## Central Bank Digital Currency Adoption: A Two-Sided Model

_IMF Working Papers, June 16, 2023_

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## Bibliographic details
- Authors: Brandon Joel Tan
- Published: June 16, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400244858.001

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### Summary and Objectives
- 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.

### Core Mechanism: Two-Sided Feedback Loop
- 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.

### Determinants of Household Adoption
- Households are more likely to adopt CBDC if:
  - it is low cost;
  - it provides an attractive savings vehicle;
  - it reduces the cost of remittances;
  - it improves the efficiency of government payments;
  - and, if accepted by merchants, it offers a valuable means of payment.

### Determinants of Firm (Merchant) Acceptance
- 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.

### Steady States, Transition Dynamics, and Policy Tools
- 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.

### Welfare, Inclusion, and Disintermediation Effects
- 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.

### Publication and Access
- By Brandon Joel Tan
- June 16, 2023
- Pages: 53
- Series: Working Paper No. 2023/127
- DOI: https://doi.org/10.5089/9798400244858.001

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

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_Source: https://www.imf.org/en/publications/wp/issues/2023/06/16/central-bank-digital-currency-adoption-a-two-sided-model-534325_