CBDC design key to maintaining financial stability – IMF paper

The design of a central bank digital currency (CBDC) is key to preventing financial instability as a result of their issuance, research by the International Monetary Fund concludes.

A team of IMF economists carried out scenario analysis to explore how different approaches to launching CBDCs might play out in the banking sector. A CBDC could create liquidity stresses in the sector by luring away a share of commercial banks’ deposits. The economists note that flows out of the banking sector could be large during a crisis or if network effects encouraged rapid CBDC adoption.

A CBDC should be appealing as a payment method, but not as a store of value, the authors say

In their working paper, published on October 11, the economists find three conditions under which the adverse impact of a CBDC would be greater: where the replacement of deposits is significant; where banks do not hold excess reserves at the central bank; and where the central bank is unwilling to increase the supply of reserves beyond existing collateral requirements.

The economists test possible policy responses by the central bank. They find that using macro-prudential tools alone to offset the adverse effects of a CBDC issuance is “likely to be difficult”. Expanding central bank lending, especially during crises, could help, though it might also expose the central bank’s balance sheet to greater risks.

They conclude that the best approach is to design the currency to be appealing as a payment method, but not as a store of value. Design elements could include zero or negative rates on CBDC balances, limits to holdings, and a “high degree of interoperability” with existing payment systems.