introduction
The following is the text:
introduction
Since Facebook released the Libra white paper, it has sparked extensive discussions around the world. In China, there are particularly hot discussions on how the Chinese government and the public should respond to the challenges brought by Libra, and whether they should develop a Chinese version of Libra, which has once again sparked attention to the central bank digital currency (Central Bank Digital Currencies: CBDC).
Some important features of Libra, such as super-sovereignty and international payment convenience, have important reference significance for the challenges and implementation paths of RMB internationalization. Therefore, this article will focus on proposing a practical design of China's CBDC (if there is no special explanation below, CBDC refers specifically to the digital currency of the People's Bank of China) and discussing its impact on financial stability. This article also believes that the Chinese private version of Libra (hereinafter referred to as Libra-x) and CBDC have different issuers (the former is dominated by a consortium of enterprises, while the latter is dominated by the central bank), and their design goals and implementation methods are very similar , so this article will also discuss the Libra-x design scheme based on the CBDC design scheme. Discussions of CBDCs in this article will apply to Libra-x unless otherwise stated.
The author of this article is not familiar with the research and development of the central bank's digital currency that is being promoted by the People's Bank of China. This article only proposes a feasible proposal for CBDC from a theoretical and practical perspective. It only represents the author's personal opinion and does not reflect any official views and work status. .
introduce
introduce
From the perspective of financial stability, the design of CBDC should follow the following principles to avoid or mitigate the impact of the introduction and realization of CBDC on the stability of the existing financial system:
Do not introduce uncertainty into existing monetary policy tools and transmission mechanisms;
Introducing new monetary policy tools for CBDCs where possible, taking into account that CBDCs may serve entirely different core objectives;
Do not change or significantly weaken the business model of commercial banks (creation of deposit money through loans, providing credit and liquidity to society);
Do not affect or significantly weaken the ability of the entire financial system (after the introduction of CBDC) to provide credit and liquidity to the whole society;
Avoid possible commercial bank runs after the introduction of CBDC (such as depositors switching from bank deposits to CBDC on a large scale)
2017 The Bank for International Settlements (BIS) in its Quarterly Review
[1]The famous "flower of currency" proposed in the paper proposed a relatively complete taxonomy of different currency forms, a working paper released by BIS in March 2018
[2]A comprehensive overview of CBDC is provided, analyzing its implications for payments, monetary policy, and financial stability. The world's major central banks and major monetary policy institutions have carried out research in the field of CBDC in full swing. Different CBDC systems may have very different scopes of application in principle, with some viewing CBDC as an electronic version of central bank cash, some viewing CBDC as a central bank reserve with expanded accessibility, and some viewing CBDC as a substitute for commercial bank deposits ; Some CBDC systems continue the existing central bank/commercial bank account-based system, and most CBDC systems are expected to be token-based.
At present, the RMB is still subject to capital control and cannot be freely converted, but the RMB is facing a strong demand for internationalization, such as encouraging more countries to use the RMB for valuation and settlement in a wider range of trade activities, or to use the RMB as a value storage tool or reserve currency . This article further extends the demand for RMB internationalization in the super-sovereign category, RMB CBDC should allow a wider range of subjects to participate in its issuance process and share seigniorage. Therefore, this paper defines that CBDC has the following characteristics:
CBDC is a form of currency of the central bank, which is consistent with the face value of other forms of central bank currency (such as cash and reserves) (that is, to maintain parity);
Compared with central bank reserves, CBDC allows access to a wider range of subjects (the former is only accessible to commercial banks, some payment institutions and foreign central banks, etc., and the latter is designed to allow commercial banks, non-bank financial institutions, households and companies to access);
CBDC is token-based, while reserves are account-based;
Use a separate operating framework from other forms of central bank money, thus allowing CBDCs to serve entirely different core objectives;
CBDC could be interest-bearing and, under reasonable assumptions, could pay different interest than reserves;
In addition to supporting retail payments, CBDC supports cross-border payments. In contrast, cash is mainly a retail payment tool, while reserves are mainly used for inter-bank settlement purposes;
The issuance mechanism of CBDC can be different from cash and reserves, such as supporting different collaterals, allowing a wider range of subjects to participate in the issuance of CBDC.
