Central Bank digital currencies: The devil will be in the details

Larissa de Lima and Douglas J. Elliott from Oliver Wyman recommend policymakers to avoid critical design and implementation errors on the issuance of digital currencies by Central Banks (CDBCs), as “there is strong momentum in key nations for central banks to create digital versions of their currencies for widespread use”.

According to the authors, this strong momentum for central banks to create digital versions of their currencies is consistent with the fact that China and Sweden are already in the experimentation phase, Bahamas has already its “digital sand dollar” and in Europe “Christine Lagarde is indicating a digital euro could be in use by 2025.” Faced with this situation, the authors propose several recommendations that should be considered by policymakers in the design and implementation of the CDBCs:

• Consider the big picture in the payments ecosystem: “CBDCs do not exist in isolation; policy regarding CBDCs, stablecoins, other digital assets, and the modernization of payments ecosystem must fit together coherently.” This task may be not easy as few countries, if any, have a single authority responsible of all the above categories. No coordination across the different parts of the payments ecosystem may have unintended consequences in the financial system.
• The design will be better and easier once the purpose is clear: CBDCs can be a powerful tool but central banks need to prioritize policy objectives and need to have a clear view on what they pursue with the issuance of a CDBC: it will be designed to replace the cash, to increase financial inclusion, to improve cross-border payments processes, to decrease fraud and illicit activity… At this point, and to carry out an efficient design and implementation, other questions must be answered, too: Who should have access to CBDCs? Will CBDC holders have a direct relationship with the central bank or will intermediaries, such as banks and Fintechs, be used? Will the system be account-based, token-based, or some combination? What limits will be in place for users and intermediaries? How will anonymity be preserved?…
• CBDCs issuances should bear in mind stakeholder’s views and be accompanied by a good communications plan as it will have a significant impact on the financial system and society. Central banks should involve finance ministries and financial regulators in the design and implementation but without undermining the independence of central banks in monetary policy. The authors highlight that this will be critical in regard to some decisions, for instance in the interest remuneration of CDBCs as “any significant difference between what banks pay on deposits and what CBDCs accrue is likely to provoke anger that the ‘people’s bank’ is treating citizens worse than the profit-seeking banks are”.