Unwrapped

The state of CBDCs


This week the International Monetary Fund (IMF) released a report outlining six case studies of central bank digital currencies (CBDCs). The report provides an overview of six central banks’ policies and designs, lays out best practices, and offers advice to other central banks – such as the Reserve Bank of India – that are dipping their toes into digital money.


The six chosen projects meet at least one of the following criteria:
  • The central bank has already issued a CBDC: Central Bank of The Bahamas
  • A CBDC has been or is being tested with actual households and firms: People’s Bank of China (PBUC), Eastern Caribbean Central Bank (ECCB), and Banco Central de Uruguay (BCDU)
  • A CBDC project has been brought onto the country’s political agenda and is being analysed by government or parliamentary bodies outside of the central bank: Sveriges Riksbank
  • The central bank has conducted a CBDC project and decided against issuing a CBDC for now: Bank of Canada

Goals dictate guidelines: The report noted that central banks’ policy goals help set guidelines for more detailed choices. These goals include:
  • Financial inclusion: In the Bahamas, Uruguay and ECCU member nations, financial institutions have found it unprofitable to operate in certain locations, leaving swathes of the population unbanked. In China, while the PBOC has sought to promote digital payments and financial inclusion for two decades, it estimates that around 10% of the population still lack access to basic financial services.
  • Access to payments: This remains a problem even in countries with high financial inclusion, the report said. For example, the Riksbank highlighted lack of accessibility for elderly and disabled people amid a trend toward cashless payments.
  • Efficiency: In countries where existing digital payments are relatively expensive, such as the Bahamas and the ECCU, CBDC is a potential policy tool to offer a cheaper alternative. “The non-profit nature of central banks means that they could potentially offer low-cost payments as a public good, potentially subject to the need to eventually recover costs,” it noted.
  • Resilience: The urgency of this policy goal is especially high in disaster-prone nations such the Bahamas and ECCU member states, the report said.
  • Curbing illicit use: The report noted that the Bahamas is the only country that has made combating illicit use of its CBDC a top policy goal. “Some features of cash, including anonymity and the lack of an audit trail,19 make it attractive for illicit transactions (for example, tax evasion, money laundering, and terrorist financing). CBDC could potentially reduce this problem,” the IMF said.

Design differences: The report details a range of design choices by the six central banks, including:
  • No interest payouts: One of the biggest concerns around CBDCs is that they could lead to bank runs. To limit competition between their CBDCs and existing bank deposits, the CBOB, PBOC, and ECCU don’t offer interest on their digital money.
  • Holding limits: Putting a cap on the amount of CBDC people can hold is another technique central banks use to stave off competition with commercial banks. The ECCB, for example, has an aggregate creation limit for DCash, and the Bahamas’ CBDC will soon have a feature that directs Sand Dollars over a certain limit to people’s regular bank accounts.
  • Offline payments: Offline functionality – a big part of ensuring the widest possible access to CBDCs – has turned out to be technologically complicated, the report said. “The Bahamas considers off-line functionality to be vitally important but has encountered difficulties in achieving it. The pilot revealed that the planned solution of local off-line networks—built on introducing local redundancies to the main telecommunication system—did not fully achieve the policy goal,” it said.

Written by Zaheer Merchant in Mumbai.

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Curated by Judy Franko in Delhi. Graphics and illustrations by Rahul Awasthi.

That’s all from us this week. Stay safe.

Updated On Feb 12, 2022, 08:53 AM IST

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