To further explain the above characteristics:
Feature 1: This feature has two meanings. The first level of meaning points out that CBDC is a liability of the central bank and belongs to the category of traditional currency concept M0, which is consistent with the speech of Wang Xin, Director of the Research Bureau of the People’s Bank of China, that CBDC is positioned at M0[3]. The second meaning points out that CBDC needs to maintain a parity relationship with other forms of currency of the central bank. In most monetary frameworks, different types of central bank currencies can be exchanged at equal face value, for example, one unit of central bank banknotes can be exchanged for one unit of central bank reserves, but some authors do suggest breaking this tradition, especially in the context of CBDC Down. For example Kimball and Agarwal's paper[4]A framework is described where a flexible exchange rate can be maintained between cash and CBDC to help achieve negative interest rates on cash to overcome the classic "liquidity trap". This means that an economy runs two fiat currencies at the same time, although they are at a managed exchange rate. This poses serious challenges, is cash or the CBDC the financial unit of account for the economy? If both fiat currencies were indeed widely used, all goods and services would have to be quoted in both, which would introduce serious administrative costs. There is general industry consensus that managing two fiat currencies at the same time presents significant risks to monetary stability. Therefore, although in theory CBDC can have a different face value from other forms of central bank currency, this paper assumes that CBDC must be consistent with the face value of other forms of central bank currency, which means that in the CBDC scenario (the same as Libra-x), a new financial record is not formed. Necessity and possibility of account unit.
Feature 3: The existing monetary system is based on accounts. For example, the central bank only opens reserve accounts for a small number of institutions including commercial banks, while commercial banks open deposit accounts for ordinary users; inter-bank payments need to be cleared in real time by the central bank ( The Real Time Gross Settlement (RTGS) system clears between the relevant commercial banks' reserve accounts with the central bank. CBDC is a token-based system, so transfers and payments can be made directly between all participating entities without relying on the existing RTGS system. Therefore, token-based design also provides possibility for 4).
Based on the above definition of the characteristics of CBDC, this article will explore whether CBDC can be used as a new monetary policy tool, with the use of price rules (the central bank sets the interest rate of CBDC to allow its quantity to change) or quantity rules (the central bank sets the supply of CBDC amount to allow its interest rate to vary).
secondary title
CBDC Monetary Policy Trilemma
Bjerg's paper[5]The classic monetary policy trilemma is modified to apply to two competing domestic monetary systems - the central bank and the commercial banking system. This paper uses a similar approach to modify the classic model to be applicable to two competing domestic monetary systems - CBDC and the existing central bank monetary system.
The original idea of the classic monetary policy trilemma comes from Keynes[6], followed by Mundell[7]and Fleming[8]was elaborated, and eventually Obstfeld and Taylor[9]image description
Figure 1: The Classic Monetary Policy Trilemma
The function of CBDC is basically equivalent to the existing monetary system of the central bank, thus forming a certain form of competition between the existing monetary system and CBDC, which can be compared to the competition between different currencies in the classic monetary policy trilemma. The realization of CBDC will bring the same type of contradiction in the classic trilemma. We transform the classic model into the model shown in Figure 2 according to the following rules:
The traditional policy objective of exchange rate management between the two currencies translates into ensuring financial stability by maintaining the face value of CBDC and other forms of currency at the central bank (i.e. maintaining parity);
The traditional policy objective of monetary autonomy in setting central bank interest rates translates into monetary autonomy in setting CBDC interest rates;
image description
An economy’s risk-free nominal interest rate, which is equal to the interest rate on a nominally risk-free pure store-of-value asset such as local currency short-term government bills;
The nominal interest rate currently paid on reserves is either equal to, or closely related to, through arbitrage, the risk-free nominal interest rate in that economy;
The interest rate of CBDC is equal to the risk-free rate minus the convenience yield of CBDC (that is, the premium of CBDC as a medium of exchange);
The convenience benefits of CBDC decrease as the number of CBDC increases. The marginal holders of CBDC are companies and households. Their demand for CBDC and the supply of CBDC by the central bank determine the convenience income of CBDC. In the non-arbitrage situation of marginal holders, if the convenience income of CBDC is zero, the supply of CBDC is required to be at a saturation point-the supply of CBDC is close to the level of bank deposits. This will bring about two challenges: the first is that there is not enough qualified collateral that the central bank can use to issue CBDC; the second is that if the liquidity of CBDC supply reaches the level of bank deposits, this will make bank deposits and loans no longer available. Necessary to destroy the bank's business model. Therefore, it is reasonable to expect that the central bank will only moderately issue CBDC;
Because it is not a marginal holder of CBDC, it is very unlikely that the bank's marginal benefit from holding CBDC will exceed its holding of reserves or bonds. Therefore, banks tend not to hold large amounts of CBDC because the opportunity cost is too high. The bank's decision to hold CBDC is similar to the bank's holding of physical cash, and the minimum holding is only to meet customer requests.
