Numerous questions are on the minds of central banks as they embark on issuing Central Bank Digital Currency (CBDC), therefore, we gathered the most frequently asked questions during our meetings and their answers by our experts in an enlightening CBDC frequently asked questions series.
1. Who are CBDC stakeholders?
Everybody involved in the payment chain is a CBDC stakeholder, this includes first and foremost the issuer of CBDC, the central bank. The central bank has the responsibility of minting, pledging and redeeming CBDC to and from commercial banks. As the host of CBDC, the central bank also configures and defines the rules and the design decisions of CBDC operations in a country.
Commercial banks play a vital role for the success of a CBDC implementation, especially in the two-tier model as the custodian of the wallets, distributors, and know your customer agents. The distribution from central banks to the end users can be done efficiently and securely when there is a proper and strong banking ecosystem in place. Not only that, but commercial banks can act as nodes in the network and transaction validators depending on central bank regulations, as well as maintain a copy of the ledger as well.
The government is also considered as a stakeholder which is responsible for executive and legislative rules and regulations, as well as technology and infrastructure providers. Let’s not also forget the end users of the solution, who, depending on the use cases and features offered, play a vital role in the success or failure of CBDC.
2. What does CBDC have in common with cryptocurrencies?
What most CBDCs share with other digital currencies is the underlying technology. They are both built on blockchain networks and use Distributed Ledger Technology (DLT) to manage transaction information. DLT has proven its success and benefits in many various domains, but most importantly in the domain of finance, especially with the rise of decentralized cryptocurrencies.
Cryptocurrencies are split into two major categories: traditional and stablecoins. Traditional cryptocurrencies were designed to be used for transactions, but they are well-known for their high price volatility versus major fiat currencies, which limits their use as a unit of account and medium of exchange. However, they are becoming widely used as store of value and for investment and speculation. The main examples are Bitcoin and Ethereum.
Stablecoins on the other hand are usually issued by private companies and intended to be used as mediums of exchange in cryptocurrency ecosystems, yet they are posing a threat to some countries’ banking ecosystems, especially where there is low central bank credibility. End users are starting to use stablecoins as medium of exchange, mostly in countries which have high level of inflation or lack trust in the banking ecosystem. A main example is Tether USD (USDT).
CBDC on the other hand is different. It is issued and backed by the central bank and not by a private entity, so it is more trustworthy. In addition, central banks guarantee CBDC convertibility into other forms of central bank money (e.g., cash) on a one-to-one exchange rate basis.
3. What is the cost benefit analysis of implementing a CBDC?
There are many dimensions involved in this as it largely varies from one country to another. For example, even in countries that have a high-level of digital penetration, CBDC comes as a complementary and more inclusive channel than digital payment systems.
The analysis goes far beyond that. For example, in the case of the ECCB, cash is very expensive to produce and distribute, so this is what they focus on in their cost benefit analysis.
It’s hard to identify the exact cost/benefit behind implementing a CBDC before identifying the objective behind it and the challenges it is trying to resolve, but the benefits vary depending on the target and key performance indicators of the central bank to issue its digital currency.
4. What needs to be done on the regulatory level to implement a CBDC?
Countries with existing robust regulatory/supervisory frameworks in place, as well as vibrant digital ecosystems, may require less action than others. As for other countries, they would need to build and staff such frameworks from scratch to study the readiness of the country, regulations, integrations and interoperability with existing payment systems, technology, finance and economy and more.
5. Will there be any direct impact on tax collection?
Point-of-sale tax collection can be a possibility, or user transaction information could be linked to a tax reporting system. However, these have important user privacy implications that need to be considered carefully. Plus, if smart contracts are part of point-of-sale tax collection, there are additional system complexities and risks to be managed.
6. What has been the experience in terms of substitution between cash and CBDC in countries that have launched?
The International Monetary Fund has been engaging with some of the central banks that have launched CBDC pilots, and this is one of the main questions that they are investigating. In the Bahamas or ECCB, currently, the actual amount of CBDCs issued is still little so it is not yet clear if there will be substitution and to which level.
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