Early experiments in the Central Bank Digital Currency (CBDC) space have seen limited competition between the digital currencies and bank deposits, according to a staff paper released by the International Monetary Fund (IMF) on February 9.
"Central banks engaged in CBDC projects have committed to not jeopardising financial stability and avoiding any sudden shifts to the structure of the financial system," the paper noted.
"All CBDCs that are currently circulating, either as official currency or through a pilot, are designed with restrictions that limit the competitiveness of CBDC versus bank deposits," it added.
The paper, titled 'Behind the Scenes of Central Bank Digital Currency-Emerging Trends, Insights, and Policy Lessons', does not necessarily represent the views of the IMF or its Executive Board.
The IMF's staff examined the experience of six CBDC projects at an advanced stage. These include those of Central Bank of The Bahamas, People's Bank of China, the Eastern Caribbean Currency Union's (ECCU) Eastern Caribbean Central Bank, Banco Central de Uruguay, Sweden's Sveriges Riksbank, and Bank of Canada. Of these, only Central Bank of The Bahamas has already issued a CBDC.
| KEY DESIGN FEATURES | |||||
| Country | Interest on CBDC | Quantitative curbs | Anonymity | Offline | Cross-border payments |
| Bahamas | No | Yes | For lower tier | Yes/exploring | Future project |
| Canada | Undecided | Undecided | Undecided | Exploring | International collaboration |
| China | No | Yes | For lower tier | Yes | Experimenting/international collaboration |
| ECCU | No | Yes | For lower tier | No | Future project |
| Sweden | Undecided | Exploring | Undecided | Exploring | International collaboration |
| Uruguay | No | Yes | Yes, but traceable | No | Possible future project |
In India, the recent Finance Bill, 2022 provided for legal changes to allow the Reserve Bank of India (RBI) to issue its own digital currency. While the RBI is yet to launch its pilot project, there has been speculation regarding the cannibalisation of bank deposits and implications for monetary policy.
However, the IMF staff paper found that by limiting the amount of CBDCs that can be held and not offering interest on them, they don't compete with bank deposits.
On the other hand, the Swedish central bank's staff pointed out that "a zero percent interest rate on CBDC could limit the ability to carry out a negative interest rate monetary policy". Further, bank deposits become less attractive compared to a CBDC as policy rates decline.
Another key aspect of CBDCs is if they can offer the anonymity that private virtual currencies do. The staff paper noted that the three active CBDC projects of The Bahamas, China, and the ECCU all followed a tiered approach for wallets and their thresholds.
"Those with lower thresholds allow for greater anonymity. As a result, CBDC can more easily be rolled out into rural or disadvantaged areas where virtual identification can be difficult," the paper said.
On the business model, the paper noted that the CBDC projects it reviewed were in agreement that the main business model for private intermediaries was based on fees on payments.
"The role of the central bank is seen as providing a free or low-cost platform on which private intermediaries can operate. None of the central banks favour allowing private intermediaries to gather payments data, which could be used for commercial purposes," the paper said.
| TECHNOLOGY CHOICES | ||
| Country | Main technology contractor | Distributed ledger technology |
| The Bahamas | NZIA | Yes |
| Canada | - | - |
| China | - | Hybrid |
| ECCU | Bitt | Yes |
| Sweden | Accenture | Testing |
| Uruguay | Roberto Giori | No |
In a speech on February 9 at Washinton DC-based think-tank Atlantic Council, IMF Managing Director Kristalina Georgieva batted for CBDCs, saying they could be more resilient, safe, accessible, and cheaper than private digital currencies.
"That is clearly the case when compared to unbacked crypto assets that are inherently volatile. And even the better managed and regulated stablecoins may not be quite a match against a stable and well-designed central bank digital currency," Georgieva said.
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