The central bank or commercial banks do not guarantee the conversion of bank deposits to CBDC
The central bank either allows the interest rate of CBDC to be adjusted (according to the CBDC quantity rule), or allows the quantity of CBDC to be adjusted by exchanging non-deposit eligible assets (according to the CBDC price rule), so that the expected parity relationship of the private sector is maintained. That is, the central bank continuously and reliably meets the demand for CBDC according to the target quantity or price;
There is a functioning and liquid market for CBDC eligible assets;
At least one private sector participant (which can be a bank or a non-bank financial institution) can receive/originate payments from bank deposits and is active in the CBDC market and the CBDC eligible asset market.
Sell/buy CBDC to/from households and companies in exchange for bank deposits;
Sell/buy deposits to/from other private sector counterparties in exchange for central bank eligible collateral (e.g. government bonds);
Sell/buy bonds to/from the central bank in exchange for CBDC;
image description
Libra-x is a cryptocurrency stablecoin issued by the Libra-x Association, a consortium of enterprises, which is consistent with the face value of other forms of RMB currency (such as cash and bank deposits) (that is, to maintain parity);
Libra-x allows a wide range of access subjects, including commercial banks, non-bank financial institutions, households and companies, etc.;
Libra-x is a token-based system;
Libra-x can be interest-bearing, and under reasonable assumptions, it can pay interest different from central bank reserves;
Libra-x supports cross-border payments;
The issuance mechanism of Libra-x supports a wide range of eligible collateral, including RMB treasury bonds and sovereign bonds, foreign currency sovereign bonds, and native digital assets, etc., allowing a wider range of subjects to participate in the issuance of Libra-x.
From the Libra-x monetary policy trilemma, we can see that the Libra-x design chooses the monetary autonomy that can set the interest rate and maintains the policy goal of maintaining the parity relationship between Libra-x and RMB, while abandoning Libra-x and the existing type of currency of the central bank (cash, reserves and bank deposits) free convertibility.
Sell/buy Libra-x to/from households and companies in exchange for bank deposits;
Sell/buy deposits to/from other private sector counterparties in exchange for Libra-x Association eligible collateral;
Sell/buy eligible collateral to/from the Libra-x Association in exchange for Libra-x;
image description
Bech, M and R Garratt (2017): “Central bank cryptocurrencies”, BIS Quarterly Review, September, pp 55–70.
BIS Committee on Payments and Market Infrastructures, Markets Committee, Central bank digital currencies
Wang Xin, "The State Council has approved the research and development of the central bank's digital currency" speech,https://www.zilian8.com/163931.html
Kimball, M., & Agarwal, R. (2015). Breaking Through the Zero Lower Bound. IMF Working Paper(15/224)
Bjerg, O. (2017). Designing New Money: the policy trilemma of central bank digital currency. Copenhagen Business School.
Keynes, John M. 1930. A Treatise On Money. London: Macmillan.
Mundell, Robert A. 1963. ‘Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates’. Canadian Journal of Economics and Political Science/Revue Canadienne de Economiques et Science Politique 29 (04): 475–485.
Fleming, J. Marcus. 1962. ‘Domestic Financial Policies under Fixed and under Floating Exchange Rates’. IMF Economic Review 9 (3): 369–380.
Obstfeld, Maurice, and Alan M. Taylor. 1997. ‘The Great Depression as a Watershed: International Capital Mobility over the Long Run’. Working Paper 5960. National Bureau of Economic Research. ———. 2002. ‘Globalization and Capital Markets’. Working Paper 8846. Cambridge MA: National Bureau of Economic Research.
Kumhof, M., & Noone, C. (2018). Central Bank Digital Currencies design principles and balance sheet implications. Bank of England.
Meaning, J, J Barker, E Clayton and B Dyson (2018), ‘Broadening narrow money: monetary policy with a central bank digital currency’, Bank of England Working Papers, No. 724.
