cbdc adoption

If potential central bank digital currencies (CBDCs) are to achieve their policy goals, they would need to be adopted by users and accepted by merchants. This report outlines the considerations for central banks in designing a CBDC that might fulfil user needs both now and in the future. Learning from past payment innovations, considering the features most valued by users, investigating incentives for adoption and carrying out consultations could all play an important role in CBDC design. The next steps for this work will be to continue research on the impact user requirements and financial stability safeguards on system design, and the range of approaches to public engagement and consultation on CBDC. 1. Introduction and general overview A central bank digital currency (CBDC) would need to be adopted and used if it is to fulfil public policy goals that motivate its issuance.1 Integral to achieving adoption and use of a general purpose CBDC in a jurisdiction would be understanding and serving current and future user needs in a fast-changing payments landscape. This report examines what drives user adoption of digital payment services, referencing the use-cases and design choices envisaged for CBDC. Without being prescriptive or precise about a specific level of adoption that might ensure success of a CBDC project, this report presents issues that jurisdictions may wish to consider in their own evaluations. Key messages: • CBDC adoption would likely be driven by its future usefulness to users and acceptance by merchants. Central bank money is the safest form of money available. Yet beyond security, other valuable features of CBDC could include lower cost to consumers and merchants, offline payments, a higher level of privacy in comparison to commercial options and multiple accessibility features. • A CBDC would need to anticipate the needs of future users and incorporate related innovations. Central banks might accommodate evolving user needs by designing a flexible core system, supporting a diverse ecosystem of intermediaries delivering choice, competition and innovation. As payments become increasingly integrated into digital living, a CBDC available to innovators could combine innovative features into a single product in a new and unique way. • Strategies for CBDC adoption would need to be tailored to the diverse economic structures and payment landscapes in individual jurisdictions, but experience points to some common factors. Specifically, adoption may be more successful if it fulfilled unmet user needs, achieved network effects, and were implemented with the use of existing, accessible technology and infrastructure (eg at the point of sale). Additional measures that some jurisdictions might consider for a potential CBDC adoption strategy include the use of CBDC by public sector authorities, requiring some minimum level of acceptance and supporting future payment needs. Not all strategies would be desirable in all jurisdictions. • A CBDC adoption strategy in a fast-changing payments landscape would require balancing the needs of the majority of consumers with reaching smaller parts of the population. Different users and needs would need to be defined and addressed in the system’s design. The analysis of specific market segments through user personas and stories could provide an important method for investigating user needs and designing informative consultations with prospective end-users. 1 Central bank digital currency is a digital form of central bank money that is different from balances in traditional reserve or settlement accounts ie a digital payment instrument, denominated in the national unit of account (Group of central banks (2020)). 2 Central bank digital currencies: user needs and adoption • Further exploration will involve considering how financial stability safeguards might allow the CBDC adoption needed to meet public policy objectives and user needs, how user requirements could impact system designs, and the approach to public consultation and communications on CBDC Section 2 provides some context on CBDC adoption. Section 3 then identifies key features of the experience with implementation of previous payments innovations (both successful and failed) and the lessons that may be drawn for CBDC. Section 4 then examines user needs followed by a discussion on strategies for designing a CBDC. The last section concludes. 2. Context on CBDC adoption For a discussion of CBDC adoption, there are two important contextual elements from the preceding report published by this group of central banks and the BIS (Group of central banks (2020)). First, for the central banks contributing to this report, the common motivation for exploring a general purpose CBDC is its use as a means of payment. “Use” in this report should be understood in this context. Adoption of CBDC as a means of payment would likely present the most value for public policy objectives. Second, without continued innovation and competition to drive efficiency in a jurisdiction’s payment system, users may adopt other, less safe instruments or currencies, potentially leading to economic and consumer harm. If user needs emerge in the future, unserved by safe payment instruments, the chance of this risk materialising arguably increases. CBDCs that support innovation and competition may play a role in supporting future user requirements for payment services. Digital payments are already rapidly changing in response to an increasing integration into evolving digital services (BIS (2020)). It is likely that these evolutions will continue and catalyse an even broader diversity of novel use cases and payments requirements than today. Central banks may therefore need to consider current and possible future user demands in their CBDC system designs, understanding where new technologies might be harnessed (eg programmable money) and through encouraging innovation and competition among intermediaries, while incorporating sufficient flexibility to evolve with digital economies (Group of central banks (2021b)). Finally, there are broader considerations for central banks arising from user “take-up” of CBDC (ie the use of CBDC as a means of payment and potentially a store-of-value). The speed of user take-up and the potential need for transition arrangements as well as other potential safeguards are beyond the scope of this report but are necessary issues for central banks to consider in designing a potential CBDC that enhances monetary and financial stability This report has focused primarily on potential risks to