paper No. 2023/127).