Gürtler, K, Nielsen, S T, Rasmussen, K and M Spange (2017), ‘Central bank digital currency in Denmark?’, Analysis, No. 28, December 2017. Available at: http://www.nationalbanken.dk/en/publications/Pages/2017/12/Central-bank-digital-currency-in-Denmark.aspx
Callesen, P (2017), ‘Can banking be sustainable in the future? A perspective from Danmarks Nationalbank’, Speech at the Copenhagen Business School 100 years celebration event, Copenhagen, 30 October 2017. Available at: https://www.bis.org/review/r171031c.htm
Long Baitao, CFMI Token Financial Model and Stablecoin Mechanism,https://www.8btc.com/article/451663
John Barrdear and Michael Kumhof, The macroeconomics of central bank issued digital currencies
REMARKS BY JAVIER GUZMÁN CALAFELL, DEPUTY GOVERNOR AT THE BANCO DE MÉXICO, ON “SOME CONSIDERATIONS ON CENTRAL BANK DIGITAL CURRENCIES”. THE OMFIF FOUNDATION–FEDERAL RESERVE BANK OF ST. LOUIS SYMPOSIUM “THE NEXT DECADE OF FINANCE: ASSESSING PRIORITIES AND IMPLICATIONS FOR SOCIETY, POLITICS AND ECONOMICS”. Washington University in St. Louis, Missouri, July 9, 2019
Figure 2: CBDC Monetary Policy Trilemma
According to the definition of CBDC, maintaining the par value consistency between CBDC and other forms of currency of the central bank is a policy goal that must be chosen. There are two remaining policy goals, choose to be able to set the interest rate of CBDC, or choose the free exchange between CBDC and other forms of currency of the central bank?
CBDC is designed to support cross-border payments. If CBDC can be freely exchanged with other forms of currency of the central bank, it will directly destroy China's existing foreign exchange management system; in addition, considering that CBDC is actually a risk-free liquidity that is safer than bank deposits Assets, if CBDC can be freely exchanged with central bank reserves, it will easily cause users to switch bank deposits to CBDC on a large scale, which will form a "run" on the entire banking system (detailed analysis later). Considering the above two points, we must exclude the policy goal of free convertibility.
Therefore, in the design of CBDC, we choose to maintain the policy goal of maintaining the same par value of CBDC and other forms of central bank currency and being able to set the interest rate of CBDC, and abandon the policy goal of free exchange between CBDC and other forms of central bank currency.
secondary title
CBDC Core Principles
In a paper by Michael Kumhof of the Bank of England and Clare Noone of the IMF[10]The core principles of CBDC are put forward to reduce the risks brought by the introduction of CBDC to the commercial banking system. These principles are: (1) CBDC pays adjustable interest rates; (2) CBDC is different from central bank reserves, and the two cannot be exchanged; (3) the central bank or commercial banks do not guarantee the conversion of bank deposits to CBDC; (4) the central bank only Issue CBDC against eligible collateral (primarily government bonds).
CBDC pays adjustable interest rates
The most fundamental reason for paying adjustable interest rates for CBDC is to maintain price stability and maintain parity between CBDC and other currencies. The supply and demand of CBDC in the market requires a price to reach equilibrium. Assuming that CBDC pays a nominal interest rate of zero like cash, if the central bank oversupplies CBDC because of inaccurate forecasts of demand for real CBDC balances, then there are only two ways to eliminate excess supply: (1) CBDC depreciates and thus destroys CBDC Parity with other forms of money, or (2) reducing the real value of nominal CBDC balances to align with real demand for CBDC, clears the market through general price levels, but doing so directly contradicts central bank anti-inflation objectives. If the interest rate paid by the CBDC is fixed, there is no third possibility here. Yet adjustable interest rates could increase demand for CBDC without central bank balance sheet adjustments, disruption of parity, or price level adjustments.
CBDC is different from reserves, the two cannot be exchanged
First, this principle helps maintain financial stability when depositors seek to switch to CBDC in large numbers. If CBDC is freely convertible with reserves, in which case a single bank's willingness to pay CBDC for deposits could be a sufficient threat to financial stability. This stems from the bank's commitment to settle interbank payments against reserves through the RTGS system. When a bank pays CBDC for deposits, all non-bank entities can take advantage of this by transferring deposits to that bank. When draining deposits to this bank, other banks must settle interbank payments with reserves through the RTGS system. When a central bank supports the instant exchange of reserves for CBDC, the bank can use its newly acquired reserves to obtain CBDC to pay depositors who come to it for that purpose. This would result in the destruction of deposits and trigger a system-wide, almost instant bank run. In the same way, if the reserve fund is the same as the CBDC, the run can be triggered in the same way through the RTGS system.
