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This paper discusses how different
CBDC attributes (anonymity, remuneration, value-added services or caps
on the holdings) can limit the substitutability between bank deposits
and CBDCs in different situations.
The Covid-19 crisis has brought about a number of changes in economic behaviour as a result of the lockdown and the need of maintaining social distancing. Two of the most prominent changes are the increase in e-commerce transactions and the generalization of credit card payments, preferably through contactless technology. Both trends have reduced the use of cash as a means of payment, generating a certain stigma for banknotes.
These trends happen at a time when there is a debate on the possibility of central banks issuing a digital form of cash (the so-called central bank digital currencies, CBDCs), which would obviously overcome the drawbacks of cash as a disease transmitter as well as its limitations in e-commerce, hence the renewed interest on CBDCs as a result of the pandemic. The initial debates were mostly academic1, but the discussion rapidly moved to the policy arena2. A few central banks are developing pilots on use cases, with Sweden and China as the frontrunners.
Many central banks that analyzed the topic over recent years were hesitant to move forward, because of the problems related to anonymity and the likely disruption of financial intermediation. In very simplistic terms, if kept anonymous CBDCs will raise issues of AML related transactions; if identified, they will compete with bank deposits and probably disrupt financial intermediation as we know it. Furthermore, the accumulation of functions in central banks that CBDCs imply may jeopardize their independence, which is already under scrutiny. Confronted with this dilemma, many central banks decided to keep their projects on hold.
In this context the announcement by Facebook of the launch of Libra in June 2019 reignited interest in CBDCs for many central banks. The threat of a powerful BigTech issuing a stablecoin that may compete with fiat currencies triggered a reaction in the central banking community: on the one hand, the authorities raised questions on the nature of Libra and its regulatory treatment; and, on the other hand, they looked back at plans for CBDCs with a more positive attitude. This fresh look at CBDCs was accompanied by a more pragmatic approach, with more nuanced proposals that lessen the dilemmas implied in the first, more academic proposals. In particular, some of these new proposals focus on modalities that rely on public-private partnerships rather than full provision by the central bank. There is also increasing elaboration on variants that limit the extent of the dilemmas posed by anonymity.
All this debate was stimulated by the Covid-19 crisis. The stigma of cash, compounded with the above-mentioned reasons, is convincing many central banks that they should offer a means of payment that links them directly with the population and does not rely entirely on private providers. Furthermore, for many countries the payments space is dominated by a few foreign international card schemes, which is an additional factor, since the Covid crisis raised the value of national self-reliance on critical services in the authorities’ preferences. It is important to clarify that not all the authorities have the same view in this respect. Some of them might not see a significant problem in relying on a few foreign credit card providers for the retail payments infrastructure, to the extent that they are efficient and function according to local regulations. But after Covid the number of countries whose authorities are concerned on national sovereignty and the importance of preserving a role for the central bank in the provision of retail means of payment has probably increased3.
One reason mentioned by some central banks4 for the provision of CBDCs is the need to offer an alternative for retail users that do not want or cannot afford to have a payment card, or even a bank account. According to this view, it is the obligation of the central bank to provide an affordable means of payment that does not depend on private firms’ solutions that are costly and may not be appropriate for certain segments of the population. Financial inclusion considerations are often mentioned in this context. In general, central banks also mention the safety and robustness of payments as one of the main motivations for issuing CBDCs (see figure).5
Full paper 
SUERF Policy Note, Issue No 183 (0.51 MB)