Central bank digital currencies — Design principles for financial stability

Abstract

This paper studies sectoral balance sheet dynamics when a central bank digital currency (CBDC) is first introduced into an economy, and when there is an attempt at a large-scale run out of bank deposits into CBDC. We find that if the introduction of CBDC follows a set of conservative core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed. In addition, under these core principles CBDC can be expected to trade at par with other types of money in all but the most extreme situations. The core principles are: (i) CBDC pays an adjustable interest rate; (ii) CBDC and reserves are distinct, and not guaranteed to be directly convertible into each other at the central bank; (iii) no guaranteed convertibility of bank deposits into CBDC at commercial banks (and therefore by implication at the central bank); (iv) the central bank guarantees to issue CBDC only against eligible securities. The final two principles imply that households and firms can freely trade bank deposits against CBDC in a private market, and that the private market can freely obtain additional CBDC from the central bank against eligible securities.