Vox: The conflict between CBDC goals and design choices

03 May 2021

This column argues that central bank digital currency alone will not achieve those goals unless central banks are willing to engage in all the steps of the payment system or complement their digital currency with ... regulatory changes to ensure competition and interoperability of payments.

In response to new developments in the area of digital money and payments, an increasing number of central banks are exploring the possibility of creating their own version of digital money, typically referred to as central bank digital currency, or CBDC (Auer et al. 2020, Niepelt 2020).

The motivations of central banks to launch CBDC are diverse but they start with the principle that we need a public option for payments (Boar et al. 2020). In some sense this just means maintaining the status quo. Currently, physical currency, issued by central banks, runs parallel to private digital payments. But as the role of physical currency is diminishing, we might need a digital replacement controlled by the central bank. In the words of the ECB (2020), CBDC is the “natural transition from currency” and it will “give people more choices about how to pay”.

But what are the economic arguments that justify the need for a public option running in parallel to private systems of payments? Fundamentally, the existence of a public payment option can be seen as central to the trust in the currency and its role as the unit of account (Söderberg 2019). Today, €10 in a bank account can be redeemed by withdrawing a €10 note. This process creates a connection between the value of the bank account deposit and the unit of account managed by the central bank. In the absence of physical currency, that link would disappear.1

But beyond trust in the currency most central banks tend to emphasize operational benefits of CBDC such as promoting a resilient, inclusive and efficient payment system (BIS 2020). For example, the ECB sees the value of resilience to “cushion the impact of extreme events when traditional payment services may no longer function” (ECB 2020). And the Riksbank specifically brings up both the importance of promoting competition and the need to provide access to individuals struggling with digital payments (Söderberg 2019). 

In summary, central banks are looking for improved resilience, financial inclusion and increasing competition. But these three goals can only be achieved if CBDC can effectively compete with private versions of digital money. This requires that CBDC offers a competitive payment technology, and it might require that the central bank controls many or all of the steps of the payment system, something that goes beyond the current CBDC designs being discussed. In order to understand the issue, we first need to recognise that digital money is a lot more complex than cash. With cash the issuance of the asset also represents the creation of the (physical) payment technology. But when it comes to digital money, there is a separation between the asset (the digital repository of value) and the payment technology. And digital payment technologies are complex and composed of many layers controlled by different private actors. An account at the central bank will always be a digital record of value but this does not guarantee that it will be accepted for payments everywhere of that it will be as efficient as alternative forms of payments. If CBDC is not competitive with private alternatives it will be challenging to achieve the stated goals. 

Design of CBDC: It’s all in the details

When it comes to the design of CBDC there are three main possibilities being considered (Auer and Böhme 2020):

  1. Direct CBDC. Accounts are opened directly at the central bank. The central bank controls the ledger and is involved in the execution of retail payments. The central bank acts like a regular bank. 
  2. Hybrid or intermediated CBDC. The accounts also represent a liability on the central bank balance sheet, but private intermediaries handle retail payments (and possibly account opening). The difference between the hybrid and intermediated model is in whether or not the central bank keeps a central ledger of all transactions. 
  3. Synthetic CBDC. Accounts are not on the balance sheet of central banks and, for this reason, many argue that this is not true CBDC. Intermediaries hold the liability but are required to deposit 100% of the customers’ accounts at the central bank.2  

Central banks are mostly focusing on the first two options, where CBDC becomes a liability on their balance sheet. But the success of CBDC depends on the details on how payments will be executed. In fact, in all cases above, even in the case of direct CBDC, private sector intermediaries are likely to be involved in a transaction. Today when making a payment using a bank account, it is likely that additional intermediaries are part of the process: a credit card company (e.g. Visa or Mastercard) or the company managing the infrastructure of payments (e.g. Stripe or PayPal). 

Central banks are reluctant to become payment providers and, for that reason, current projects (e.g. in China, Sweden, and the euro area) are all using a hybrid model. Their reluctance comes from the fact that they do not want to “provide end user-facing services such as customer identification and support” and, in addition, “a parallel infrastructure would also run counter to the aim of issuing a digital euro in order to improve the cost and environmental footprint of payments” (ECB (020).


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