Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Central-bank digital currencies: proceed with caution

Peter Bofinger 29th October 2019

Peter Bofinger argues that introducing central-bank digital currencies would need to be subject to very careful consideration.

digital currencies
Peter Bofinger

While Facebook’s Libra is confronted by ever stronger headwinds, a new competitor, the so-called central-bank digital currency (CBDC), is entering the arena of digital money. While this idea has been discussed by several central banks for some time now, it has been boosted by recent announcements by Chinese central bankers. On August 10th Mu Changchun, deputy chief of the payment and settlement division of the People’s Bank of China, said: ‘People’s Bank digital currency can now be said to be ready.’

Different types of CBDC have been mooted (see table). Account-based CBDCs would make it possible for private households and corporations to open an account with the central bank. This could be designed as an all-purpose account for anyone, with unlimited uses (retail CBDCs). But CBDCs could also be designed as a pure store of value, which would only allow transactions between the central-bank account and a designated traditional bank account. Such accounts could be organised as retail CBDCs but access could be restricted to large investors and providers of payments platforms (wholesale CBDCs).

Token-based CBDCs (‘digital cash’) are imagined as an alternative to cash for peer-to-peer transactions. They could be designed as prepaid cash cards issued by the central bank, without the user having an account with the central bank.

A typology of CBDCs

These CBDC variants challenge existing money, financial-assets and payments providers:

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.
  • Token-based CBDCs would compete above all with private providers of digital-payments products (such as credit-card companies, Paypal and Alipay).
  • All-purpose CBDCs would compete with traditional bank accounts.
  • Store-of value, account-based CBDCs would compete with time deposits of commercial banks but particularly with ‘safe assets’ and above all government bonds.

With the issuance of token-based CBDCs, but also with all-purpose CBDCs for anybody, central banks would compete with private suppliers of payments networks and commercial banks.

Such a change in the competitive environment could only be justified were a significant market failure to be identified. The Swedish Rijksbank argues: ‘If the state, via the central bank, does not have any payment services to offer as an alternative to the strongly concentrated private payment market, it may lead to a decline in competitiveness and a less stable payment system, as well as make it difficult for certain groups to make payments.’

Effective competition policy

But the solution to these problems is not necessarily that the central bank becomes a provider of retail-payments services. Rather, this calls for an effective competition policy and comprehensive supervision of payments providers. And one has to ask whether the central bank would be an adequate institution for screening, monitoring and supporting customers, as well as developing new retail-payment technologies.

In addition, all-purpose CBDCs for private households and companies could raise serious problems for the financial-intermediation mechanism. If bank customers decided to shift significant parts of their deposits to the central bank, the deposit base of commercial banks would be reduced. This gap would have to be filled by the central bank, which would in turn require sufficient eligible collateral on the part of the banks.

If such accounts were to gain in popularity, the central bank would increasingly find itself in a situation in which it would have to refinance private loans and decide, indirectly or directly, on the quality of private borrowers. In the end a ‘full money’ (or 100 per cent reserve) financial system could emerge, in which commercial banks would lose the ability to create credit independently. Contrary to its advocates, this would massively throttle or even eliminate a central driver of economic momentum.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Safe assets

While fully-fledged CBDCs for private households and firms would be associated with serious challenges and risks for the whole financial system, there are no obvious market failures which could warrant such innovation. This raises the question of whether the introduction of CBDCs should be limited to ‘store of value’ CBDCs (sov-CBDCs). Such central-bank balances could not be used for payments to third parties but only for transfer to one’s own account at a commercial bank.

With store-of-value CBDCs the central bank would not compete with payments providers. The competition with commercial banks would be limited to short-term time and saving deposits, without depriving banks of their liquid deposit base. Above all, such CBDCs would provide a safe asset, which in this form could not be created by private actors. Sov-CBDCs would be comparable to cash as they would provide a 100 per cent guarantee of nominal value, which cannot be guaranteed by bank accounts—according to the Bank Resolution and Recovery Directive, depositors with assets in excess of €100,000 must be bailed in if their bank gets into trouble—or government bonds.

The attractiveness of this asset would be largely determined by its rate of return. Treating it as a digital substitute for cash, a zero interest rate would be appropriate. In this case, the substitution processes from traditional bank deposits to CBDCs would be limited. In addition, a lower limit of €100,000 for sov-CBDCs could be justified, as bank customers with lower deposits are protected by national deposit-insurance schemes.

Overall, such CBDCs would increase the stock of ‘safe assets’ that are of great importance to the players in the financial markets. This is also not without risks, however, as the introduction of a new safe asset could be detrimental for countries with a poorer bond rating. Moreover, in periods of crisis such CBDCs could lead to digital bank-runs, which would further destabilise the system.

Synthetic CBDCs

The narrowest version of CBDCs comprise store-of-value CBDCs restricted to providers of payments services as a collateral for their depositors (‘stable coins’). The designers of Libra plan to use bank deposits and government bonds as collateral. But, as indicated, the stability of bank deposits in a crisis is limited. As for government bonds, massive sales by Libra would likely result in price losses. These problems could be avoided if suppliers of stable coins could use CBDCs as collateral. Adrian and Manicini-Griffoli speak of synthetic CBDCs (sCBDCS).This model is already being practised in China, where Alipay is obliged to keep its accounts with the central bank.

In principle, this could result in ‘narrow banks’, which on their asset side only maintained balances with the central bank and concentrated on the function of payment-service provider. These would be opposed by ‘investment banks’, operating the traditional credit business and offering longer-term, interest-bearing deposits. Compared with all-purpose CBDCs, this arrangement has the advantage that the payments system is operated by private suppliers and not by the central bank. But there is also the risk that the banking system loses the ability to generate loans and a full-money financial system develops.

The introduction of CBDCs, in whatever form, should be subject to very careful consideration. There is little to suggest today that central banks should play an active role as payment-service providers, as would be the case with the introduction of token CBCDs and all-purpose central-bank deposits. Not least, there would be the danger that this would be used by states to achieve even closer monitoring of their citizens.

An interesting innovation, however, would be if CBDCs could only be used as a store of value. Such an asset could only be created by the central bank and it would be particularly interesting for companies and investors who would be confronted with a bail-in in the event of a bank insolvency. Such CBDCs could serve as collateral for payment-service providers issuing a stable coin. But since this could lead to considerable changes in the way the entire financial system functions, no hasty steps should be taken here either.

This article is a joint publication by Social Europe and IPS-Journal

Peter Bofinger

Peter Bofinger is professor of economics at Würzburg University and a former member of the German Council of Economic Experts.

Home ・ Economy ・ Central-bank digital currencies: proceed with caution

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

Gazprom,Putin,Nordstream,Putin,Schröder How the public loses out when politicians cash inKatharina Pistor
defence,europe,spending Ukraine and Europe’s defence spendingValerio Alfonso Bruno and Adriano Cozzolino
North Atlantic Treaty Organization,NATO,Ukraine The Ukraine war and NATO’s renewed credibilityPaul Rogers
transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa
hydrogen,gas,LNG,REPowerEU EU hydrogen targets—a neo-colonial resource grabPascoe Sabido and Chloé Mikolajczak

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube