Tokenised deposits and wCBDC: Norges Bank explores liquidity management
A Norges Bank Staff Memo explores the consequences of wholesale central bank digital currency (wCBDC) and tokenised bank deposits for central bank and commercial bank liquidity management. It focuses on balance sheet issues arising from reserve steering and overnight redistribution.
Scarce reserves, sudden shifts
Wholesale central bank digital currency (wCBDC) is envisioned for settlement in new financial infrastructures featuring tokenised assets, smart contracts, and atomic settlement within a 'unified ledger'.
This memo discusses its consequences for central bank and commercial bank liquidity management, distinguishing between settlement in traditional reserves or wCBDC, and whether reserves are scarce or ample.
The two models with scarce reserves pose significant theoretical challenges.
Tokenised payments shortly before the central bank's RTGS system closes can rapidly alter banks' reserve and wCBDC balances.
With scarce reserves, banks may be forced into urgent overnight redistribution or costly recourse to standing facilities.
This could disrupt liquidity management, affect short-term interest rates, and consequently disturb monetary policy implementation.
The memo highlights that issues related to central bank liquidity management have not received much attention in wCBDC literature, particularly concerning scarce reserve environments.
Solutions for a complex landscape
For scarce reserves with tokenised deposits settled in traditional reserves, deferred settlement offers an advantage.
This allows payee banks to credit funds before interbank settlement, enabling 24/7 tokenised transfers without extending RTGS hours.
However, for scarce reserves and wCBDC settlement, liquidity management is trickier due to atomic settlement.
The memo suggests imposing limits on tokenised payments before RTGS closing or using different cut-off times for reserves and wCBDC.
With ample reserves, liquidity management is more straightforward, as all overnight balances are remunerated at the policy rate.
The authors conclude: "The financial system faces a choice between manageable adjustment costs today and potentially severe disruption tomorrow.
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Unpacking the digital dilemma
This Staff Memo offers a crucial framework for understanding wCBDC, tokenised deposits, and central bank liquidity management, especially with scarce reserves.
It proposes practical solutions like deferred settlement or payment limits, while highlighting inherent trade-offs between efficiency and stability.
The paper effectively addresses a critical gap in existing wCBDC literature, which has largely overlooked these operational challenges.