Three Digital Currency Models Putforth In BoE’s Crypto Report
The Bank of England has published a study of the design principles and balance sheet implications of government backed digital assets (Central Bank Digital Currencies – CBDC). The report, published as “staff working paper”, does not represent the views of the Bank of England, and simply describes the research in progress.
While examining the risks associated with digital assets, the report also defines three models of CBDC, which differ in the sectors that have access to CBDC.
Before explaining the CBDC models, the paper lists the features that a CBDC or “electronic central bank money” will carry.
- can be accessed more broadly than reserves.
- potentially has much greater functionality for retail transactions than cash.
- has a separate operational structure to other forms of central bank money, allowing it to potentially serve a different core purpose.
- can be interest bearing, under realistic assumptions paying a rate that would be different to the rate on reserves.
Furthemore, the Central bank paper explains the core principles behind CBDC. They are:
- CBDC pays an adjustable interest rate
- Reserves and CBDC are distinct and not convertible into each other.
- No guaranteed, on-demand convertibility of bank deposits into CBDC
- The Central Bank issues CBDC only against eligible securities.
Finally, in its summary of CBDC models and assumptions, the report describes three models of CBDC, which are as follows:
Financial Institutions Access (Model FI) – in this model, access is limited to banks and NBFIs. Under Model FI, all banks and NBFIs can have a CBDC account at the central bank. While they can individually trade (buy/sell/lend/borrow) CBDC with the central bank in exchange for eligible assets, in aggregate this can only lead to a change in the quantity of CBDC outstanding when the central bank pursues a price rule, meaning that it accommodates any demand or supply at the targeted rate.
Economy-wide Access (Model EW) – in this model, alongside banks and NBFIs, households and firms will also have access to CBDC. Under Model EW, all banks, NBFIs, CBDC Exchanges and households and firms can have a CBDC account at the central bank. Only banks, NBFIs and CBDC Exchanges can trade CBDC directly with the central bank.Households and firms can instead use a CBDC Exchange to convert deposits to CBDC and vice versa. A CBDC Exchange may be a new stand-alone entity, or operated by an NBFI or bank.
Financial institutions plus CBDC-backed narrow bank access (Model FI+) – in this model CBDC access is limited to banks and NBFIs. Within the NBFI sector, there is at least one financial institution that acts as a narrow bank, providing a financial asset to households and firms that is fully backed by CBDC but that does not extend credit. All banks, NBFIs, CBDC Exchanges and households and firms can have a CBDC account at the central bank. Only banks, NBFIs and CBDC Exchanges can trade CBDC directly with the central bank. Households and firms can instead use a CBDC Exchange to convert deposits to CBDC and vice versa.
It is the not first-time the Bank of England has published a report on the implementation of blockchain technology in the financial sector. In mid-April, the BoE published a PoC (proof of concept) describing a distributed ledger network “[studied] some of the key questions that could arise from ensuring privacy on a distributed ledger system.”
Last week, Norway’s central bank, Norges bank, issued a study report on CBDC. Elsewhere in Europe, Sweden’s Riksbank is working to introduce e-krona in the next few years. While Venezuela has already gone forward in introducing cryptocurrency Petro, Iran may soon join the list.