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CBDCs should let central banks provide a universal means of payment for the digital era. At the same time, such currencies must safeguard consumer privacy and maintain the two-tier financial system. We set out the economic and operational requirements for a “minimally invasive” design – one that preserves the private sector’s primary role in retail payments and financial intermediation – for CBDCs and discuss the implications for the underlying technology. Developments inspired by popular cryptocurrency systems do not meet these requirements. Instead, cash is the model for CBDC design. Showing particular promise are digital banknotes that run on “intermediated” or “hybrid” CBDC architectures, supported with technology to facilitate record-keeping of direct claims on the central bank by private sector entities. Their economic design should emphasise the use of the CBDC as medium of exchange but needs to limit its appeal as a savings vehicle. In the process, a novel trade-off for centra...

A Short Introduction to the World of Cryptocurrencies Aleksander Berentsen and Fabian Schär 1 INTRODUCTION Bitcoin originated with the white paper that was published in 2008 under the pseudonym “Satoshi Nakamoto.” It was published via a mailing list for cryptography and has a similar appearance to an academic paper. The creators’ original motivation behind Bitcoin was to develop a cash-like payment system that permitted electronic transactions but that also included many of the advantageous characteristics of physical cash. To understand the specific features of physical monetary units and the desire to develop digital cash, we will begin our analysis by considering a simple cash transaction. 1.1 Cash Cash is represented by a physical object, usually a coin or a note. When this object is handed to another individual, its unit of value is also transferred, without the need for a third party to be involved (Figure 1). No credit relationship arises between the buyer and the seller. This i...

5 Financial stability While the model above does not explicit incorporate the possibility of bank runs, it would be easy to extend the analysis in the manner of Andolfatto, Berentsen and Martin (2019). In what follows, I use the model developed above in combination with this latter paper as an heuristic device to evaluate concerns over the potential for CBDC to destabilize money markets. Cecchetti and Schoenholtz (2017), for example, suggest that CBDC may render bank deposits a less stable form of funding, with unsophisticated depositors prone to moving their money out of private banks into CBDC at the Örst sign of Önancial distress, perhaps leading to a self-fulÖlling bank crisis (Diamond and Dybvig, 1983 and Bryant, 2005). Of course, as they acknowledge, such instruments are already available in the form of cash and treasury debt. The main di§erence with CBDC is its apparent superiority and widespread availability as a ìáight to safetyî vehicle. The run-inducing incentives put in pla...

Eichengreen, B (2018), "From Commodity to Fia1. Introduction Money makes the world go round. More concretely, it greases the wheels of commerce and finance. The adequacy of the supply of currency and coin, and of their financial derivatives, has long been a preoccupation of governments, since the stability of the economy and hence of the state itself rides upon it. Now the monetary landscape is being turned upside down by the digital revolution: by the issuance and circulation of private-label cryptocurrencies and the prospect of central bank digital currencies. These new units, it is said, will transform the monetary world as we know it. But just saying so doesn’t make it true. The challenge is separating the facts from the hype. This paper is an effort to get my mind and those of readers around the issue by placing it in historical perspective. I start with a brief review of the relevant European and U.S. history, starting with commodity money and moving from there to bank money...