Today the BIS and seven central banks shared their views on central bank digital currency (CBDC) policy issues. None of the central banks – the United States, England, Europe, Switzerland, Canada, Sweden and Japan – have decided to proceed as yet. And it’s clear from the short paper that one of the challenges is gaining sufficient CBDC adoption without causing significant outflows of bank deposits.
Introducing quantity limits is one approach, with the European Central Bank proposing relatively low limits of €3,000. The paper acknowledges holding limits could negatively impact adoption. That’s because there could be failed transactions, or it becomes inconvenient to use. The central bankers also recognize competition – stablecoins have no holding limits.
Without sufficient adoption, the policy objective of providing public money is undermined. They don’t mention that some CBDCs that have launched or are in advanced pilot stages have struggled with traction. However, when the group published its first joint report in 2021, a key theme was that a retail CBDC needs to be attractive to achieve adoption.
The other lever to control CBDC holdings is offering interest on the CBDC, including potentially negative interest rates. However, in a crisis, if the option is the possibility of losing money at a struggling bank or accepting negative rates, many people will go for a CBDC, exacerbating a run. Also in some jurisdictions, negative interest rates have never been levied on consumers.
One of the most notable takeaways is that CBDC standards are being considered. The dual objective is to enable integration with conventional payments and for point of sale payments.
The paper also explores blockchain, saying none of the seven central banks have finalized technology decisions. However, they note performance and scalability challenges. They see blockchain likely being reserved for ‘ancillary’ cases such as programmable payments.