CBDC: Context, challenges, and conditions for a successful adoption

• Main Author: LAY, Charlie Nhuc Hiang
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2023
• Subjects: Central bank digital currencies (CBDC); crypto assets; monetary policy; monetary sovereignty; financial stability; payments system; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/etd_coll/490; https://ink.library.smu.edu.sg/context/etd_coll/article/1488/viewcontent/GPGM_AY2020_PhD_Charlie_Lay_Nhuc_Hiang.pdf
• Institution: Singapore Management University

Central bank digital currencies (CBDC) are the digital version of physical notes and coins. They are the latest milestone in the evolution of money over the centuries due to technological advancements. This digitalisation of physical money primarily serves as a medium of exchange that has a central bank anchor. There are two versions of CBDC, wholesale and retail. This thesis focuses on retail CBDC, which targets the general public and small daily transactions. It discusses the issues and the plausible implementation of a retail CBDC. A CBDC will preserve monetary sovereignty, foster financial stability, and counter private network effects, i.e., prevent private payment system monopolies and safeguards the payments system. It can also promote lower fees via increased domestic payment competition. More importantly, it can facilitate interoperability among foreign CBDCs and considerably lower fees for cross-border payments. While there are arguments against CBDC, the concerns about financial disintermediation, loss of privacy, and cyber threats can be mitigated by well-considered design choices. A successful CBDC adoption must be preceded by at least four key foundations: the maintenance of the two-tier fractional banking system, an account-based model, an intermediated architecture, and a centralised system to facilitate real-time gross settlement (RTGS). Other essential conditions include co-existence with physical cash, a cap on CBDC deposits, non-interest yielding, offline functionality, and strong cybersecurity. Importantly, it will require broad public support, which will depend on cultural and social norms. All major central banks are stepping up research into CBDC, and its introduction is a matter of when and how, not if. However, implementation will be a significant challenge, and getting the public’s support will be the key. It will differ from country to country. For countries with high digital transactions and low interchange fees, the urgency to introduce CBDC may not be high, e.g., Scandinavia. For countries with high cash usage, the cost savings will be more significant, but this will also entail higher investments in the necessary infrastructures, education, and public promotion. This thesis provides an examination of these foundational and auxiliary issues surrounding a successful CBDC adoption.