BIS Working Papers

1 BIS Working Papers No 976 Central bank digital currencies : motives, economic implications and the research frontier by Raphael Auer, Jon Frost, Leonardo Gambacorta, Cyril Monnet, Tara Rice and Hyun Song Shin Monetary and Economic Department November 2021 JEL classification: C72, C73, D4, E42, E58, G21, O32, L86. Keywords: money, digital currencies , central banks, central bank digital currencies , CBDC, stablecoins, cryptocurrencies, distributed ledgers, big tech, data privacy. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank.

2 The Papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website ( ). Bank for International Settlements 2021. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISSN 1682-7678 (online) CBDCs: motives, economic implications and the research frontier 1 Central bank digital currencies : motives, economic implications and the research frontier Raphael Auer , Jon Frost , Leonardo Gambacorta , Cyril Monnet , Tara Rice and Hyun Song Shin 1 Abstract In just a few years, central banks have rapidly ramped up their research and development effort on central bank digital currencies (CBDCs).

3 A growing body of economic research informs these activities, often focusing on the reserves for all aspect of CBDCs for retail use. However, CBDCs should be considered in the full context of the digital economy and the centrality of data, which raises concerns around competition, payment system integrity and privacy. This paper gives a guided tour of the growing literature on CBDCs on the microeconomic considerations related to operational architectures, technologies and privacy, and the macroeconomic implications for the financial system, financial stability and monetary policy.

4 A set of questions, particularly on the cross-border dimensions of CBDCs, remains unresolved, and calls for further work to expand the research frontier. Keywords: money, digital currencies , central banks, central bank digital currencies , CBDC, stablecoins, cryptocurrencies, distributed ledgers, big tech, data privacy. JEL classification: C72, C73, D4, E42, E58, G21, O32, L86. Bank for International Settlements. University of Bern and Study Center Gerzensee. 1 This paper was prepared for the Annual Review of Economics. When citing this paper, please use the following: R Auer, J Frost, L Gambacorta, C Monnet, T Rice and H S Shin, Central bank digital currencies : motives, economic implications and the research frontier , Annual Review of Economics, vol 14, 2022, submitted, DOI: The views expressed here are those of the authors and not necessarily those of the Bank for International Settlements.

5 The authors would like to thank Giulio Cornelli for outstanding research assistance. 2 CBDCs: motives, economic implications, and the research frontier Introduction The digitalisation of economies has far-reaching implications for many areas of economic inquiry, not least for monetary economics and the concept of money itself. With the massive volumes of data that digital activities generate come new opportunities and challenges for societies and the monetary system. A tradition in monetary economics is to view money as a coordination device that serves as a substitute for the complete list of economic transactions ie as society s memory of all economic transactions (eg, Kocherlakota (1998)).

6 Yet this abstract definition of money leaves open its institutional underpinnings, upon which the welfare consequences of the institution of money may crucially depend. In particular, due to the inherent network effects in payments (Rochet and Tirole (2006)) and the potential for the proprietary use of data, digital forms of money pose substantial challenges for competition, privacy and integrity. It is in this context that an important public debate has arisen on the issuance of new, digital forms of central bank money and how they will affect the architecture of the monetary system.

7 The idea that central banks would issue digital forms of money for general use is a natural progression from the issuance of physical cash. In addition, banks have had access to digital forms of central bank money for several decades in the wholesale payment system. However, the debate on the issuance of digital central money that is accessible to ordinary users has picked up pace only recently. Initially, policy reports took a cautious approach to issuance (eg CPMI-MC (2018)). The last few years have witnessed a broadening of the debate. Alongside the rise and fall of cryptocurrencies, the emergence of global stablecoin proposals such as Facebook s Diem, and increasing technological disruption in finance, central banks have adopted a more proactive stance by anticipating a future when innovation and the entry of new private forms of money will already have transformed the monetary system, rather than treating the current system as the benchmark.

8 Central banks have begun to engage in research on CBDCs and, in some instances, also their development. According to a survey from late 2020, 86% of global central banks are conducting research on CBDCs, and as of July 2021, 56 central banks have publicly communicated their research or development efforts (see Boar and Wehrli (2021) and Auer et al (2020)). At the time of writing, two central banks have launched CBDCs and several are conducting pilots. However, there is as yet no broad consensus among central banks on the need for CBDC issuance. Alongside a fast-changing and intense policy debate, a still nascent but rapidly growing academic literature has emerged that examines the broader economic implications of CBDCs.

9 The focus to date has mostly been on the reserves for all aspect of CBDCs, and the associated balance sheet implications for central banks in their interactions with commercial banks, the impact on the effectiveness of monetary policy, and the implications for financial In policy circles, meanwhile, there is growing confidence that a targeted economic design can achieve public policy goals while limiting systemic implications. Hence, the discussion focuses more on the potential enhancements to payments inclusion and efficiency, and the policy objectives of ensuring competition, data privacy and integrity of payment systems (see Auer and B hme (2020, 2021) and BIS (2021)).

10 3 Many central banks, meanwhile, 2 See the discussion in Section 4. Studies assess how the issuance of retail CBDCs could affect the balance sheets of central and commercial banks and the respective volatility (ie Kumhof and Noone (2018), Brunnermeier and Niepelt (2019)), lending and the interest rates of commercial banks (Andolfatto (2021)), and the bounds and effectiveness of monetary policy (ie Bordo and Levin (2017), Davoodalhosseini et al (2020)). 3 See also Kiff et al (2020), Bank of Canada (2020), ECB (2020), Bank of England (2020), People s Bank of China (2021). CBDCs: motives, economic implications and the research frontier 3 see CBDCs as a public infrastructure that could help to ensure competition and open markets in the face of competitive threats from the incursion of big techs into payment This chapter gives a guided tour of the growing literature on CBDCs in economics and other related disciplines.