Second, this principle enables both the reserve fund and the CBDC to serve their respective core purposes. CBDC can be used not only as a retail payment medium, but also as an inter-bank settlement asset, and also supports cross-border payments. This leaves the central bank with a new policy tool, notably the quantity or interest rate of CBDC. This allows the central bank to maintain control over the amount of reserves in the financial system and their interest rates. Maintaining control over reserves allows the central bank to continue to influence the risk-free interest rate in the economy, which is a key factor in real investment decisions and allocation decisions across cycles.
Paper by Jack Meaning and Ben Dyson et al., Bank of England[11]It is believed that the reserve market has been integrated into the new CBDC system. Alternatively, they postulate that CBDCs are created by expanding access to reserves rather than by introducing a new central bank currency. This regime of expanded access to reserves could affect in unknown ways the established monetary policy transmission mechanism, at least through the policy rate, if reserves and CBDC remain separate.
Paper by Michael Kumhof[10]Further, from the perspective of CBDC convenience yield (convenience yield), the scenarios of household and corporate sector arbitrage and bank arbitrage were investigated respectively, and it was demonstrated that in the equilibrium state of arbitrage and non-arbitrage, the interest rates of reserves and CBDC will not converge to the same value, so they are different. Core arguments include:
Some CBDC Research[11]It is proposed that banks are obliged to convert deposits into CBDC in any amount at any time. They see this as key to maintaining parity between CBDCs and other forms of central bank money. paper[10]It is argued that this proposal is neither dangerous nor necessary as a necessary feature of a CBDC.
The danger first comes from guaranteeing the credibility of this obligation. The banking sector may be able to cope when net inflows into CBDC and net outflows of deposits are small and slow-moving. The challenge, however, is meeting obligations in times of stress. Assuming that the entire non-bank sector needs more CBDC, so that the entire banking sector runs out of its own CBDC, banks need to sell or repurchase eligible assets to the central bank to obtain CBDC. The central bank may have to expand the catalog of eligible collateral, or even waive collateral requirements entirely for large unsecured loans. The credibility of this obligation therefore depends on the central bank's commitment as a lender of last resort. Given the potential size of the liquidity requirement, it could pose unprecedented risks to central bank balance sheets. That is, the guarantee that the bank is ready to convert deposits into CBDC must eventually be guaranteed by the central bank.
If the central bank commits to accepting bank deposits in exchange for CBDC in an emergency, it would open the door for a run on bank deposits to CBDC. It is conceivable that such a run could run almost instantaneously and on an unprecedented scale because it is a run from the entire banking system rather than from one bank to another. This reflects that the liquidity support that the banking sector may need to request from the central bank will be an order of magnitude larger than a traditional bank run.
The convertibility of guaranteed deposits to CBDC is also not necessary to maintain parity between CBDC and bank deposits. In fact, the parity between CBDC and bank deposits can be maintained as long as the following conditions are met:
Condition 1) is self-explanatory. According to the design goals of CBDC, eligible assets can be government bonds or native digital assets. The former corresponds to a mature bond trading market, and the latter corresponds to an emerging digital asset exchange. Conditions 2) and 3) allow the agent to exploit any arbitrage opportunities in this market to push the parity deviation between CBDC and bank deposits to zero. Under these conditions, a reasonable outcome would be that there would be a large liquid private market in which households and the corporate sector could trade bank deposits and CBDC with each other, with a small number of participants able to access inventories of eligible assets to obtain additional CBDC from the central bank . Relying on this market, coupled with at least one participant being able to trade on any arbitrage opportunities, therefore ensures parity between bank deposits and CBDC. The risk of relying on this market is much less than that of relying on bank convertibility guarantees.
We further illustrate that the above-mentioned arbitrage mechanism drives the maintenance of parity between CBDC and deposits. Assume that CBDC is traded to deposits at an exchange rate of 1-x (x>0). Then, financial institutions can obtain deposit inflows of 1 RMB unit from customers, buy 1 RMB unit of bonds in the market, immediately sell 1 unit of bonds to the central bank in exchange for 1 unit of CBDC, and deliver 1-x CBDC to customers, thereby locking x units of CBDC are risk-free profits. Arbitrage will drive x to zero. Note that it is the central bank's commitment to pay 1 unit of CBDC for 1 unit of "deposit currency" worth of it, i.e. the central bank uses a par exchange rate in its operations, that makes this strategy work.
