Central Bank Digital Currencies - Design Principles and Balance Sheet Implications

54 Pages Posted: 25 May 2018

See all articles by Michael Kumhof

Michael Kumhof

Bank of England

Clare Noone

Reserve Bank of Australia

Date Written: May 18, 2018

Abstract

This paper sets out three models of central bank digital currency (CBDC) that differ in the sectors that have access to CBDC. It studies sectoral balance sheet dynamics at the point of an initial CBDC introduction, and of an attempted large-scale run out of bank deposits into CBDC. We find that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed. The core principles are: (i) CBDC pays an adjustable interest rate. (ii) CBDC and reserves are distinct, and not convertible into each other. (iii) No guaranteed, on-demand convertibility of bank deposits into CBDC at commercial banks (and therefore by implication at the central bank). (iv) The central bank issues CBDC only against eligible securities (principally government securities). The final two principles imply that households and firms can freely trade bank deposits against CBDC in a private market, and that the private market can freely obtain additional CBDC from the central bank, at the posted CBDC interest rate and against eligible securities.

Keywords: Central bank digital currencies, sectorial balance sheets, monetary systems, financial stability

JEL Classification: E42, E44, E52, E58

Suggested Citation

Kumhof, Michael and Noone, Clare, Central Bank Digital Currencies - Design Principles and Balance Sheet Implications (May 18, 2018). Bank of England Working Paper No. 725. Available at SSRN: https://ssrn.com/abstract=3180713 or http://dx.doi.org/10.2139/ssrn.3180713

Michael Kumhof (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Clare Noone

Reserve Bank of Australia ( email )

65, Martin Place
Sydney, NSW 2000
Australia

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