Copyright Page
© 2023 International Monetary Fund
WP/23/60
IMF Working Paper
Monetary and Capital Markets Department (MCM)
Monetary Policy Implications Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems
Prepared by Inutu Lukonga1
Authorized for distribution by Tommaso Mancini Griffoli
March 2023
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Central bank digital currencies (CBDCs) promise many benefits but, if not well designed, they could have undesired consequences, including for monetary policy. Issuing an unremunerated CBDC or a wholesale CBDC does not change the objectives of monetary policy or the operational framework for monetary policy. CBDCs can, however, induce changes in the retail, wholesale and cross border payments that have negative spillover effects on monetary policy, through their effects on money velocity, bank deposit
disintermediation, volatility of bank reserves, currency substitution, and capital flows. Countries most vulnerable are those with banking systems dominated by small retail deposits and demand deposits, low levels of digital payments and weak macro fundamentals. Proposed CBDC design features, such as caps on CBDC holdings and unremunerating the CBDC can moderate disintermediation risks, but they are not sufficient. Central banks will need to ensure that unintended macroeconomic risks are comprehensively identified and mitigated.
| JEL Classification Numbers: | C72, C73, D4, E41, E42, E52, E58, O32, O33, G21, L86 |
| Keywords: | Central Bank Digital Currencies; CBDC; CBDC Pilots; Monetary Policy; Islamic Finance |
| Author’s E-Mail Address: | ilukonga@imf.org |
| JEL Classification Numbers: | C72, C73, D4, E41, E42, E52, E58, O32, O33, G21, L86 |
| Keywords: | Central Bank Digital Currencies; CBDC; CBDC Pilots; Monetary Policy; Islamic Finance |
| Author’s E-Mail Address: | ilukonga@imf.org |
Contents
Glossary
Introduction
CBDC Design Options, Intrinsic Risks to Monetary Policy, and Country Choices
Design Options and their Implications for Monetary Policy
Cross Country Trends and Choices
Monetary Policy Implications of Issuing CBDCs
Monetary Policy Frameworks and Transmission Channels
How CBDCs Impact Monetary Policy Implementation and Transmission
Retail CBDCs
Wholesale CBDCs
Cross Border Use of CBDCs
Strength and Speed of the Impact on Monetary Policy
Retail CBDCs, Deposit Disintermediation and Changes to Money Velocity
W-CBDCs, Tokenization and Financial Market Segmentation
Cross-Border Use of CBDCs, Currency Substitution and Capital Flow Volatility
Implications for Jurisdictions with Islamic Banks
Overview of Islamic Financial Systems and Monetary Policy Fr2ameworks
Sharia’h Principles and CBDC Designs
Potential Impact on Monetary Policy Implementation and Transmission
Conclusions and Policy Strategies
References
BOXES
1. Taxonomy of Retail CBDC Designs
2. The Quantity Theory of Money and Money Demand
FIGURES
1. CBDC Design Options
2. Risks to Monetary Policy Inherent in CBDC Designs
3. Status of CBDC Projects Around the World
4. Trends by Type of CBDCs
5. Distribution of Countries by Nominal Anchor
6. Operational Frameworks for Monetary Policy
7. Channels through which CBDCs Impact Monetary Policy
8. Main Systems Used for Large Value Payments
9. Changes in Currency in Circulation to GDP
10. Cash as a Ratio of Money Supply
11. Penetration of Debit, Credit Cards and ATMs
12. Technological Developments and Money Velocity
13. Jurisdictions with Large Islamic Banking Sector and Share of Unremunerated Accounts
14. Monetary Policy Regimes in Countries with Islamic Banks
15. Monetary Policy Transmission in Jurisdictions with Islamic Banking Systems
16. Balance Sheet Structure of Islamic Banks
TABLES
1. Balance Sheet Effects of Exchanging Cash for CBDCs
2. Balance Sheet Effects of Substituting Bank Deposits for CBDCs
3. Balance Sheet Impact of Central Bank Operations to Compensate for the Decline in Deposits
4. Stylized Balance Sheet Involving W-CBDC
Glossary
| Atomic Settlement | A conditional settlement that occurs if delivery and payment are both received at the same time. |
| Application programming interface (API) | Rules and specifications followed by software programs to communicate with each other, and an interface between different software programs that facilitates their interaction. |
| Distributed Ledger | A record of transactions held across a network of computers (nodes), rather than stored in a central location. |
