Earlier this month, the Bank of England released a working paper that describes three different central bank digital currency (CBDC) models, providing an outline of how it would operate in the banking industry, as well as possible scenarios of risk and financial stability issues.
The three outlines construct models depending on the sectors with access to CBDC.
The Financial Institutions Model
This model reportedly limits access to banks and non-bank financial institutions (NBFIs). This model is described as seemingly similar to reserve assets of the central Bank of England; however, there are differences including “broader access and different functionality and core purpose.”
Financial institutions would “interact directly with the central bank to buy/sell CBDC in exchange for eligible securities.” Regarding this mode, the BoE notes that “it is assumed that there are no institutions that provide an asset to households and firms that is fully backed by central bank money, even though this may be technically feasible, as indeed it is technically feasible today.”
The Economy-Wide Model
This model allows households and firms access to CBDC as well as banks and NBFIs. The paper notes that “CBDC can, therefore, serve as money for all agents in the economy,” although only banks and NBFIs would be authorized to “interact directly with the central bank to buy/sell CBDC; households and firms would be required to use a CBDC Exchange to buy and sell CBDC.
The paper mentions an alternative under this model in which households and firms could trade CBDC directly with the central bank.
The Financial Institutions Plus CBDC-Backed Narrow Bank Model
This model, like the Financial Institutions model, limits access to banks and NBFIs. However, “at least one institutional bank” would provide financial assets to household and firms serving as a “narrow bank” that provides assets to households and firms “fully backed by CBDC” but does not “extend credit.”
This model was put in place to “study the differences between direct and indirect access to CBDC by households and firms.”
Notably, the report concluded that CBDC does not lead to a contraction in bank funding, no adverse effects on private credit or on “total liquidity provision to the economy.” However, the report acknowledges further models and research are necessary for more concrete conclusions.
The Bank of England is not the only central bank exploring the use of CBDCs. ETH News recently reported on the Bank of Korea launching a task force to research CBDCs.
Cointelegraph reported that Norway’s Central Bank has been exploring similar options, noting that a “decline in cash usage” has prompted this exploration. Switzerland was another that recently requested a study on state-backed digital currencies.
The actual implementations of these CBDCs remain to be seen; it is becoming increasingly clear that this is only one of the many uses for cryptocurrency technology.