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Steve Cecchetti and Kermit Schoenholtz respond to the 22 questions posed in the Fed's central bank digital currency (CBDC) discussion paper. In general, they doubt that the benefits of a U.S. CBDC will exceed the risks, and that other, less risky, means are available to achieve all the key benefits that CBDC advocates anticipate. But if the Fed were to go ahead, they suggest that there should be no cap on individual holdings, to avoid a premium on CBDC (compared to other central bank liabilities) that would just redirect runs into close substitutes (such as Treasury bills). Also, the Fed should expect to pay interest on CBDC because it would be politically unsustainable for the Fed to pay interest on wholesale digital liabilities without paying interest on retail digital liabilities. Also, not paying interest on CBDC would diminish its attractiveness relative to other safe, liquid instruments. Plus, that interest will be in part a mechanism to compensate the private intermediaries for performing the necessary services of creating and maintaining accounts, verifying identities, tracking assets, implementing transactions, and monitoring for suspicious activity. They acknowledge that these would increase run risk in the private financial system, but in their view all of the benefits expected from issuing CBDCs can be achieved less disruptively, and they provide alternative mechanisms for five widely claimed benefits. They see two potential developments that could make a U.S. CBDC worthwhile; (i) if regulation of stablecoins prove politically infeasible (see their earlier post), or (ii) if other highly trustworthy financial jurisdictions (with convertible currencies, credible property rights protections, and free cross-border flow of capital) offer their own CBDC. If the Fed does go ahead an issue CBDC, offline capability would add to its attractiveness. When the internet is not available, mobile telephony could provide a backup, and to facilitate everyday payments,

The "Blockchain Trilemma" is a term used to describe the challenge of increasing performance, security, and decentralisation at the same time. Current enterprise blockchains are not truly decentralised. They may be structurally decentralised, but are operationally centralised. By reversing this, having structurally centralised, but operationally decentralised architecture, a CBDC can achieve a high-performance blockchain. However, any blockchain-based CBDC should not only solve the blockchain trilemma, but also the CBDC design trilemma, which notes that identity, privacy, and programmability cannot be easily enhanced at the same time. A CBDC cannot ignore privacy for the sake of achieving legal compliance and implementing programmable money. From an expertise point of view, the answer to this trilemma is the use of a decentralized identity system such as self-sovereign identity (SSID) to find the perfect equilibrium for the CBDC design trilemma. Self-sovereign identity is very popular for its advanced privacy protection. By having an SSID-based blockchain system, a CBDC can incorporate both privacy and transparency into the blockchain-based CBDC system. Additionally, a use of zero-knowledge encryption to protect the transaction privacy of blockchain data is highly recommended for any CBDC implementation.

Adoption of CBDCs can be fostered through multiple approaches. While the strategy may differ, two fundamental components should remain as the foundational pillars of CBDC launch: trust and transparency. The adoption of CBDC will rely on central banks' ability to address privacy concerns effectively and ensure individual's rights are protected. The issue of privacy surrounding CBDCs is closely tied to the public's trust in public institutions, which is why commercial banks could play a crucial role. As trusted partners of the public, commercial banks can help promote CBDC adoption by offering assurance regarding the safety and security of CBDC holding. Not limited to trusted partners, commercial banks will also have an active role in CBDC adoption. Finally, it is essential to consider both end-user and merchant perspectives when evaluating CBDC adoption. Merchant and public adoption are two sides of a coin, being interconnected and interdependent.

The IMF reported that over 40 countries have approached with requests for CBDC capacity development assistance. Countries' questions range from objectives and design choices to pilots and analysis of macro-financial implications. In the past two years, the IMF has started to engage with almost 30 countries. The IMF will also publish a Handbook that will be the basis for CBDC capacity development and help countries make well-informed decisions when taking the major step to design and issue their own CBDC. The Handbook chapters will provide mostly a framework for structuring CBDC exploration and cover five priority areas: (1) policy objectives and operational framework of CBDC; (2) foundational requirements and readiness to issue CBDC, such as legal considerations, cyber resilience, central bank governance, and regulation and supervision; (3) CBDC design processes, considerations, and choices; (4) project approaches and technology; and (5) potential macrofinancial impacts of CBDC. The initial wave of chapters, slated for publication around the 2023 Annual Meetings, will (1) provide a methodological framework for conducting CBDC exploration; (2) address the most common requests that IMF staff encounter in capacity development engagement; and (3) be based on relatively well-established knowledge and experiences. [

