The Big Choices When Designing Central Bank Digital Currencies

Published on by Coindesk | Published on

Oct 26, 2020 at 15:55 UTC.The increased interest in central bank digital currency has led to a surge in ideas and research about the topic, so much so that it's all but impossible to keep up with everything that's been published lately.

In simple terms, a direct CBDC makes it possible for everybody, from big banks to informal workers, to deposit their money with the central bank.

In times of crisis, people could move their money from banks to the central bank, creating bank runs that would worsen the trouble.

Even in normal times, if a significant number of bank deposits moved to the central bank, banks would lose a cheap source of funding and might have trouble providing as much credit as demanded.

Consider now the synthetic CBDC, or sCBDC. The idea is that licensed private entities are authorized to issue "Digital dollars" fully backed by central bank reserves, a type of central bank money used in transactions between banks and with the central bank.

Today, only banks and some selected financial institutions can park their spare money in the huge vaults and balance sheet of the central bank.

In short: the platform model combines indirect connection to the central bank with direct access to the central bank balance sheet and the CBDCs.

With the backend at the central bank, private parties, from banks to fintech and big tech firms, would take care of the front end: the "Customer relations." These private parties could offer all kinds of APIs and interface platforms to help persons and businesses plug into their central-bank accounts and use CBDCs from their cell phones, computers or other devices.

Any central bank could opt for this technological arrangement to start issuing CBDC soon enough, an initiative that could be called "Open central banking." But how would this platform model affect credit creation?

On the one hand, the central bank should not offer credit products, not even overdraft, for its new "Customers." Financial intermediation and credit allocation would remain with financial institutions so that central banks avoided giving up their role as monetary authority to become development banks.

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