Academic Assistantship Task 2
Table of Contents
What is CBDC ?................................................................................................................1
Country-Wise Classification of CBDC - whether it is Retail, Wholesale or Direct Retail....2
1. Retail CBDCs....................................................................................................................2
China.................................................................................................................................................2
Nigeria...............................................................................................................................................2
Singapore..........................................................................................................................................2
Digital Euro.......................................................................................................................................3
Cambodia..........................................................................................................................................3
2. Wholesale CBDCs.............................................................................................................3
France................................................................................................................................................3
Australia............................................................................................................................................3
Switzerland.......................................................................................................................................3
Effect of CBDC on Inflation..............................................................................................4
Effect of CBDC on Green Finance....................................................................................4
Effect of CBDC on Monetary Policy..................................................................................5
Reference:.........................................................................................................................6
What is CBDC ?
CBDC stands for Central Bank Digital Currency is a government-issued digital currency
which is backed and upheld by the central bank of the concerned nation. CBDC is the legal
tender that is issued by the national bank in a digital form. It is an electronic record or we can
call it a digital token of the official currency that is issued by the central bank of a nation.
In a retail CBDC, the digital form of currency issued by the national bank of the concerned
country would be used by the consumers and the businesses. Retail CBDC would work with
the motive of taking on the traditional attributes of the physical that is currency present in the
concerned economy. Retail CBDC based on DLT has the features of anonymity, traceability
and availability of 24 hours a day and for 365 days a year. The retail CBDC proposal is
popular among the emerging or developing economies due to the motivation of taking the
lead in the rapidly growing and emerging fintech industry, to promote financial inclusion by
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accelerating the shift to a cashless society, and to reduce the cash printing and handling
costs(Editorial Team, 2019).
A wholesale CBDC is mainly for financial institutions that hold the reserve deposits with the
national bank. This could be used for improving the payments and securities settlement
efficiency and also to reduce the counterpart credit and liquidity risks. A value based
wholesale CBDC would replace and complement the reserves at the central bank with a
restricted access digital token. A token would be a bearer asset, meaning that during the
transaction, the sender would transfer value to the receiver without involvement of the
intermediaries(Editorial Team, 2019).
Country-Wise Classification of CBDC - whether it is Retail, Wholesale or Direct Retail.
1. Retail CBDCs
China – The national bank of China is the first around the globe in the CBDC
race. The People’s Bank of China was the first to introduce CBDC in 2020. They
launched a pilot version of their digital currency (eYuan) which is named as
Digital Currency Electronic Payment (DCEP) System with the expectation to be
widespread by 2022. It is expected that the digital currency of China could roll out
for larger trials at the Beijing Winter Olympics next year.
Nigeria – The national bank of Nigeria launched the digital form of currency
called e-Naira. The digital currency e-Naira is the digital equivalent of the
national currency Naira. It is a continuation to its CBDC that the country had
started in 2017. The digital currency has the similar features as the physical
currency so that it can be the official tender of Nigeria. The introduction of eNaira
is backed by the perceived opportunities that the digital form of currency may
benefit the economy in resilient payment system with lesser costs and moving to a
cash less economy.
Singapore – The Monetary Authority of Singapore has conducted a successful
experiment for cross border and cross-currency payments with the help of CBDC.
A retail CBDC in Singapore would be a direct claim to the MAS, while the private
sector is responsible for handling distribution and customer contact activities such
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as KYC checks. Moreover, the Singapore dollar retail CBDC will have to be
stored in an electronic wallet.
Digital Euro – The European Central Bank (ECB) launched an experiment on
Digital Euro in 2020 with the aim of exploring the opportunity to create digital
Euro as a CBDC from the perspective of Eurosystem.
Cambodia – The Central Bank of Cambodia launched ‘Project Bakong’ with the
aim to simplify and expedite access to financial services for its citizens. The
project allows the users to transact in Cambodian Riel and USD. The project also
uses DLT for recording the transactions that also reduces the burden of the
financial institutions.
2. Wholesale CBDCs
France – The central bank of France initiated a joint experiment program in 2020
with market participants to look for opportunities for issuing wholesale CBDC as
a new form of money that is used for circulating central bank money on a
distributed ledger platform. This would include settling securities in different
configurations and for a variety of assets and to achieve cross-border and cross
currency transactions and to explore the diverse potential types of multiple CBDC
arrangements.