This Bank for International Settlements (BIS) paper explores initial thinking on the cross-border use of central bank digital currency (CBDC) based on a survey of 50 central banks in the first quarter of 2021. While most central banks have yet to take a firm decision on issuing a CBDC, the survey responses show a tentative inclination towards allowing use of a future CBDC by tourists and other non-residents domestically. They have a cautious approach to allowing use of a CBDC beyond their own jurisdiction. Concerns about the economic and monetary implications of cross-border CBDC use and about private sector global stablecoins are taken seriously. At the wholesale level, 28% of surveyed central banks are considering options to make CBDCs interoperable by forming multi-CBDC arrangements. This involves arrangements that enhance compatibility, interlink or even integrate multiple CBDCs into a single payments system. Finally, almost 14% of respondents are considering an active role for the central bank in FX conversion.

A paper by Rhys Bidder, Timothy Jackson and the Deutsche Bundesbank's Matthias Rottner examined the impact of CBDC on banks and the broader economy drawing the Bundesbank's Survey on Consumer Expectations using a structural macroeconomic model with endogenous bank runs. Based on the survey, they show that a substantial share of German households would include CBDCs in their portfolio in normal times - replacing, in part, commercial bank deposits. That is, there is hypothetical evidence of "slow" disintermediation of the banking system. In addition, during periods of banking distress, their willingness to shift to CBDC is even larger, implying a risk of "fast" disintermediation. They map the model to Euro area data under the status quo and in a hypothetical situation where CBDC is introduced. The model implies that slow disintermediation shrinks a banking system that is prone to runs with positive welfare effects. However, CBDC promotes fast disintermediation, and for reasonable calibrations, the second effect dominates and the introduction of CBDC decreases financial stability and welfare. However, complementing CBDC with a holding limit or pegging remuneration to policy rates can reverse these results, implying that CBDC is welfare improving. Such policies retain the gains of increased stability arising from slow disintermediation, but limit the downside of fast disintermediation.

This paper discusses how different CBDC attributes (anonymity, remuneration, value-added services or caps on the holdings) can limit the substitutability between bank deposits and CBDCs in different situations. CBDC holding caps seem the most obvious solution but this may face practical difficulties such as how to impose the limits when an individual holds CBDCs in wallets offered by different providers or what to do with payments to accounts that exceed the caps. Another possibility is to set different tiers of CBDCs holdings, with a penalizing interest rate above a certain threshold. This may function in normal times, but would probably require extremely penalizing (negative) rates in a crisis or a bank run, which may create problems from the point of view of the central bank objective of preserving the value of money. Even if the CBDC is non-interest bearing, the substitutability between deposits and CBDCs will still depend on the extent to which regulation and competition dynamics allow banks and other financial intermediaries to compete with CBDCs, and in a crisis situation their value-added services may become irrelevant as compared to the safety of central bank money.

Through CBDC, governments could send direct payments much more rapidly than through checks or tax refunds and could provide geographically and temporally targeted relief. The CBDC supporting infrastructure would also enable fund receivers to make payments and transfers seamlessly to other CBDC holders and/or non-CBDC holders, anywhere and anytime across the economy. CBDC could reinforce the resilience of a country's retail payment services, especially in those cases where private sector infrastructures are disrupted, due to technical problems, personnel unavailability, or inability of service providers to operate. The 'programmability' of CBDC could be used to monitor and control how, when, and where recipients utilise the funds. Finally, CBDC could enable people to substitute for cash and in-person payment methods when social distancing is required, or if the use of cash plummets as people worry about germs. Still, CBDC projects will take time to materialise, and meanwhile existing infrastructures could be improved to facilitate transfers and payments.

