Central Bank Digital Currency CBDC , Lender of Last Resort and Financial Distress periods :
We discussed pros/cons of CBDC, and potential effect with a macroEconomic point of view. We try to put the technology innovation in context of a specific case study
We discussed pros/cons of CBDC, and potential effect with a macroEconomic point of view. We try to put the technology innovation in context of a specific case study
1-Quick overview of Pros & Cons:
Pros
a-Lower Txs cost
b-Economic growth
c-Financial inclusion
d-lower cost, higher seigniorage income
Pros
a-Lower Txs cost
b-Economic growth
c-Financial inclusion
d-lower cost, higher seigniorage income
2-Cons
a-Increased system risk of banks runs
b-Competition for commercial banks
c-Network default
d-Geographic limitation
e-Privacy
a-Increased system risk of banks runs
b-Competition for commercial banks
c-Network default
d-Geographic limitation
e-Privacy
3-Potential use of CBDC in financial distress times is an electronic emergency liquidity assistance.
The design of the CBDC in this context require all feature design of the CBDC to meet monetary policies targets and the role of the CB as LOLR
The design of the CBDC in this context require all feature design of the CBDC to meet monetary policies targets and the role of the CB as LOLR
4-Design of CBDC in an emergency liquidity assistance context;
A- Accessibility:
In period of distress, access to CBDC should be restricted and not public to avoid any bank run where depositors might transfer their bank deposits to CB directly using CBDC to avoid potential risks.
A- Accessibility:
In period of distress, access to CBDC should be restricted and not public to avoid any bank run where depositors might transfer their bank deposits to CB directly using CBDC to avoid potential risks.
B-Anonymity
According to the nature of regulations and centralised power CB might seek during distress periods, the proposed design of CBDC should avoid anonymity and restrict usage based on KYC ( maybe mediated by commercial banks).
According to the nature of regulations and centralised power CB might seek during distress periods, the proposed design of CBDC should avoid anonymity and restrict usage based on KYC ( maybe mediated by commercial banks).
C-Transfer mechanism
Transfer should be based on a peer to peer mechanism directly between CB and other parties. Linked to real currency ( possible lollar ) to avoid any price volatility.
Transfer should be based on a peer to peer mechanism directly between CB and other parties. Linked to real currency ( possible lollar ) to avoid any price volatility.
D-Interest bearing:
Making this CBDC interest bearing is an advantage as this will make lending more profitable keeping in mind that interest rate should stay lower than the cost of liquidating assets in distress periods.
Making this CBDC interest bearing is an advantage as this will make lending more profitable keeping in mind that interest rate should stay lower than the cost of liquidating assets in distress periods.
C- Limits or Caps:
Limits or Caps usually limits the effect of an emergency liquidity tool, but because we suggested a transfer mechanism with Lollar, a cap is due in this situation.Making the max supply with a cap of total lollar deposit might hold a higher value than using LBP.
Limits or Caps usually limits the effect of an emergency liquidity tool, but because we suggested a transfer mechanism with Lollar, a cap is due in this situation.Making the max supply with a cap of total lollar deposit might hold a higher value than using LBP.
Designing a CBDC is somehow very flexible & could change drastically depending on the purpose of its creation. Context and usage utility dictates the design feature of any CBDC.
This design could be challenged as I like to say that CBDC design follows the Chaos theory behaviour
This design could be challenged as I like to say that CBDC design follows the Chaos theory behaviour
