CBDCs Across Borders: Macro-Financial Implications Revealed by IMF Study
Explore the macro-financial implications of Central Bank Digital Currencies (CBDCs) across borders in this insightful work by the IMF. Delve into the key questions, factors determining international currency use, hypothetical CBDC adoption scenarios, and detailed macro-financial implications affecting monetary policy transmission, financial stability, capital flows, and international reserves.
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Presentation Transcript
CBDCs Across Borders Macro-Financial Implications IMF work by MCM-SPR-LEG departments APRIL 2021 Presented by Annette Kyobe Resident Representative to the Russian Federation INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 1
Key questions Key questions 1) What is special about new forms of digital money that could lead to cross-borders use? 1) How could adoption of CBDCs across borders affect monetary policy transmission, financial stability, capital flows, and the configuration of international reserves? Introduction Introduction INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 2
Several Factors Determine the International Use Several Factors Determine the International Use of a Currency of a Currency Issuer characteristics Economic weight Geopolitics Economic forces Network effects reinforced by synergies across functions of money Traditional Low transaction costs Ease of access Digital features Special to CBDC Cross-border use of currencies falls into two categories: 1) International transactions 2) Currency substitution in domestic transactions Introduction Introduction INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 3
CBDC Hypothetical Adoption Scenarios CBDC Hypothetical Adoption Scenarios Scenario 1 Scenario 2 Scenario 3 Multipolarity where a few CBDCs coexist and compete Niche adoption for specific international transactions CBDC induces greater use of foreign currency in countries with lower policy credibility or underdeveloped payment systems Competition can be either within or across countries No adoption for local transactions CBDCs are widely used as store of value, means of payment, and unit of account Scenarios Scenarios INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 4
Outline Outline 1. Key questions 2. Factors that determine the international use of currency 3. CBDC hypothetical adoption scenarios 4. Macro-financial implications a. Monetary Policy Transmission b. Financial Stability c. Capital Flows d. International Reserves INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 5
Currency substitution Currency substitution - - a risk to monetary policy a risk to monetary policy transmission transmission Macro Macro- -financial implications financial implications Monetary Policy Transmission Monetary Policy Transmission INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 6
Currency substitution Currency substitution - - a risk to monetary policy a risk to monetary policy transmission transmission Macro Macro- -financial implications financial implications Monetary Policy Transmission Monetary Policy Transmission INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 7
CBDC may impair monetary policy transmission CBDC may impair monetary policy transmission If Scenario 1 the adoption of CBDC for remittances The impact on monetary policy may be limited But there s a close link between availability of foreign currency and currency substitution In countries with weak fundamentals currency substitution is more likely If Scenario 3 each country uses multiple CBDCs Difficulty of exchange rate anchoring and private sector menu costs . Macro Macro- -financial implications financial implications Monetary Policy Transmission Monetary Policy Transmission INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 8
CBDC may pose risks to financial stability CBDC may pose risks to financial stability In addition to use in transactions, CBDC may also be attractive as a store of value posing risks Potentially destabilizing funding risks, solvency risks, runs on the banking system Easy to move money abroad fast Some argue CBDCs could lead to disintermediation But IMF staff expect such effects can be mitigated by design choices Macro Macro- -financial implications financial implications Financial stability Financial stability INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 9
CBDCs may increase capital flows and volatility CBDCs may increase capital flows and volatility Global adoption of a single CBDC Global adoption of multiple CBDC Risks Risks Multipolarity could also increase complexity; Higher volatility, exacerbating the policy trilemma Could lead to fragmentation in established market and official mechanisms to provide liquidity backstops. Benefits Could largely remove exchange risks and re-denomination risks; Benefits Could create more opportunities for international risk-sharing, New classes of safe assets with superior features may merge. Macro Macro- -financial implications financial implications Capital Flows Capital Flows INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 10
International reserves International reserves holdings may holdings may adjust adjust CBDC adoption may accelerate shifts in the configuration of international reserve currencies through powerful network effects Adoption of CBDCs alter the incentives for reserve holders and issuers For reserve holders: Greater currency substitution induced by CBDC would lead central banks to increase foreign reserves for precautionary motives. For reserve issuers: If internationalization is a policy objective, issuers would at least partially accommodate the shift in demand Macro Macro- -financial implications financial implications International Reserves International Reserves INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 11
Implications for international reserves Implications for international reserves Global adoption of a single CBDC Global adoption with multipolarity Widespread adoption of a CBDC Multipolar world with a few widely adopted competing CBDCs Would resemble to current system with the dollar as a hegemon Reserve holdings could become more diversified, with stabilizing effects for the IMFS by expanding the supply of safe assets Stability of the system depends on the ability of the CB to ensure cyber security and provide emergency liquidity in stress times One could envision a synthetic hegemonic currency backed by a basket of CBDCs Macro Macro- -financial implications financial implications International Reserves International Reserves INTERNATIONAL MONETARY FUND INTERNATIONAL MONETARY FUND 12