From the perspective of preventing runs, there are also several other ways to establish a CBDC system to limit the conversion of deposits into CBDC, for example, limiting the amount of deposits that banks must convert into CBDC within a specified time or limiting the amount of CBDC held in a CBDC account. However, these constraints run the risk of not maintaining parity even during normal times. Furthermore, papers such as Gürtler and Nielsen et al.[12]As stated, the holding cap of CBDC will limit the quantity or value that can be traded, which may damage the effectiveness of CBDC as a payment system. On Financial Stability, Callesen's Dissertation[13]argues that if a cap is set high enough for a CBDC to be useful in transactions, it will be too high to control the risk of a bank run. This core principle therefore expresses that banks are not obliged at all to provide CBDC for deposits. Banks are free to redeem CBDC for deposits, or not, at their discretion. This is a flexible approach that allows banks to decide for themselves how to manage the risks they face.
The central bank issues CBDC based only on eligible collateral (mainly government bonds)
The core principle is that the central bank only uses the eligible collateral it chooses to exchange for CBDC, and it does not support the exchange of reserves or bank deposits for CBDC. This principle allows the central bank to manage the risks that issuing a CBDC brings to its own balance sheet, just as it does for issuing reserves and cash. More importantly, these issuance arrangements could eliminate the risk of runs on the banking sector as a whole, either because CBDC and reserves are convertible or because CBDC and bank deposits are instantly convertible.
Now, we explain how to provide CBDC from the perspective of policy rules. The quantity rule determines the quantity of the corresponding central bank currency and allows its interest rate to be adjusted. Price rules determine the interest rate on the corresponding central bank currency and allow its quantity to be adjusted. The terms price rule and rate rule are interchangeable.
CBDC can be provided under volume rules or price rules. According to the rules on the number of CBDCs, the central bank will not issue additional CBDCs in response to increased demand, but will allow interest rates on CBDCs to be adjusted downward until the market clears. Under the CBDC price rule, the central bank sets the CBDC interest rate and allows the private sector to determine its quantity. In doing so, the central bank freely issues (or withdraws) CBDC to the private sector on demand, limited to eligible assets. According to such rules, the issuance arrangement of CBDC is crucial.
Assume eligible assets consist only of government bonds. A private-sector agent wishing to convert bank deposits into CBDC must first exchange the deposits for bonds, which are subsequently offered to the central bank in exchange for CBDC, or the agent must find a counterparty who exchanges bonds from the central bank for CBDC and is willing to exchange the bonds with the agent deposits in exchange for CBDC. Through these transactions, deposits do not leave the general banking system as long as the bonds are not acquired from the banking sector, they are simply transferred to the sellers of the bonds. Thus, bank financing in general does not “disappear” when the private sector acquires additional CBDC. The key point to achieve this result is that the central bank will not accept bank deposits in exchange for CBDC, in other words, it does not directly provide funds to commercial banks. This forces the agent to first exchange bank deposits for assets other than bank liabilities, here bonds, and parties that increase their holdings of CBDC will reduce their bond holdings rather than deposit holdings.
If the source of the bonds is the banking sector, the overall balance sheet of the banking sector shrinks, but as we will discuss later, this does not immediately affect the amount of credit or liquidity in the economy. Furthermore, if banks are not obligated to provide CBDC for deposits (as suggested above), then banks would not be forced to use their own bond holdings to provide CBDC for deposits in the first place.
At present, the RMB issuance mechanism is mainly based on US dollar foreign exchange funds, supplemented by an open market operation mechanism (that is, commercial banks borrow/return additional liquidity by mortgaging qualified assets and entering into repurchase agreements with the central bank). It can be seen that the CBDC issuance mechanism is different and similar to the RMB. Domestic financial academics and regulators have been calling for changes to the mechanism that relies too much on foreign exchange to avoid the RMB being overly affected by the dollar's monetary policy and economic cycle.
