Sergey Andrushin

The Central Bank’s digital currency

Doctor of Economic Sciences, Professor, Chief research fellow of The Institute of Economics with RAS

 

After the appearance of the first virtual currencies in the world economy, at first in the form of cryptocurrencies (Bit- coin, Ethereum, Ripple, Litecoin, and other altcoins), and then in the form of stable coins (Tether USD, Coin, Diem and other stable coins); in 2017 numerous central banks started to more actively create proprietary digital currencies (Central Bank Digital Currency, CBDC).

There is discussion today practically in every central bank on the following topics – motives and current expectations from the CBDC issuance, legislative power to issue CBDC, form of functional compatibility of CBDC and existing payment infrastructure, the role of the private sector in the CBDC ecosystem, as well as issues related to the financial availability, the increase of trans-border settlements efficiency, providing price and financial stability, including questions of minimization of risks of utilization of cryptos and stable coins in the settlement system of wholesale and retail payments.

In October 2021 the Committee of the Bank of International Settlements on payments and market infrastructure (CPMI) and the International Organization of Commissions on Securities (IOSCO) published a Report on the survey results of 81 central banks (1) regarding the CBDC, their motives and intentions towards issuance of retail and/or wholesale CBDCs, issuance and usage of crypto and stable coins for payments.

After the Bahamas’ launch of trading dealing with CBDC (Sand Dollars) in 2020, Nigeria issued eNaira in 2021, and the Eastern part of the Caribbean Basin and China launched pilot versions of their DCash and e-CNY, it was discovered that more than two thirds of central banks are ready to issue the retail CBDCs in the near future or midterm. The work on the issuance of wholesale CBDCs in central banks is not going fast; it is determined by the motives linked with further growth of efficiency of transborder payments and settlements.

CBDC – is the third form of money of the state or digital form of national currency, or electronic obligation of the central bank, nominated in a national monetary unit and functioning as a means of payment, measure of accounting (for control of valuables exchange), and retention (saving) of value.

Architecturally and functionally, we divide currencies into:

• wholesale CBDCs (W-CBDCs);
• retail CBDCs (R-CBDCs).

The retail CBDCs – is a digital form of money of the central bank for broad application by both individuals and legal entities. The R-CBDCs serve as a substitute for cash at hand (or addition thereof) and are an alternative to bank deposits. They allow implementation of financial inclusivity, accelerate shifting towards a cashless society, and decrease the cost of issuing money and spending on the processing of digital currencies.

Concurrently, the R-CBDCs differ from existing forms of cashless payment instruments such as credit transfers, direct debit, card payments, and e-money, in that they are direct claims to the central bank and not to a private financial institute.

Wholesale CBDCs are payment monetary units, controlled by the central bank. They are available only to a narrow group of users (financial institutions, holding funds on the accounts of central banks and professional participants of the financial market). Analogies to the wholesale digital currencies are “the reserves of the central bank”, accumulated on correspondence accounts and deposit accounts of financial intermediaries in the central bank.

W-CBDCs are able to speed-up operations of financial systems, boost their security, eliminate settlement risk, cut costs, as well as accelerate realization of transactions in OTC markets, in the segment of syndicated lending, and the system of trans-border operations/settlements within international trading framework.

 

Positive attributes of the CBDC issuance

Presently all central banks are already practicing virtual issuance of electronic currency, and a significant share of transfers and payments is being carried out in cashless form. However, CBDC – is not an electronic form of national currency, but a digital form of the sovereign (fiat) currency, which is intended to:

• increase efficiency of the interest channel of transfer mechanism of the monetary-crediting policy via utili- zation of accrued interest, performing as an operating instrument of the central bank;
• decrease risk of credit overheating in the economy, substituting traditional deposits in commercial banks for their digital equivalents;
• solve the problem of negative interest rates by algorithmizations, programmability, and transparency of the digital currencies;
• enhance liquidity of commercial banks by refinancing the liquidity deficit of the banking sector in digital currency in the interbank market;
• widen the balance of the commercial banks by buying bank bonds for digital currency;
• solve the problem of bad debts of the private sector on the commercial banks’ balances without involvement of taxpayers’ funds;
• create additional payment infrastructure for carrying out transactions with less costs and risks;
• reduce the amount of circulating banknotes and thus stimulate further development of the cashless payments and settlements in the economy;
• boost the crediting activity in the economy via development of the debt market, nominated in digital currency;
• subdue dollarization of the economy by using digital currency for payment for goods and services.

 

Negative attributes of the CBDC issuance

Aside from the aforementioned advantages, the CBDC also features a number of substantial disadvantages, which diminish the monetary-crediting system efficiency, functioning on the platform of circulation of the digital form of sovereign money. Among these are:

• retention of high level vulnerability (losses) from cybercrime (according to IMF, consolidated losses of the bank systems are estimated at 100 to 300 billion dollars per annum);
• dependence of the commercial banks on credits (re- financing) of the central bank exacerbates problems linked with the shortage of collateral;
• increasing potential of exiting of the customers of commercial banks from traditional instruments (cash and deposits), reducing the liquidity level in the banks as well as the value of traditional crediting of real economy;
• increasing probability of a loss of political independence of the national regulator as a result of growth of currency of the central bank currency balance via buying treasure bonds for digital currency;
• outflow of digital currency from the commercial banks can negatively impact compliance to international standards and regulations of liquidity of banks, drastic reduction of multiplication of private money in the economy;
• organization by the state of total digital control over all subjects of the Russian economy (individuals and legal entities), payment transactions, digital wallets, uniform biometric personal data systems, accumulated in the digital profile services, receiving an Information System status in many countries at legislative level.