Central Bank Digital Currencies – How Might They Work in Practice?

Abstract

Payment media, from gold coins to stablecoins, exist to be used, and in practice their use requires payment systems. In my paper ‘Central Bank Digital Currencies And Stablecoins – How Might They Work In Practice?’ I consider the way in which existing payment infrastructures and particularly payment banks — might reconfigure their services to accommodate Central Bank Digital Currencies (CBDCs) and stablecoins.

For this purpose, it is probably irrelevant whether the ‘coins’ concerned are created by central banks or private providers, or for that matter what the form is of the technology by which they are constituted. What does matter is that they are capable of being directly owned by the user without any intermediation. The question is whether that is how they will be dealt with in practice.

There are two possible ways in which this intermediation could be structured. One is where the intermediary provides a ‘custody’ service. This will involve the customer being charged for the service, since the custodian derives no benefit from his holding of the asset. The other is where title to the coin is passed to the intermediary. This will enable the intermediary to use the asset in his business, and therefore result in the customer paying lower or no fees for the intermediation.

Since a legal structure involving a ‘custody’ structure — where the customer retains direct ownership of the coin — will be a more expensive offering for that customer, it seems unlikely that this will be the prevalent model. However, a structure involving a transfer of ownership of the coins to the bank would seem to have no benefits over the existing bank account offerings, and would arguably be worse for the customer, in that the customer potentially loses the benefit of deposit insurance (since a deposit of stablecoins is arguably not a ‘deposit’ for that purpose).

Keywords: CBDC, Crypto, DLT, Banking, Wallet, Payments, Payment Services

JEL Classification: E50, E58, K22, K11