These include the fundamental role of the central bank, as well as more detailed policy choices regarding: how to ensure that monetary policy transmission channels continue to function; Several central banks have responded to the emergence of new non-bank payment service providers (PSPs) by expanding access to clearing accounts at central banks in a bid to increase competition. What is the right level of competition between domestic digital currencies, especially between private ones and the central bank version.
This two-tiered system – where the public has digital accounts with commercial banks from which they can make payments and physically withdraw cash, and commercial banks that have accounts with the central bank – is the current system in much of the world. The customer's claims against the intermediary are fully backed by the intermediary's claims against the central bank. In the first, everyone holds accounts with the central bank and every payment transaction is simply a transfer from one account to another.
In the second, the central bank issues a digital token, and manages an authorized system to clear transactions. While the central bank may call in intermediaries to do the initial KYC, all claims are on the central bank, and all transaction information is with it. Because it has the data, the responsibility of maintaining the customer relationship, including KYC, may inevitably fall on the central bank.
Today, someone who wants a claim against the central bank must physically withdraw and store money, which incurs transaction costs.
Background
More than 470 million Indian adults opened a bank account with a financial institution and the proportion of the population with access to banking exceeded 80 percent. The India Stack is a set of standards, infrastructure components, and independent APIs (Application Programming Interfaces) or platforms, each focused on a specific task, yet capable of being strung (or stacked) together to perform a common task. . UPI is an instant real-time retail payment system that uses an open API architecture developed by the National Payments Corporation at about 1 percent compared to 3.5 percent in the United States.
Some of the greatest advances in retail payments have occurred in developing economies that are less hampered by legacy systems and the entrenched vested interests of established players. Note: This box is largely drawn from "Designing Digital Infrastructure: Lessons from India" by Derryl D'Silva, Zuzana Filková, Frank Packer and Siddharth Tiwari, BIS Working Paper 106, December 2019 and "India Stack-Digital Infrastructure as Public Good”, Vivek Raghavan, Sanjay Jain, Pramod Varma, Communications of the ACM, November 2019, Vol. To reap the benefits of this division of labor, the core infrastructure provided by the central bank must build in a robust “back end” which promotes interoperability and a level competitive playing field among payment service providers.
India's UPI system (see Box 1) is an example of how a central bank can provide such an infrastructure. Payments can be made and settled bilaterally without the need to trace a chain of interconnected intermediate balance sheets, regardless of the geographical proximity of the sender and receiver. A key policy objective is to increase the efficiency of the payment system while safeguarding (if not improving) the transmission of monetary policy, financial stability, financial inclusion, investor protection, privacy, tax compliance and payment legality.6 These objectives involve a complex policy decision, as trade-offs include several dimensions of political space.
Users who are segregated into separate, closed payment networks will not benefit from the efficiencies that come from network effects – being part of a large and open community of users with whom they can transact easily and at low cost. Network effects are likely to be particularly strong when payment services are provided by BigTechs – that is, large companies with established technology platforms7 – that aggregate other digital services using their existing businesses in e-commerce, social media or search. The data generated by existing platforms could amplify network effects, resulting in a data-network activities (DNA) loop that entrenches a dominant private service provider.8 In this way, the benefits of network effects in payments should be weighed against the harm. - numerical effects of dependence on dominant private companies.
Here, of course, the challenge is to strike a balance between providing a level playing field to existing players and leaving room for competition and innovation. A second possible policy response is to define a role for the public sector in providing basic infrastructure in order to promote a level playing field that nevertheless reaps the benefits of network effects. The development of the modern Internet was made possible by the common adoption of standards, such as the TCP/IP protocol, and the convention governing email addresses.
Policies regarding compliant digital currencies
Perhaps more worrisome in this regard would be a token-based central bank digital currency issued by a credible central bank. In this context, a direct central bank digital currency (CBDC) can find justification when the CBDC can increase the efficiency of this infrastructure. Among other related concerns, the central bank may need to expand its balance sheet to accommodate the larger volume of advance funding.
