The IMF has published a detailed decision making framework for implementing central bank digital currencies (CBDC). It covers every phase of the process, from research and architecture all the way to widespread adoption. The IMF is already involved in more than thirty CBDC projects and intends to publish a handbook for CBDCs with 4-5 chapters published every year.
This framework highlights the key decisions for central bankers. Central bank mandates focus primarily on financial stability and other economic outcomes to varying degrees. As with traditional monetary policy, the development of a CBDC depends heavily on external factors. This could include shifts in consumer demands, international pressures from other digital currencies, and the ongoing digitalization of the financial sector.
External factors in CBDC decisions
Hence, the framework depends on a strong understanding of the external factors that might draw economies towards a CBDC. For advanced economies, the most important motivations typically include payment competitiveness and accessibility and ensuring the future effectiveness and autonomy of monetary policy in digitalized economies.
The report highlighted the case of Israel, where the persistent decline in cash transactions could lead to a growing penetration of stablecoins or other private payment means. This could impair payment competitiveness, and impact the transmission of monetary policy.
As a result of currency substitution, many developing and emerging market economies already suffer from ineffective monetary policies. The widespread adoption of crypto assets and the potential for a foreign-issued CBDC by the United States or the euro area would only exacerbate this international pressure. That’s the case even for some advanced economies such as Canada.
Although not mentioned in this report, cultural attitude is a key external factor that could play a significant role in CBDC issuance. For example, the US, UK and parts of Eastern Europe have already seen significant anti-CBDC movements. However, international studies have also identified a strong CBDC appetite in developing economies currently served by the IMF.
The IMF advised that a CBDC must be planned based on more than short term motivations. For example, we observed that some countries want to reduce the costs of distributing physical cash. That’s the case for several Caribbean countries as well as India. Though compelling, the short term motivations for CBDCs are likely to change.
Measuring CBDC potential
The report suggests several KPIs to assess the ability of the financial sector to adjust to CBDC issuance during trials. These include the number of active accounts, transaction volumes and adoption rates amongst merchants and target populations.
It’s tempting to rely on the KPIs, but the IMF suggests there’s also a need for qualitative analysis to assess adoption potential.
The IMF published the decision making paper alongside another focused on CBDC product development.