Digital money as a central bank public good

The foundation of the monetary system is trust in the currency. As the central bank provides the ultimate unit of account, that trust is grounded on confidence in the central bank itself. Like the legal system and other foundational state functions, the trust engendered by the central bank has the attributes of a public good. Such “central bank public goods” underpin the monetary system.14

Central banks are accountable public institutions that play a pivotal role in payment systems, both wholesale and retail. They supply the ultimate means of payment for banks (bank reserves), and a highly convenient and visible one for the public (cash). Moreover, in their roles as operators, overseers and catalysts, they pursue key public interest objectives in the payments sphere: safety, integrity, efficiency and access (see glossary).

The central bank plays four key roles in pursuit of these objectives. The first is to provide the unit of account in the monetary system. From that basic promise, all other promises in the economy follow.

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Second, central banks provide the means for ensuring the finality of wholesale payments by using their own balance sheets as the ultimate means of settlement, as also reflected in legal concepts of finality (see glossary). The central bank is the trusted intermediary that debits the account of the payer and credits the account of the payee. Once the accounts are debited and credited in this way, the payment is final and irrevocable.

The third function is to ensure that the payment system works smoothly. To this end, the central bank provides sufficient settlement liquidity so that no logjams will impede the workings of the payment system, where a payment is delayed because the sender is waiting for incoming funds. At times of stress, the central bank’s role in liquidity provision takes on a more urgent form as the lender of last resort.

The central bank’s fourth role is to oversee the payment system’s integrity, while upholding a competitive level playing field. As overseer, the central bank imposes requirements on the participants so that they support the functioning of the payment system as a whole. Many central banks also have a role in the supervision and regulation of commercial banks, which are the core participants of the payment system. Prudential regulation and supervision reinforce the system. Further, in performing this role, central bank money is “neutral”, ie provided on an equal basis to all commercial parties with a commitment to competitive fairness.

Central bank digital currencies should be viewed in the context of these functions of the central bank in the monetary system. Wholesale CBDCs are for use by regulated financial institutions. They build on the current two-tier structure, which places the central bank at the foundation of the payment system while assigning customer-facing activities to PSPs. The central bank grants accounts to commercial banks and other PSPs, and domestic payments are settled on the central bank’s balance sheet. Wholesale CBDCs are intended for the settlement of interbank transfers and related wholesale transactions, for example to settle payments between financial institutions. They could encompass digital assets or cross-border payments. Wholesale CBDCs and central bank reserves operate in a very similar way. Settlement is made by debiting the account of the bank that has net obligations to the rest of the system and crediting the account of the bank that has a net claim on the system. An additional benefit of settlement in wholesale CBDCs is to allow for new forms of the conditionality of payments, requiring that a payment only settles on condition of delivery of another payment or delivery of an asset. Such conditional payment instructions could enhance the delivery-versus-payment mechanism in RTGS systems (see Box III.A).

Compared with wholesale CBDCs, a more far-reaching innovation is the introduction of retail CBDCs. Retail CBDCs modify the conventional two-tier monetary system in that they make central bank digital money available to the general public, just as cash is available to the general public as a direct claim on the central bank.

The monetary system with a retail CBDC

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