"We study how the introduction of a central bank digital currency (CBDC) interacts with ongoing monetary policies. We distinguish two policies: standard policy, where the central bank holds treasuries, and quantitative easing, where the central bank holds risky securities. We introduce an interest-bearing CBDC in each scenario and study the equilibrium allocations. We reach three main conclusions. First, the equilibrium impact of a CBDC depends on the ongoing monetary policy. Second, when the central bank conducts quantitative easing, the introduction of a CBDC is neutral under two conditions: the cost of issuing a CBDC is equal to the interest on reserves, and the demand for CBDC deposits is smaller than the amount of excess reserves in the system. Third, the introduction of a CBDC might render quantitative easing a quasi-permanent policy, as commercial banks optimally use their excess reserves to accommodate retailers' demand for switching from bank to CBDC deposits."

The IMF published a paper that models the financial inclusion impact of introducing a retail CBDC in a developing country context.  It finds that CBDC issuance can increase bank deposits from the previously unbanked by incentivizing the opening of bank accounts for access to CBDC wallets (offsetting potential flows from deposits to CBDCs among those already banked). Second, data from CBDC usage allows for the building of credit to reduce credit-risk information asymmetry in lending. However, if non-bank payment system providers can distribute CBDC, fewer funds will flow into deposit accounts from the unbanked, but if CBDC data is shareable with banks, those without bank accounts can still build credit and access lower interest rate loans. This design is optimal for welfare if the gains from greater access to CBDC outweigh the contraction in lending.

"The issuance of retail central bank digital currency (CBDC) entails a transfer of risk from commercial banks to the central bank. While this paper does not provide an overall assessment on whether or not to issue a retail CBDC, it analyzes how different mechanisms to limit the risk transfer, such as an unattractive interest rate on retail CBDC, a quantity ceiling or preventing convertibility of cash and reserves into CBDC, have different effects on the ability of retail CBDC to fulfil its intended purposes. In particular, these mechanisms hinder the use of CBDC as a medium of exchange. Specific aspects of demand and challenges related to a potential retail CBDC in Switzerland, namely, a small open economy with a safe-haven currency and a low level of government debt, are discussed."

A global survey of Chartered Financial Analysts (CFA) Institute members found limited understanding of and support for central bank digital currency (CBDC). 42% of respondents believe that central banks should launch CBDCs, 34% disagreed, while only 13% said they had a strong understanding of CBDCs. The top reason cited to support launching a CBDC was to accelerate payments and transfers, with the chief concerns being focused on cybersecurity and fraud, data privacy, and lack of use cases. Respondents in emerging markets were more receptive to CBDC and they CBDC would enhance financial inclusion. Respondents in advanced economies were generally more satisfied with the current financial infrastructure and more skeptical of the need for a CBDC.

The BIS published a survey, carried out in late 2022, of 86 central banks on their views and plans regarding central bank digital currencies (CBDCs). 93% are engaged in some form of CBDC work and that the work on retail CBDC is more advanced than on wholesale CBDC. The results also indicate that emerging market and developing economies (EMDEs) are more advanced in their CBDC work than advanced economies (AEs). In addition, 80% of central banks surveyed see potential value in having both a retail CBDC and a fast payment system (FPS), because CBDC allows access to a wider set of financial institutions and the unbanked population. Also, programmability and offline payments were mentioned as features that an FPS may not provide.

The Alliance for Financial Inclusion (AFI) published a report that evaluates the extent to which retail central bank digital currency (CBDC) can advance financial inclusion in emerging market and developing economy (EMDE) countries. It concludes that, retail CBDC can be designed to alleviate identity gaps, and mobile phone and digital access divides through its unique ability to generate digital identity proxies and enable offline capabilities while being device agnostic. However, CBDC will not automatically advance financial inclusion, and if not designed appropriately, could reinforce existing barriers. Also, in many EMDE jurisdictions, they are likely to be limited by poor electricity coverage, access to (and affordability of) CBDC-enabled devices and limited cash-in and cash-out infrastructure. Finally, the report concludes that CBDC may not always be the right tool for addressing financial inclusion in different EMDE country contexts relative to other digital payment interventions. The unique feature of CBDC, which makes it distinct from other digital payments instruments, is that is issued by the central bank. But this feature does not necessarily make CBDC a better tool.