As noted by Brainard (2019) and Carstens (2019a), risks and operating costs for the central bank can be daunting. The economic (and possibly political) power concentrated in the central bank would also be formidable. This raises the potential for a link between the central bank's monetary policy independence and its reputation among voting consumers for the quality of its CBDC services.
Depending on the design, the central bank can become a repository for economy-wide data at the transaction level. The central bank's responsibility to protect privacy and data, including from other parts of government, can be onerous. In general, an increase in the efficiency of the payment system will increase the speed and extent of the pass-through of key interest rates to various interest rates in the private sector.14 The central bank has the option of offering interest rates (typically negative) per CBDCs.
Without an effective public-private partnership, the central bank could also become responsible for monitoring anti-money laundering at the transaction level/. Concerns associated with the size of the central bank's footprint resulting from direct CBDC can be mitigated by partially isolating the central bank from ordinary users. Another would be an approach where narrow payment banks invest customer deposits exclusively in central banks.
In all cases, the private sector rather than the central bank will be responsible for onboarding CBDC users to application program interfaces and for the distribution and exchange of the CBDC. The general public can exchange e-CNY from the authorized operators, who can exchange the same amount of e-CNY from the central bank. Also, endorsement by the central bank will smooth possible surges in consumer demand for the crypto-assets.
The authors of this report and the G30 are grateful to the People's Bank of China for contributing to this box on the current state of the Central Bank of China's digital currency project. Account-based central bank digital currencies, which are designed for the exclusive use of regulated financial institutions for "bulk" (interbank) purposes, have long existed in the form of conventional central bank deposits.
An approach to evaluating the policy options
Assessment of the impact of central bank digital currencies on private banks.” Working Paper 2018-026C, Federal Reserve Bank of St. Enabling Cross-Border Transfer of High Value Using Distributed Ledger Technologies.” Jasper-Ubin Design Paper, Bank of Canada and Monetary Authority of Singapore, May. Central bank digital currency.” Joint Report of the Committee on Payments and Market Infrastructures (CPMI) and the Markets Committee.
Federal Reserve Actions to Support Interbank Settlement of Faster Payments.” Board of Governors of the Federal Reserve System, Washington, DC, August. Digital Currencies, Stablecoins and the Evolving Payments Landscape.” Board of Governors of the Federal Reserve System, Washington, DC, October 19. The growing challenges for monetary policy in the current international monetary and financial system." Speech delivered at the Jackson Hole Symposium, Bank of England, Jackson Hole, 23 August.
Central Bank Digital Currency and Monetary Policy.” Bank of Canada, Staff Working Paper 2018-36, July, Bank of Canada, Ottawa. Expanding Tight Money: Monetary Policy with a Central Bank Digital Currency.” Bank of England, Staff Working Paper No. 724, Bank of England, London, May. Chairman of the Board of Trustees, Group of Thirty Former Chairman, Former Governor of JPMorgan Chase International, Bank of Israel.
Senior Research Fellow at the Griswold Center for Economic Policy Studies, Princeton University Former President, Federal Reserve Bank of New York Former Partner and Managing Director. Former Chairman of the Board, BM&F-Bovespa Former Governor, Banco Central do Brasil Timothy F. Former Secretary of the Treasury, Former President of the United States, Federal Reserve Bank of New York Gerd Häusler.
Distinguished Service Professor of Finance, Chicago Booth School of Business Former Governor, Reserve Bank of India. Senior Fellow and former Chairman of the Board, Institute for New Economic Thinking Member of the House of Lords, United Kingdom Former Chairman, Financial Services Authority Kevin M. Professor, Warsaw School of Economics Former President, National Bank of Poland Former Deputy Prime Minister And .
President, China Society for Finance and Banking Former Governor, People's Bank of China Former President, China Construction Bank. Former President, Morgan Stanley International Former COO, Federal Reserve Bank of New York Guillermo de la Dehesa.
