While many readers have been keeping up with general developments in CBDCs through these pages and other sources, the more detailed implications around how these digital currencies will be managed has been mostly lacking—at least at the digestible level.
In this piece posted on Fintech Singapore, we have an interesting discussion around how CBDCs may impact monetary policy, which of course is one of the remits associated with central banks. One of the things holding up the digital dollar in the U.S. is the controversy around the method of distribution. In the physical retail currency world, the Treasury prints money and distributes through commercial banks. The Fed monitors the supply of money. So the relationship between central banks and the commercial world has to be defined clearly, otherwise some interesting disruptions can occur. The author cites a recent working paper from the IMF titled “Monetary Policy Implications Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems,” and in it the monetary policy topic is addressed.
The article goes into some of the risks associated with poorly designed CBDCs and places a nice chart from the source document into the discussion. The piece states that ‘poorly designed CBDCs could have unintended consequences on financial stability, monetary policy implementation, and payment systems. Therefore, understanding the potential risks and designing CBDCs that limit disruption is crucial.” One of the recommendations to limiting disruption is what we mentioned in the previous paragraph, which is the two-tiered retail CBDCs with distribution through commercial banks, minimizing deposit disintermediation. There are a few sovereign nations that are already actively using CBDCs at the retail level, though at a miniscule level compared to overall currency in circulation. The piece doesn’t specify the method of distribution being used however (e.g.; China, Bahamas, Nigeria). The author also discusses cross-border implications of CBDCs, which of course may impact capital inflows and outflows given demand dynamics and the potential speed of transactions, especially in the wholesale space (wCBDC) as adoption accelerates in a few years.
Some other charts are made available, but interested readers can easily link out to the IMF paper to spend a bit of time digesting the complex potential challenges of the digital currencies under development.
Overview by Steve Murphy, Director, Commercial Advisory Service at Javelin Strategy & Research.