The Journal of International Financial Markets, Institutions and Money published a paper that examines the interconnectedness CBDC development and adoption levels, digital asset returns and financial stability. (CBDC development and adoption was measured with a news media coverage based "CBDC Uncertainty Index" developed by Wang et al (2022).) The paper finds a significant level of connectedness between CBDCs, digital assets and financial stability, but only a weak positive connectedness between CBDCs and returns on digital assets. Furthermore, the study finds bidirectional connectedness between CBDCs and other financial stability measures, suggesting that changes in CBDC performance can influence the overall stability of the financial system, and vice versa.

The Bank of England and the U.K. Treasury announced the creation of a Central Bank Digital Currency (CBDC) Taskforce that will (i) coordinate exploration of CBDC objectives, use cases, opportunities and risks, (ii) guide evaluation of the design features, and (iii) support a rigorous, coherent and comprehensive assessment of the overall use case. Also, the Bank of England established a CBDC Unit, and created a CBDC Engagement Forum to engage senior stakeholders and gather strategic input on all non-technology aspects of CBDC, and a CBDC Technology Forum to gather input on all technology aspects of CBDC.

This De Nederlansche Bank surveyed a representative panel of Dutch consumers to determine public preferences regarding central bank digital currency (CBDC) demand. It found that roughly half would open a CBDC current or savings account, suggesting that consumers perceive CBDC as distinct from current and savings accounts offered by traditional banks. Intended adoption is positively related to respondents' knowledge of CBDC and trust in banks and in the central bank, but the amount respondents want to deposit in the CBDC savings account depends on the interest rate offered. Furthermore, intended usage of the CBDC current account is highest among people who find privacy and security important and among consumers with low trust in banks in general.

The Bank of Thailand today published the results of its retail central bank digital currency (CBDC) study and public survey, which the central bank says will guide the development of the country's CBDC pilot test. The guidelines for a retail CBDC include: (1) the CBDC should be cash-like and non-interest bearing, and (2) intermediaries such as financial institutions would distribute the CBDC to the general public. A "Foundation Track" pilot will begin in Q2 2022 and will involve using the currency to conduct cash-like activities at a limited scale, e.g. as payment or receipt for goods and services, as well as for conversion. An "Innovation Track" will explore use cases for the CBDC with participation from the private sector and technology developers. https://www.bot.or.th/Thai/PressandSpeeches/Press/News2564/n6064e.pdf

"According to David Andolfatto a Canadian retail CBDC is, in principle, an attractive proposition. But given the system currently in place and the prospects for its near-term evolution, a retail CBDC on its own is, in my opinion, not an essential initiative at this point in time. For consumers, a retail CBDC would mostly replicate what they already have available. As such, the initiative is not likely to attract business away from private-sector PSPs or serve to discipline private-sector pricing protocols and rewards programs. For a CBDC to be successful in this regard, legislation (or moral suasion) designed to alter private-sector marketing behaviour is likely required. But if such legislation were forthcoming, the rationale for a retail CBDC is even further diminished. On the other hand, a wholesale CBDC (together with legislation governing pricing protocols) seems like the most straightforward way to promote competition and fairness in the Canadian payments system. While I see no reason why a CBDC could not work in principle, I also do not see why it is essential in practice. It probably makes more sense to let the Bank of Canada focus on its core competencies - monetary policy, regulation and wholesale payments - and let a regulated private sector manage retail payments."

The Dallas Fed published a paper that explores whether there could be a first-mover advantage for a jurisdiction issuing a central bank digital currency (CBDC) compared to other jurisdictions that subsequently issue their own CBDC. The academic literature provides a framework by which one can assess a CBDC in the domestic payments market, the international payments market, and the technology markets that support payments. However, a CBDC may be more than just a means of payment and thus first-mover advantage is examined for both the asset component of reserve currency and a future financial system built on CBDCs. Overall, the first mover literature does not suggest that there is a compelling first-mover advantage for issuing a CBDC.