This column provides a comprehensive taxonomy for categorising central
bank digital currency design options, and evaluates these options based
on their allocative efficiency and attractiveness for users. The
analysis shows that digital cash substitutes cannot be justified from
either perspective. Instead, there is huge potential for central bank
digital currencies in a retail payment system organised by the central
bank, but without a new, independent payment object.
The discussion about central bank digital currency (CBDC)
has gained an impressive momentum. Auer et al. (2020) report that many
central banks have published retail or wholesale CBDC work and that in
speeches of central bank governors and board members about CBDC there
have now been more speeches with a positive than a negative stance. The
ECB has recently published a comprehensive report on ‘a digital euro’
These activities have led to a growing literature, with a focus on
the macroeconomic dimensions of CBDCs. Key topics are the effects of
CBDCs on commercial banks, especially the risk of disintermediation, and
on monetary policy and financial stability (Carapella and Flemming
2020, Brunnermeier and Niepelt 2019, Fernández-Villaverde et al. 2020,
In contrast, the microeconomic aspects of CBDCs have received
relatively little attention. Our study (Bofinger and Haas 2020) provides
a microeconomic analysis of CBDC, which in our view is of central
importance for a comprehensive discussion of CBDCs. Specifically, two
questions are at stake:
- What is the market failure that would justify central banks
entering business areas that have so far been operated by commercial
banks and private retail payment system providers?
- Are the options discussed so far by central banks attractive enough
for CBDCs to compete successfully with the products offered by private
Finally, the microeconomic analysis shows that there is no such
thing as a CBDC per se, but rather a variety of different design
options. Therefore, a macroeconomic analysis can only make sense if we
have first clarified what we mean by CBDC.
CBDC design options
A systemic perspective is required for a comprehensive taxonomy of
CBDC design options. From the systemic perspective, CBDC concepts can be
presented in two separate but interrelated ways. CBDCs can be discussed
from the perspective of:
- new payment or settlement objects made available by central banks, and/or
- new payment infrastructures or systems operated by central banks.
A CBDC can thus be understood as a purely monetary object, i.e. a
deposit with the central bank that is used within the framework of
existing real-time gross settlement (RTGS) payment systems. However, it
can also be understood as an independent payment system that operates in
parallel to the existing system using deposits held with the central
bank. The systemic perspective also opens the view for solutions where
central banks create new retail payment systems which would not
necessarily require deposits that are held with central banks.
Table 1 Options for digital central bank projects
A further differentiation arises in the case of CBDC objects. Here, a
distinction must be made between account-based and token-based CBDCs.
In addition, one can also differentiate between central bank balances,
which can be used primarily as a means of payment, and balances which
can be used primarily as a store of value. Finally, one can
differentiate between retail CBDCs designed for private households and
wholesale CBDCs designed for firms or for payment service providers.
Table 2 Options for CBDC objects
For our microeconomic evaluation of CBDC design options we use two criteria:
- Allocative efficiency: Any government
interference with the market process requires the diagnosis of market
failure (Carletti et al. 2020). The burden of proof lies with the
central banks. They have to show that the objectives which they pursue
with CBDCs are currently not satisfactorily met by the private
providers. And even if public goods like financial stability or
stability of the payment system are not optimally met, it is not obvious
that CBDC is the adequate solution.
- Attractiveness for users: If CBDCs are designed as
new payment objects that are used within existing payment systems, the
user perspective implies that CBDCs must compete with existing payment
objects (above all cash and traditional bank deposits). If CBDCs
constitute new payment systems, their acceptance by private users must
be analysed within the context of the existing payments ecosystem. For
the reputation and credibility of central banks, it is important that
any CBDC solution is attractive enough for potential users to adopt it.
A narrow CBDC approach is the provision of CBDC objects as means
of payment that are used within the existing payment systems, above all
the real-time gross settlement systems operated by central banks. As
the model by Bindseil (2020) shows, account-based CBDCs can be designed
in a way that they are mainly suitable as a payment object. But from the
allocative perspective there is no obvious market failure that could
justify the provision of an ordinary bank deposit by a central bank.
