09 September 2019

SUERF: Controlling CBDC through tiered remuneration

This paper discusses two concerns that central bankers have associated with CBDC, namely risk of structural disintermediation of banks and centralization of the credit allocation process within the central bank and risk of facilitating systemic runs on banks in crisis situations.

The paper proposes as solution a two-tier remuneration of CBDC. While the first tier would be attractively remunerated, the second would not. By choosing the per capita allowance of tier one deposits and the remuneration rates of the two tiers, the central bank can control the quantity of CBDC such that it is predominantly used as means of payment, and not as large scale store of value.

This paper tried to further demystify CBDC, also by representing it in a simple system of financial accounts which allows capturing its flow of funds implications. Moreover, the paper revisited the question how to address the risk, rightly stressed in the literature, that CBDC could structurally, or cyclically (in relation to financial crises) disintermediate the banking system. A simpler and less innovative alternative to the approach of Noone and Kumhof (2018) is developed, which relies on a tiered remuneration of CBDC, in line with long-tested central bank logic and practice. It was at the same time acknowledged that the control of CBDC quantities is not equivalent to the control of the impact of CBDC on the financial system, since CBDC might be a catalyst for the further shrinkage of bank balance sheet at the benefit of non-bank intermediaries, in particular if CBDC accounts offer relatively comprehensive account services such that many households may no longer feel a need to have a deposit accounts with banks.

As remarked by Carstens (2019, 10), central banks are not there to “put a brake on innovations just for the sake of it”, but to ensure that implications of major changes are well understood so “that innovations set the right course for the economy, for businesses, for citizens, for society as a whole”. From this perspective, this paper may suggest that central banks could be somewhat open to studying CBDC, although the overall business case and the precise risks to change the financial system in a disruptive way need further analysis. This conclusion seems similar to the one of Juks (2018), although Juks is less assertive on the tools to address possible unwarranted effects of the introduction of CBDC. The overall business case for CBDC will also still depend on preferences of households as money users and voters. In progressive countries, in which the demand for banknotes falls rapidly and in which conspiracy theories about a deliberate attempt of authorities to strengthen control of citizens and/or enhance the ability to exert financial repression power through the discontinuation of banknotes may be less popular, a business case for CBDC seems relatively plausible. In contrast, in countries which are, with regard to money, conservative and emotional, and are possibly even characterized by mistrust into central banking, introducing CBDC would probably have more costs than benefits until sentiments change.

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