CBDC provides China with a suitable opportunity to try to change the CBDC issuance mechanism: cancel foreign exchange holdings, and mainly obtain/recover liquidity by selling/purchasing qualified assets to the central bank; Repurchase agreements to borrow/return additional liquidity. At present, the People's Bank of China has developed a wealth of policy tools for open market operations, allowing financial institutions to borrow/return liquidity from the central bank, including short-term liquidity adjustment tools (SLO) within 7 days, and standing lending facilities for 7 days to three months ( SLF), the medium-term lending facility (MLF) of three months to one year, or some instruments with longer maturities. The central bank only needs to adapt these tools appropriately to apply to CBDC.
The central bank can also formulate a special catalog of eligible collateral for CBDC, which can include high-credit RMB treasury bonds/sovereign bonds, financial corporate bonds, and corporate bonds. In order to strengthen the positioning of CBDC as a super-sovereign currency, foreign currency sovereign debt and native digital assets (such as Bitcoin and Ethereum, etc.) can also be added to the list of eligible collaterals, which can weaken the impression that CBDC is dominated by China and encourage relevant countries. Actively participate in the issuance of CBDC. Adding foreign currency assets to the list of eligible collateral will bring additional exchange rate risks to the central bank’s issuance of CBDC, but mainstream central banks have relatively rich experience in this regard. Compared with traditional bonds, native digital assets are highly volatile, and require more careful management of their market risk and liquidity risk. The author's thesis[14]secondary title
China CBDC Economic Model
Paper by Michael Kumhof[10]image description
Figure 3: China’s CBDC economic model
Access to CBDC by all agents does not mean that the central bank provides retail services to all CBDC holders. In the CBDC economic model, only banks and non-bank financial institutions can directly interact with the central bank to buy and sell CBDC, while households and companies must use CBDC exchanges to exchange deposits for CBDC. Of course, households and companies can always trade with each other to buy and sell CBDC . A CBDC exchange could be a new separate entity, or run by a bank or non-bank financial institution, but for clarity, this article treats a CBDC exchange as a separate entity.
Commercial banks maintain debit and credit positions (denoted by "bank deposits" and "bank loans" in the figure) for non-bank financial institutions, households, and corporations. NBFIs provide financial services to households and firms, such as fund management services, with the result that NBFIs assume debt to the household and corporate sectors.
CBDC exchanges execute four types of transactions as follows:
Figure 4: Description of the operation of the CBDC exchange
secondary title
Financial Stability Analysis of CBDC Economic Model
2016 Michael Kumhof in paper[15]Using DSGE modeling to calibrate the macro data of the United States before the crisis, it is found that a CBDC based on the issuance of 30% of GDP by treasury bonds can permanently increase GDP by 3%. In addition, the use of countercyclical CBDC price and quantity rules as a secondary monetary policy tool can Significantly enhance the central bank's ability to stabilize the business cycle. Although there is no in-depth analysis, we can cautiously guess that the introduction of CBDC may stimulate economic activity and may also improve the efficiency of the monetary system.
To assess the impact of the CBDC economic model on economic outcomes, we use “gross credit” to denote the total amount of funds received by borrowers in the non-bank sector (including non-bank financial institutions, households, and companies), which determines the investment and transaction capabilities of these borrowers , using "aggregate liquidity" to represent the ability of the non-bank sector to conduct economic transactions. "Total credit" is roughly equal to the sum of "loans" in the balance sheet of the banking sector and "non-loan bank assets" held by the banking sector and the non-bank sector, and "total liquidity" is roughly equal to the sum of bank deposits held by the non-bank sector, The sum of cash and CBDC.
Examine balance sheet changes from a sectoral perspective. When the non-bank sector attempts to offload deposits in excess of its needs, they either exchange deposits for non-loan assets held by banks (such as securitized assets) or deposits for non-deposit-type liabilities provided by banks (such as commercial bank bonds) . paper[10]The analysis shows that in all scenarios, the balance sheet of the central bank will expand, and in most scenarios, the balance sheet of the banking sector will shrink, but the total credit and total liquidity will not be directly affected by the switch of bank deposits to CBDC. On the other hand, it may also increase, because the introduction of CBDC liquidity may stimulate economic activity. The expansion of the central bank's balance sheet is an expected outcome as it acquires assets to issue CBDC. The reason for the shrinkage of the banking sector is that the banking sector generally needs to sell assets to the central bank to respond to the growth in demand for CBDC in the non-bank sector, or to sell assets to the non-bank sector in response to the reduction in its bank deposit demand. If the banking sector sells non-deposit bank debt to the non-bank sector in response to a reduction in its deposit needs, the composition of the banking sector's balance sheet changes but its capacity remains the same.