From a user perspective, having a direct account with the central bank
could be attractive because of its absolute safety. But as bank deposits
below €100,000 are protected by the deposit insurance schemes, holding
smaller amounts of CBDCs – Bindseil (2020) speaks of a limit of €3,000 –
is not an obvious reason to switch from a traditional bank account to a
central bank account. In addition, it is unlikely that central banks
would be able to offer the same spectrum of services that are associated
with a private bank account. And if they decided to do so, this
interference with private banks could hardly be justified by a market
The case for a token-based CBDC that could serve as a digital
substitute for cash is also not obvious. While the allocative
perspective could justify that central banks provide a digital
substitute for cash for which they already have a monopoly, the need to
comply with anti-money laundering (AML) regulations sets rigid
quantitative limitations for such products. Accordingly, from a user
perspective the demand for a token CBDC will be very low as they would
only provide an imperfect substitute for cash, which today is especially
attractive for payments in the shadow economy and as a store value in
periods of financial instability.
An option that has received little attention so far is a CBDC that is
designed solely as a store of value. Such a CBDC could only be used for
payments to and from the commercial bank account of its holder. From
the allocative perspective, the supply of such a CBDC could be justified
by the need of (nominally) safe assets which can only be provided by
central banks. The demand for a store-of-value CBDC would come from
firms and large investors with bank deposits of more than €100,000,
which would be bailed-in in the case of a bank restructuring. From the
user perspective, this demand would depend on the interest rate for such
deposits. Central banks could auction store-of-value deposits which
would give them a perfect control over their amount. While there could
be a high demand for such a CBDC, central banks do not seem to be
interested in this option, as they fear that this could lead to a strong
disintermediation of the banking system (Bindseil 2020).
Store-of-value CBDCs could also be designed as collateral for large
payment service providers. In China, Alipay is required to hold deposits
with the central bank. Libra/Diem (2020, p.11) has expressed the “hope
(…) that as central banks develop central bank digital currencies
(CBDCs), these CBDCs could be directly integrated with the Libra
network, removing the need for Libra Networks to manage the associated
Reserves (…)”. This approach would prevent the Libra/Diem system from
getting disconnected from central banks and their control over the
monetary system. From an allocative perspective, such central bank
intervention can be justified as it would de facto include payment
service providers under the umbrella of the central bank’s reserve
requirements and hence improve financial stability.
More ambitious CBDC models, like the Swedish e-krona (Sveriges
Riksbank 2018), envisage a stand-alone payment system within which new
CBDC objects can be transferred. For the attractiveness of CBDC bank
deposits this is not necessarily an advantage. Without a specific
payment system, CBDC deposits could be used like a commercial bank
deposit. With a stand-alone payment system, CBDC deposits could only be
used for payments to other CBDC accounts. The lack of interoperability
constitutes a major drawback of such CBDC solutions. Especially in a
small country like Sweden, the domestic focus is another major
Therefore, if central banks want to develop a serious answer to the
dynamic activities of global payment service providers, they must
rethink their whole approach to CBDCs. The benchmark is set by PayPal
which is the ‘elephant in the room’ of global payments. It shows that
instead of national schemes that can only operate with the national
currency and can only make transactions with system-specific accounts,
the solution must be supranational with a multicurrency operability and
an openness to payment objects that are not system-specific.
But even if central banks realise that their task is not to develop a
digital substitute for cash but a digital alternative for global
payment systems, it will not be easy to achieve the high level of
sophistication and the broad spectrum of services, especially for
e-commerce, of such payment systems. But in contrast to narrow CBDC
models, from an allocative point of view there would be an obvious
justification for supranational retail payment networks operated by
In sum, we argue that there is no obvious justification for digital
cash substitutes from the point of view of allocative efficiency. In
addition, from a user perspective, the narrow solutions that are
discussed by central banks so far do not seem attractive enough to
compete successfully with private bank deposits and private retail
payment systems like PayPal. The key advantage of CBDC, its absolute
safety, is irrelevant for retail payments. These findings mainly concern
advanced countries with a large share of the population having access
to bank accounts. For emerging and developing economies, such CBDC
solutions could be a suitable tool to approach the problem of a large
share of people without access to bank accounts.
However, there is a huge potential for CBDCs as a store of value for
retail payment service providers, like Libra/Diem. Astonishingly,
central banks have so far not discussed this option, although it would
help them to maintain control over private retail payment networks
outside the existing bank-based payment system that relies on central
bank reserves and the existing central bank settlement systems.
Finally, a clear market failure can be identified for global retail
payment networks which are based on monopolistic or oligopolistic
structures. However, the central banks' response would then have to be
supranational rather than national. Moreover, successful networks such
as PayPal show that such systems are not tied to a system-specific
currency or system-specific payment objects.
Thus, if central banks stick to their current approach, the risk is
high that CBDCs will become a gigantic flop. This would be anything but
beneficial for the reputation of central banks.
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