Today the European Central Bank (ECB) published a paper exploring how a Central Bank Digital Currency (CBDC) could be designed primarily for payments, and to discourage its use as a store of value. This follows on previous ECB activity and the recent promise by new President Lagarde that research into CBDC would be accelerated.
The 40-page working paper explores other CBDC research and suggests a two-tier system for a “general purpose” CBDC with attractive interest rates offered for smaller sums suitable for payments. But far lower rates would be available for larger amounts. This envisions a primarily account-based CBDC as opposed to token-based.
Central banks are keen for commercial banks to maintain their current role of providing credit to corporates and consumers. Hence they want to avoid dis-intermediating the banks, which could happen if people chose to hold the majority of their wealth in CBDC. If banks have insufficient deposits, they can’t lend out money or would have to resort to more expensive funding sources.
Consumers currently have access to central bank money in the form of cash and don’t earn interest. This is where the ECB is exploring substitution. Jurisdictions such as Sweden have seen a collapse in the use of cash and a shift towards a concentrated retail payments infrastructure. In other countries, there can be a lack of access to the commercial banking system.
The paper concludes that the use of CBDC for efficient retail payments is the most likely driver behind initiatives. It rejects the motivation of using CBDC as a store of value which would involve consumers switching deposits from commercial banks to CBDC.
Hence, it proposes a two-tier system of remuneration or interest rates, in which the lower tier is for payments, and the second tier is for the store of value. In the latter case, the interest offered would be relatively unattractive. The lower tier would be capped by amount.
The ECB points to jurisdictions in which central banks already apply a tiered remuneration system for central bank deposits, albeit not for CBDC. These include Denmark, Sweden, Japan, and China.
One aspect of CBDC previously explored is the use of negative interest rates. The ECB observes that this can be viewed as penalizing savers. Hence, it suggests that the payments tier of CBDC should never impose negative interest rates. This might apply, for example, to a quota of EUR 3000 per capita. However, provided it’s adequately communicated that the second tier is not designed as a store of value, this tier could potentially impose negative interest rates.
Two types of CBDC, account-based and token-based are also considered in this two-tier system, with token-based CBDC classed as tier two with the unattractive remuneration.