| Distributed Ledger Technology (DLT) | Protocols and supporting infrastructure that allow computers in different locations to validate transactions and update records in a synchronized way across a network. |
| Digital Token | A piece of software with a unique asset reference, properties and/or legal rights attached. |
| Instant Settlement | Instant settlement eliminates any time gap between trading and settlement, so that settlement happens immediately once a trade has been agreed upon. |
| Interoperability | The technical or legal compatibility that enables a system or mechanism to be used in conjunction with other systems or mechanisms. |
| Real Time Gross Settlement (RTGS) | RTGS is the continuous process of settling payments in real time on an individual order basis without netting debits with credits. |
| Smart Contracts | Smart contracts are coded programs that are used to automate pre-specified transactional events based on agreed upon contractual terms. |
| Society for Worldwide Interbank Financial Telecommunications (SWIFT) | SWIFT is a global member-owned cooperative and the world’s leading provider of secure financial messaging services. |
| SWIFT GPI | SWIFT GPI is a new facility that makes for quicker payments with full transparency on accompanying costs, while providing on-the-spot information on the status of transactions. |
| Sukuk | Sukuk refers to Islamic/Sharia-compliant bonds or Islamic investment certificates. Sukuk is structured according to international sharia standards and is asset-based securitization, not merely receivables. |
| Tokenization of CBDCs | Tokenization of financial assets is the conversion of financial instruments into digital objects and enables the transfer, storage, and trading of the assets in real time without intermediaries via digital channels. |
| Atomic Settlement | A conditional settlement that occurs if delivery and payment are both received at the same time. |
| Application programming interface (API) | Rules and specifications followed by software programs to communicate with each other, and an interface between different software programs that facilitates their interaction. |
| Distributed Ledger | A record of transactions held across a network of computers (nodes), rather than stored in a central location. |
| Distributed Ledger Technology (DLT) | Protocols and supporting infrastructure that allow computers in different locations to validate transactions and update records in a synchronized way across a network. |
| Digital Token | A piece of software with a unique asset reference, properties and/or legal rights attached. |
| Instant Settlement | Instant settlement eliminates any time gap between trading and settlement, so that settlement happens immediately once a trade has been agreed upon. |
| Interoperability | The technical or legal compatibility that enables a system or mechanism to be used in conjunction with other systems or mechanisms. |
| Real Time Gross Settlement (RTGS) | RTGS is the continuous process of settling payments in real time on an individual order basis without netting debits with credits. |
| Smart Contracts | Smart contracts are coded programs that are used to automate pre-specified transactional events based on agreed upon contractual terms. |
| Society for Worldwide Interbank Financial Telecommunications (SWIFT) | SWIFT is a global member-owned cooperative and the world’s leading provider of secure financial messaging services. |
| SWIFT GPI | SWIFT GPI is a new facility that makes for quicker payments with full transparency on accompanying costs, while providing on-the-spot information on the status of transactions. |
| Sukuk | Sukuk refers to Islamic/Sharia-compliant bonds or Islamic investment certificates. Sukuk is structured according to international sharia standards and is asset-based securitization, not merely receivables. |
| Tokenization of CBDCs | Tokenization of financial assets is the conversion of financial instruments into digital objects and enables the transfer, storage, and trading of the assets in real time without intermediaries via digital channels. |
The author would like to thank Messrs. Ammar Ahmed, Tohid Atashbar, German Villegas Bauer, Marianne Bechara, Tom Bernhardsen, Snorre Evjen, Stephanie Forte, Shafiq Ghawi, Florida Gimbel, Carel Hugo, Gregorio Impavido, Nachega Jean-Claude, Arne Kloster, Michael Law, Ashley Lannquist, Rumit Pancholi, Erlend Walter Nier, Ryan Rizaldy, Nadine Schwarz, Faith Stewart, Chia Yi Tan, and Herve Tourpe for the excellent comments.