Although total credit will not be directly affected by the switch of bank deposits to CBDC, however, through bank lending rates, it may lead to a change in the equilibrium state of credit quantity. Some of these changes may be due to regulation. For example, Basel III requires limits on the share of "unstable" bank funding (through the "net stable funding ratio") and minimum liquid asset holdings to cover potential outflows of certain types of funds (through the "net stable funding ratio"). Liquidity Coverage Ratio"). These restrictions, in turn, affect banks' ability to lend. The switch of bank deposits to CBDC not only exposes banks to the loss of relatively stable retail deposits, but may also remove relatively highly liquid bonds. Commercial banks may have to replace bank deposits with wholesale funding. These circumstances may affect regulatory ratios and thus the amount or price of credit. The vice-governor of Mexico's central bank recently expressed similar concerns[16]。
Regarding the bank run risk brought about by the introduction of CBDC, the core principles of CBDC proposed above for this risk, and the CBDC economic model are suggested according to these principles, so the risk of bank run has been fully discussed and resolved.
Chapter 2 Libra-x Economic Model
China's CBDC and Libra-x, except for the different issuers, have almost the same functions and positioning. In addition, the design of CBDC is almost completely decoupled from the existing central bank system. For example, CBDC is different from central bank reserves, serves completely different core objectives, pays interest rates different from reserves, and is not freely convertible with reserves; The policy tools related to CBDC are independent of the existing monetary policy tools; the operating structure of CBDC is independent of the existing system of the central bank. Because of the decoupling of CBDC from the existing central bank system, the CBDC design proposed in this paper can be translated to Libra-x with almost no modification, except for some necessary central bank-related modifications. The previous conclusions about the CBDC monetary policy trilemma, the four core principles of CBDC and the impact of the CBDC economic model on financial stability can be directly applied to Libra-x, so they will not be detailed here. Therefore, we only list some of the most important conclusions of Libra-x here. For details, please refer to the relevant content of CBDC.
Libra-x has the following characteristics:
In order to avoid the introduction of Libra-x from bringing systemic risks to the existing banking system, the design of Libra-x follows the core principles similar to CBDC: (1) Libra-x pays adjustable interest rates; (2) Libra-x is different from the central bank Reserve funds, the two cannot be exchanged; (3) The Libra-x Association or commercial banks do not guarantee the exchange of bank deposits to Libra-x; (4) The Libra-x Association only issues Libra-x based on qualified collateral.
The Libra-x economic model is shown in Figure 5:
Figure 5: Libra-x Economic Model
All market participants, including banks, non-bank financial institutions, households and companies, have access to the Libra-x system, so Libra-x acts as the currency for all agents in the economy. In this model, only banks and non-bank financial institutions can directly buy and sell Libra-x with the Libra-x Association, while households and companies must use the Libra-x exchange to exchange bank deposits for CBDC. Of course, households and corporate sectors can trade with each other Come buy and sell Libra-x. The Libra-x exchange can be a new independent entity, or operated by a bank or non-bank financial institution. For the sake of clarity, this article assumes that the Libra-x exchange is an independent entity.
The Libra-x exchange executes the following four types of transactions:
Figure 6: Operation instructions of Libra-x exchange
The Libra-x exchange operates as shown in Figure 6, which will charge fees or spreads for selling/buying Libra-x services to households and companies. It is also conceivable that banks might choose to subsidize Libra-x exchange service fees for their customers, just as banks subsidize the cost of cash distribution for their customers today. To supplement its Libra-x holdings, the Libra-x Exchange uses the deposits it receives to purchase eligible collateral, and then uses these assets to acquire Libra-x from the Libra-x Association. The Libra-x exchange has an account with at least one commercial bank so that it can receive deposits. The Libra-x Exchange periodically rebalances its holdings of eligible collateral, bank deposits, and Libra-x float back to the target allocation.
In the same way, the impact of CBDC on financial stability, total credit and total liquidity will not be directly affected by the switch of bank deposits to Libra-x. In fact, it may increase, because the introduction of Libra-x liquidity may stimulate economic activity. In addition, the risk of bank runs brought about by the introduction of Libra-x has been well resolved by the design of Libra-x.
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