Poh Hou Sheng, Business and Strategy Associate at Tokenomy explores the possible directions CBDC can take and stresses for careful implementation to prevent unwanted consequences.
Central banks play a pivotal role in the economy in the form of monetary policy. While opinion is divided over the extent to which central banks should influence the market, policy control is becoming increasingly difficult as financial markets become exceedingly complex. Academics warn that the demand for credit and the financialization of risk has led to society and businesses becoming highly leveraged, and commercial banks becoming too big to fail . Many central banks are also concerned with the recent unpredictability of the US, especially when the dollar is “used to price half of trade invoices and two-thirds of global securities issuance ”. Together with the rise of shadow banks and financial technology (FinTech), central bankers might not be able to rely on existing policy tools to deal with new challenges.
On this front, technology has offered new angles in the discussion of money and monetary policy. While cryptocurrencies such as Bitcoin can arguably be presented as alternative monies independent of central bank control, the underlying blockchain technology offers another possibility: that central banks can employ it to create their own digital currency. There has been increasing interest in the possibilities of Central Bank Digital Currencies (CBDCs) in policy, with the Bank of England governor Mark Carney suggesting that a “private or state-run digital currency could serve as a global counterbalance to the dollar ”.
The Current State of CBDCs
The Bank of International Settlements’  recent study concluded that of 63 central banks surveyed, 70% are studying CBDCs, albeit mostly at a conceptual stage. Most central banks see themselves unlikely to rollout CBDCs in the short term, with the possibility increasing in the medium-long term.
A list of central banks that made a recent comment on CBDCs are shown in Table 1. Multiple central banks have ongoing CBDC trials, with the BCE’s Dinero Electronico, BCU’s e-Peso, and Riksbank’s e-Krona being prominent projects1. The People’s Bank of China (PBoC) seems to be the fastest in a full CBDC rollout, with reports claiming that their digital currency will be issued to seven institutions in the coming months .
Possible Directions of CBDCs
Central banks considering CBDCs have multiple options on structure and implementation. One proposed solution is for the central bank to offer deposit accounts directly to the public, and possibly issue a digital token (similar to existing cryptocurrencies) that can be deposited in digital wallets. The central bank takes on the role of a commercial bank, and the public is allowed to transact and hold central bank liabilities .
If taking on the role of commercial banks will exert a too significant burden on central banks, they can also choose to provide reserve accounts to all financial institutions, allowing them to have a claim on and make transactions using CBDCs . In return, financial institutions will handle customer-facing operations such as KYC and data management. This concept is not new, with China requiring their payment providers (e.g., WeChat Pay) to hold their client funds with the central bank. In the future, these services can be further extended to stablecoins – cryptocurrencies which value can be pegged to existing fiat currencies2.
A third possibility suggested is for central banks to dictate that commercial bank assets must be fully backed by central bank reserves. This is a radical scenario where fractional banking is removed, and Dyson and Hodgson  explore the possibilities of this leading to better financial inclusion and reduction of systemic risks. To ensure that commercial banks retain their relevance, central banks can allow them to continue providing credit facilities by borrowing CBDC from other customers.
CBDC implementation can be a combination of the above possibilities. Regardless, one can imagine that these changes may have drastic implications on economics and finance. Banking as we know it can fundamentally change, with commercial banks playing a much smaller role. A CBDC solution can bring certain perks. CBDCs built on the blockchain can improve settlement efficiency and reduce costs. Partnering with fintech firms will increase competition in the deposit account and payments space, translating to higher benefits for consumers. As trust in e-money and stablecoins can be hampered by liquidity or default risks, allowing these firms to partner with the central bank will reinforce stability while continuing to facilitate innovation. Greater oversight to all transactions across financial institutions will also provide more reliable data, allowing policy makers to craft better responses to future shocks . In times of economic crisis, blockchain architectures might also allow for social policies such as airdrops to the most affected .
However, a change in banking infrastructure can also create problems that we are not prepared to solve. Policy makers must be careful that CBDCs do not overtly harm commercial banks. A reduction in private credit can cause financial instability if bank panics occur . Bank panics and runs can result in negative outcomes such as high unemployment rates. Bheemaiah  warns that, “If people are displaced from jobs, it will reduce aggregate demand, exasperate income inequality, and augment the disparity between savings and investment, which in turn will force down the price of borrowing money, i.e., the interest rate.” Financial instability will occur.
The Future of Digital Finance
Regardless, innovation should be welcomed with many financial institutions still bogged down by legacy systems and practices. Central banks that do not adapt and improve might find themselves being left behind by others who actively and prudently pursue innovation. As Adrian and Mancini-Griffoli  of IMF posit, “central banks and regulators might not be able to contain the growth of large e-money monopolies.” New steps such as creating CBDCs might allow monetary policy to continue flourishing, and at the same time, promote continual improvements in the financial sector.
Central bankers have the daunting task of studying CBDCs and deciding if it is the best course of action in an increasingly digital and complex world. Central bank policies will have fast, far-reaching consequences and thus care must be taken to attenuate potential risks of technological innovation, such as exacerbating technological unemployment. With technology driving progress at unprecedented speeds, central banks need to tread carefully, but quickly.
1For an analysis of these three projects, see CEMLA’s “Key Aspects around Central Bank Digital Currencies Policy Report”.
2For a comprehensive read on stablecoins, I suggest Blockchain.com’s “The State of Stablecoins”.
References and Further Reading
 Bheemaiah, K. (2017). The blockchain alternative: rethinking macroeconomic policy and economic theory. Apress.
 Stern, G. H., & Feldman, R. J. (2004). Too big to fail: The hazards of bank bailouts. Brookings Institution Press.
 Greeley, B. (2019, August 25). Central bankers rethink everything at Jackson Hole. Retrieved from https://www.ft.com/content/360028ba-c702-11e9-af46-b09e8bfe60c0
 Barontini, C., & Holden, H. (2019). Proceeding with Caution-A Survey on Central Bank Digital Currency.BIS Paper, (101).
 CBDC WG. (2019). Key Aspects around Central Bank Digital Currencies Policy Report. Center For Latin American Monetary Studies.
 Castillo, M. del. (2019, August 28). Alibaba, Tencent, Five Others To Receive First Chinese Government Cryptocurrency. Retrieved from https://www.forbes.com/sites/michaeldelcastillo/2019/08/27/alibaba-tencent-five-others-to-recieve-first-chinese-government-cryptocurrency/#2a599fe41a51
 Barrdear, J., & Kumhof, M. (2016). The macroeconomics of central bank issued digital currencies.
 Adrian, T., & Mancini-Griffoli, T. (2019). The Rise of Digital Money. FINTECH NOTES. International Monetary Fund.
 Dyson, B., & Hodgson, G. (2016). Digital Cash: why central banks should start issuing Electronic Money. Positive money.
 Kim, Y. S., & Kwon, O. (2019). Central Bank Digital Currency and Financial Stability. Bank of Korea WP, 6.
Stay in touch for more announcements!
Tokenomy Website | Tokenomy Telegram |Tokenomy Twitter|TokenomyFacebook|Tokenomy Instagram | Tokenomy Reddit
Join the conversation!
Tokenomy Telegram Group English, Bahasa Indonesia & 中文
Risk disclaimer: Tokenomy does not provide any investment, financial, accounting, valuation, tax, legal or other professional advice. All decisions to buy, sell or trade any Digital Asset using the Services are made solely by you, and you are fully responsible for all such decisions.