Tokenized CBDC optimal under specific crypto conditions
A Bank of Canada staff working paper develops a general equilibrium model to assess the optimal design of a central bank digital currency (CBDC). It compares tokenized and non-tokenized CBDCs, finding their desirability depends on private money reliability, collateral availability, and crypto sector features.
The tokenization dilemma
A new Bank of Canada working paper introduces a general equilibrium model to assess central bank digital currency (CBDC) design in a monetary system featuring both traditional banks and crypto banks that issue stablecoins.
The study compares tokenized and non-tokenized CBDCs, revealing that their desirability depends on the reliability of private money, the availability of collateral assets, and the characteristics of the crypto sector.
Crucially, the paper shows that the tokenization decision for a CBDC influences equilibrium outcomes only when collateral use varies across sectors, identifying specific conditions where tokenization is necessary to improve welfare.
Tokenized CBDC can crowd out stablecoins and enhance efficiency when crypto banks are less trustworthy and crypto assets are scarce.
Conversely, a non-tokenized CBDC may be preferred if crypto transactions are less desirable or if reallocating reserves from traditional to crypto banks is beneficial.
The findings highlight a trade-off between payment efficiency gains and potential reductions in bank lending.
Policymakers' digital challenge
Policymakers are actively considering the optimal design of future monetary systems, particularly as new technologies like distributed ledger technology (DLT) and stablecoins reshape payments.
The crypto sector, characterized by pseudonymous and borderless transactions, poses significant regulatory challenges.
The paper models an economy with two distinct sectors: a traditional sector for off-chain transactions and a crypto sector for on-chain activities.
While traditional banks issue deposits, the crypto sector relies on stablecoins from crypto banks.
Both bank types face an agency problem, requiring collateral for their payment instruments.
The crypto sector differs due to potentially undesirable transactions, less stringent regulation for crypto banks, and their ability to hold crypto assets.
Nuance in the digital frontier
The paper offers crucial, albeit complex, guidance for central banks navigating the digital currency landscape.
It effectively highlights the nuanced trade-offs, particularly the tension between payment efficiency and potential impacts on traditional lending.
While providing a robust theoretical foundation, its practical application depends heavily on the evolving trustworthiness of crypto institutions and the social desirability of crypto transactions.