financial stability that could arise from the introduction of a CBDC and how to mitigate these risks. These risks need to be considered alongside the benefits and counterfactuals. A CBDC has the potential to offer new opportunities for innovation, which may benefit banks, and non-bank/third-party providers of financial services, supporting a competitive and diverse financial system. This could facilitate new opportunities for innovation and increase the resilience of the system overall – subject to authorities ensuring appropriate regulation of all parties. At the same time there is also continuing change in payment methods and emergence of new forms of privately issued digital money, some of which pose risks themselves. The introduction of a CBDC could prompt some changes that affect the functioning of the financial system in ways similar to the introduction of new forms of private money such as stablecoins. The extent and nature of these changes would depend on take-up, which remains highly uncertain and depends on design features and attractiveness relative to deposits. The choice of a remuneration approach, and competitiveness with bank deposits, would likely be a key factor determining take-up, but non-pecuniary factors ranging from privacy to payments access could be important as well. Potential benchmarks for take-up would include factors that are specific to each jurisdiction, such as the payment attitudes and volume of currency in circulation. A material shift from bank deposits to CBDC – which would be possible for example if the holdings of CBDCs by individual users were left unconstrained – could have a non-trivial, long-term impact on bank lending and intermediation, although these impacts may be limited for many plausible levels of CBDC take-up and if the system has time to adjust. Estimates from a simple, partial model suggest that a large shift from bank deposits to CBDC could plausibly lead to a fall in bank profitability in benign circumstances, assuming normalized monetary conditions. This could in turn affect lending conditions and/or the resilience of banks. It could imply more reliance by banks on wholesale market funding. Greater take-up levels would have a greater impact on the financial system. Moreover, the impact could be exacerbated if the response of the banking system strains the capacity of funding markets. This is more likely to occur if deposits were lost over a shorter time frame. The implications could also be larger for some types of bank business model than others. In the context of negative interest rates, decisions around whether and how to remunerate a CBDC become more complex, given the presence of unremunerated cash, and potential 18 Central bank digital currencies: financial stability implications competition with bank deposits or money instruments with negative interest rates. Given the prevalence of negative interest rates and current proximity to the zero-lower bound in many jurisdictions, issues related to negative interest rates require further consideration. Yet additionally, the existence of unconstrained CBDCs, or other digital money, as an easily accessible, safe asset could increase the risk of systemic banks runs and make money market funds or instruments more susceptible to abrupt outflows. A similar effect could arise for other sectors seen as relatively safe, notably in money markets. That said, the presence of a CBDC could, over time, increase diversity of providers of payments and other financial intermediation services. The introduction of a CBDC could make it easier for new financial service providers to enter the market for payments services or to improve the competition amongst banks and non-banks for lending – increasing the diversity of financial service provision. This in turn, subject to appropriate regulation of all participants, could increase the resilience of financial service provision to shocks and reduce the impact of financial crises overall. Central banks can introduce safeguards in a CBDC framework to reduce financial stability risks, notably by limiting take-up permanently or on a transitional basis. Financial stability risks also need to be carefully considered for private digital money and are potentially more challenging to manage than for CBDC. Depending on the specific rationale in a jurisdiction for pursuing CBDC, combinations of limits on CBDC holdings or transactions, or remuneration disincentives, could be deployed to moderate take-up. Calibration of limits or remuneration frameworks would need to balance moderating the take-up of CBDC, specifically substitution with private money and deposits, with allowing a CBDC to fulfil its public policy objectives. Technical solutions that allow for monitoring and implementation of limits would also need to be considered in the design phases of a CBDC, and some safeguards may be easier to implement than others. A CBDC (or certain new forms of privately issued digital money) could also change run dynamics in a stress, and the latent level of liquidity risk banks face. Authorities might need to consider adjusting prudential liquidity requirements or other measures such as the terms of their crisis lending facilities. The potential for more abrupt flows out of money market instruments may also demand further consideration of prudential regulation in that sector. And to the extent that CBDCs encourage new entrants and the growth of non-bank financial services, authorities would need to ensure appropriate regulation of these entities. Overall, considerable further work is needed to fully understand the full range of effects and quantify the implications for financial stability from CBDCs (including the risks and also the opportunities to enhance financial stability as the payments landscape continues to evolve), and the various design, remuneration and safeguard options. The novelty of a CBDC creates many difficult to answer questions around firstly, the extent of potential take-up, and secondly how banks, nonbanks and other providers might react to its introduction. Initial, illustrative analysis has helped shed some light on partial responses to changes in bank funding, but they have also revealed that more consideration is needed of when behavioural responses could lead to bigger impacts, and when offsetting affects might appear. Furthermore, much attention to date has been focused on risks to banks, and more consideration of the impact on money markets may be worthwhile. Observations from early CBDC launches and pilot schemes could be useful in providing more information.