Australia – The Reserve Bank of Australia conducted project Atom jointly with
the Commonwealth Bank of Australia, National Australia Bank and additional
private entities in 2020-2021. The project implies a proof-of-concept for issuing a
tokenized CBDC, which would represent a digital form of currency that is a direct
claim on the central bank. Project Atom, explored issuance of two-tier wholesale
CBDC to commercial banks wherein commercial banks then made it available to
eligible wholesale market participants on the platform. This preserves the current
role of the commercial banks which includes customers onboard and all activities
related to the customers.
Switzerland – The Swiss National Bank has started testing wholesale CBDC with
commercial partners with the help of Project Helvetia. They completed the second
phase of the project by integrating a wholesale CBDC into the existing back-office
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systems. The project is envisioned as a multi-phase investigation into the
settlement of tokenised assets in central bank money. The project aims to prepare
central banks for a future where the distributed ledger technology based tokenised
financial assets are the norm. The project also aims at solving operational, legal
and policy related issues regarding settlements(Kahraman, 2022).
Effect of CBDC on Inflation
With the introduction of CBDC, the banking sector will be the most affected sector as the
country will start converting their deposits to CBDC. If the consumers decide to withdraw
their deposits and move to CBDC, the commercial banks will have to take some steps to
retain customers which would be in the form of raising interest on deposits. This in turn could
either lead to banks experience compression of margin or increase the interest rate on loans.
If the public interest for CBDC rises, the demand increases which would have an inevitable
influence on the balance sheet of the central bank. With the increase in demand for CBDC,
the balance sheet of the national bank is likely to outperform. The commercial banks would
experience funding outflow as people would withdraw their deposits from the bank and shift
to CBDC which implies that the central bank will have to support liquidity to those
commercial institutions. Thus, the trajectory and persistence of inflation will need a close
watch as a country starts shifting towards CBDC.
Effect of CBDC on Green Finance
The BIS Innovation Hub has identified six key areas that it will work on to foster
collaboration with the central banks on financial technology. The six key areas include
suptech and regtech, next gen financial market infrastructures, CBDC, open finance, cyber
security and green finance. Specific projects have already been taken in the pipeline for
building a stereotype using multiple CBDCs to explore the feasibility of cross border and
faster and cheaper payments. Also, the hub has decided to work on a concept for a regulatory
platform employing data analytics and visualisation to be able to provide the supervisors with
more detailed and time insights that will be beneficial in addressing the risks.
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Effect of CBDC on Monetary Policy
In practice, issuing CBDC is unlikely to assist the central bank in improving the efficacy of
monetary policy. One problem is that in order for a central bank to gain any possible
monetary policy advantages, the CBDC will have to be ready to bear the interest, and the
cash will have to be eliminated or restricted in its usage. Furthermore, the scale of these
gains, which are derived from breaching the ELB in the short run and lowering the
opportunity cost of maintaining the liquidity in the long run is not very well known and
requires additional investigations. Thus, issuing a CBDC may not be the only option for a
central bank to reap these benefits.
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Reference:
Kahraman, E. (2022, January 13). Swiss central bank tests wholesale CBDC with
commercial partners. Cointelegraph. https://cointelegraph.com/news/swiss-
central-bank-tests-wholesale-cbdc-with-commercial-partners?
utm_source=Telegram&utm_medium=social
Editorial Team. (2019, July 26). Towards a central bank digital currency: retail
versus wholesale. Finextra Research.
https://www.finextra.com/blogposting/17556/towards-a-central-bank-digital-
currency-retail-versus-wholesale
Dobrić, L. (2020, June 12). Anchor and CBDCs – Are Central Banks in Need of
Inflation-Resistant Peg? Anchor Cryptocurrency. https://theanchor.io/news/are-
central-banks-in-need-of-inflation-resistant-value-peg/
B. (2021, May 17). Can digital cash make inflation worse? The Economic Times.
https://economictimes.indiatimes.com/markets/cryptocurrency/can-digital-cash-
make-inflation-worse-andy-mukherjee/articleshow/82697347.cms?from=mdr
Davoodalhosseini, M. (2020, February 25). CBDC and Monetary Policy. Bank of
Canada. https://www.bankofcanada.ca/2020/02/staff-analytical-note-2020-4/
