Introduction

On digitalisation and central bank digital currencies in general

One of the most significant megatrends shaping our world today is digitalisation, which may get a massive push from the consequences of the coronavirus pandemic all over the world. Home office, digital education and online shopping, to name but a few examples, have become part of our everyday lives. Digital solutions are increasingly common in finance, just like in many other areas of life. This trend has already been observed in recent years, and it was accelerated by the special year of 2020. The challenges of the 21st century affect traditional financial institutions as well as national currencies. The traditional monetary system now has an alternative in the form of the ‘digital competitors’ entering the market of financial services. Building on their huge user base, comprehensive and detailed information on their customers and their capitalisation and technological power, the global technology corporations – the BigTech firms – can compete against traditional financial institutions. They may also produce the ‘digital rivals’ to national currencies through the digital means of payment they offer, which may fundamentally transform the monetary system as we know it today with high penetration and widespread use. One might wonder whether the new services appearing in the payment system entail risks to the efficiency of monetary policy, financial stability, the enforceability of consumers’ interests and the preservation of society’s confidence in national payment systems. What could be the appropriate response from central banks in the face of the challenges posed by the digitalisation of money?

The heads of leading central banks increasingly point to central bank digital currencies as a potential solution to these challenges. Some of them, for example the Swedish Riksbank or the People’s Bank of China, have made good progress in their projects related to this. These developments may serve several innovative purposes: they may foster the financial inclusion of those without access to banking services, promote the reduction of cash and provide a widely available, risk-free means of payment even if cash is driven out.

The concept of central bank digital currencies is based on creating a form of money that emerges as a fusion of its functions it has fulfilled for centuries and the opportunities offered by digitalisation in the modern age. Using the money issued by the central bank, just like cash, which is therefore completely risk-free but also digital, is thus simple, convenient and fast (Figure 1). Furthermore, the other parameters can be configured with considerable freedom to align them to the aim of the potential introduction as regards accessibility, the anonymity of this form of money, the role of traditional financial institutions and the technological operation of the payment system.

Digital

Figure 1: System of different types of money

Internet money

Bank deposit

Central bank reserves and settlement account

Central bank deposit account

CBDC (only for a limited group of partners)

CBDC (universally accessible)

Cash Virtual money

Central bank issued

Widely accessible

Community money

Peer-to-peer

Note: The central bank deposit account indicates the case when non-bank participants may also place a deposit with the central bank. Internet money is a money that can be purchased in various online games but can be spent only within the game. Source: Bech, M. – Garratt, R. (2017).

The period after 2010 will go down in economic history, and the most important lesson from its achievements is that the key to major economic policy turnarounds is the familiarity with, and efficient implementation of new instruments and creative innovations.1 The same goes for money: the results of the monetary policy turnaround launched after 2013 can only be sustained, and possibly even enhanced further, if the financial

1 For more details on the fiscal and financial stabilisation after 2010 and the reform of central bank policy, see the 2nd edition of György Matolcsy’s

Economic Balance and Growth.

innovations entailed by digitalisation are embraced with the necessary caution. Based on our earlier study,2 the annual social cost of payment instruments amounts to close to 1.5 per cent of GDP. Of this, society as a whole could save around HUF 100 billion, if payment habits shifted towards a more modern approach using much less cash and no paper-based solutions at all. Therefore, both the opportunities and the risks of the new digital solutions that will shape the monetary system in the decades ahead need to be identified and explored. Due to the special significance of the topic, the MNB summarises the theoretical considerations, the most important practical issues and the international experience gained so far related to central bank digital currencies in a comprehensive book of studies. It presents the motives behind the potential creation of this new instrument and the opportunities offered by this new form of money, which may fundamentally transform the monetary system.

Contents

The first study presents what happens when the settlement asset of a country used in its national and international payments becomes non-domestically issued. Based on the potential ways for the expansion of the settlement systems built on Big Tech’s existing platforms and digital ecosystems and countries’ traditional dollarisation experiences, a new concept, digital dollarisation, is described.

The second study presents three main analytical frameworks, listing the arguments for introducing central bank digital currency

2 Turján, A. – Divéki, É. – Keszy-Harmath, Z. – Kóczán, G. – Takács, K. (2011):

Nothing is free: A survey of the social cost of the main payment instruments in Hungary

in different approaches. The challenges faced by central banks on account of private players increasingly offering various payment alternatives to traditional central bank currency are discussed, together with the possible alternative central bank digital currency solutions, while considering which should be chosen under what scenarios.

The world has been enthralled by the potential of central bank digital currencies, and by 2020 China had come closest to implementing the concept. Since testing of the digital renminbi began, more and more details have become known about China’s financial innovation. The third study assesses the future of the world currency. A centralised e-RMB suitable for direct payments is the most serious challenge to the USD and the United States’ power in recent decades. The actual catalysts behind the increasingly serious discussion about the introduction of central bank digital currency included technological progress, the rise in electronic payments as well as the appearance of private solutions addressing the anomalies in payment systems. The way how different countries introduce it, however, will vary considerably. The fourth study presents and categorises the public policy, economic and technological considerations that need to be taken into account when deciding on the introduction of central bank digital currency. The introduction of CBDC means that the central bank provides non-financial actors access to the assets or liabilities side of its balance sheet, or even to both sides. The fifth study discusses how central banks would gain a new monetary policy instrument for bridging money markets and directly influencing the behaviour of non-financial actors, if they implement the CBDC as an interest-bearing asset. As a result of technological progress, digital solutions now offer a convenient and secure alternative to cash use, which may facilitate the successful introduction of central bank digital

currency. The sixth study describes the motives of cash demand that can be reduced by the appearance of central bank digital currency, and whether based on that it can be a substitute or complement to banknotes. The introduction of central bank digital currency can also have a positive impact on financial stability, by maintaining the competitiveness of the financial system and making a quasi-riskfree digital payment instrument available to participants in the real economy. At the same time, the new system can significantly transform banking business models. The seventh study presents the resulting new banking and systemic risks. The eighth study examines the aims and future development scenarios that may warrant the introduction of central bank digital currency from the perspective of payments; it provides an overview of the aims that may be relevant to Hungarian households and companies in their current payments situation; and it shows the effect the potential operating models may have on the payments market. Traditional infrastructures and future IT solutions are examined against the key criteria of reliability, transaction speed and costeffectiveness. When choosing the business model, the needs of potential users must be considered, and the cooperation between the central bank and participants in payments must also be planned. The ninth study looks at the considerations behind choosing the operating model and the technological solutions supporting it as well as the options for establishing the infrastructure and personnel conditions necessary for performing the central bank’s new tasks.

The tenth study describes in detail the possible social objectives of the introduction of retail CBDC at the international level, as well as the main international examples where consideration has been given to the introduction of such a framework along the lines of specific public policy objectives. It then presents the design aspects

of a retail CBDC framework geared towards financial inclusion, drawing on the findings and design structure presented in the chapter outlining the conceptual framework. The eleventh study presents the likely design and operational aspects of a possible form of central bank digital currency that is focused on SMEs. A low-cost, secure alternative lending channel in the form of central bank digital currency can help the SME sector, which is important for economic growth, to realise its development potential across financial cycles.

References

Bech, M. – Garratt, R. (2017): Central bank cryptocurrencies, BIS Quarterly Review, September 2017

Matolcsy, Gy. (2020): Egyensúly és növekedés (Economic Balance and Growth) – 2nd edition. Book series of the Magyar Nemzeti Bank, Budapest, 2020. Available at: https:// www.mnb.hu/kiadvanyok/mnb-szakkonyvsorozat/egyensuly-es-novekedes-2-kiadas Turján, A. – Divéki, É. – Keszy-Harmath, Z. – Kóczán, G. – Takács, K. (2011): Semmi sincs ingyen: A főbb magyar fizetési módok társadalmi költségének felmérése. (Nothing is free: A survey of the social cost of the main payment instruments in Hungary). Occasional Papers No 93, https://www.mnb.hu/letoltes/mt93.pdf