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cbdc:public:cbdc_omg:04_doc:20_comments:dsn:q15:start
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Question: 15. Should a CBDC pay interest? If so, why and how? If not, why not?
Question
- Should a CBDC pay interest?
- If so, why and how?
- If not, why not?
Answer
The answer depends on the architecture, design and implementation. (See: 4.0 Common Elements).
- If it is a replacement for cash: NO
- If it is a replacement for a bank account or equivalent such as Payment Cards savings, checking, investment, direct pay, credit, debit cards, etc. ): YES
Overview
Before an answer can be provided about paying interest on CBDC, it is essential to clearly state the purpose and goals of the CBDC. Based on the information in the White Paper, it is not clear if the CBDC should be a replacement for Physical Money, a replacement for bank accounts, or a hybrid combination of the two. Currently, there is no interest paid in cash. In fact, that is a motivation for not hoarding cash, but putting it into an account. The interest paid on the account depends on the kind of account (i.e., checking, savings, certificate of deposit, money market, etc.).
1. Is the CBDC suppose to be an alternative to existing physical dollar bills? If so:
- What denominations are to be created (\$1, \$2, \$5, \$10, \$20, \$50, \$100)?
- What about coins? (i.e., penny, nickel, dime, quarter, half-dollar)
- Will it be able to be used everywhere physical money is used?
- Can transactions be made using a combination of CBDC and Physical Money?
- Can CBDC and Physical Money be interchanged? Where? Fees?
2. Is it supposed to be the equivalent of a financial account (i.e, savings, checking, investment, direct pay, credit, debit cards, etc. )? If so:
- How many accounts can an individual have?
- Is there a cost for maintaining the accounts?
- How will rules such as Know-Your-Customer(KYC) be applied?
- Can the accounts be garnered for taxes? Child support? Student debt? Other debt?
- Does it require a court order or warrant to review the account activity?
- Is there an age limit on who can have an account?
- Do you have to be a US Resident to have an account?
- What IDs need to be associated with the account?
- Do you need a taxpayer ID?
- Do you need to have a current street address?
3. Has a trade study been conducted to determine the best solution?
Examples
There are three categories of requirements alluded to in the White Paper as identified by the Object Management Group's CBDC WG White Paper Analysis:
There are three Currency Models that are applicable to the CBDC.
- 4.2.1 Digital Cash Model - is a model representing the CBDC using cash (i.e., coins, \$1, \$2, \$5, \$10, \$20, \$50 and \$100 bills)) as the basis of the CBDC
- 4.2.2 Digital Account Model - is a model that represents the CBDC in using digital accounts (i.e, Savings, Checking, Investment, Direct Pay, Credit Cards, Debit Cards, etc.)
- 4.3 Stablecoins - is a currency model tying a cryptocurrency to a real world asset such as a fiat currency, gold, indexed funds. etc.
Table 1 provides a list of requirements associated with each of the CBDC model taxonomy.
Table 1: Example of mapping a subset of requirements identified during the White Paper Analysis conducted by the OMG's CBDC WG.
| Topic | Requirements |
|---|---|
| Digital Cash Model |
|
| Digital Account Model |
|
| Stablecoin / Research |
|
Discussion of Examples
The following discussion of the three models identified in the requirements. Each section is independent of the other sections and can be read as-is.
Digital Cash Model
Many of the OMG CBDC WG-identified “desirements” found in the Money, and Payments: The U.S. Dollar in the Age of Digital Transformation White Paper during the White Paper Analysis appear to be appropriate of a CBDC “Cash Model”. The “Cash Model” uses Digital Money in an analogous model as Cash for CBDC. For example, the requirements B0004 which is a requirement to “Protect consumer privacy” is more closely related to a “cash mode” rather than a bank account model. There are no bank accounts required in order to complete a transaction, just “cash” in exchange for goods and services. This is in contrast to checkbooks, debit, or credit card transactions, which are associated with an account offered by intermediary commercial banks and directly tied to an Identity.
Table 2: List of requirements (i.e., desirements) identified in the White Paper indicating a Cash Model.
| Requirement | Statement | Comment |
|---|---|---|
| B0003 | Complement, rather than replace, current forms of money and methods for providing financial services | A “digital cash” is complementary to the existing cash money, just without the need for physical money. |
| B0004 | Protect consumer privacy | There are no identities required for cash transactions. |
| B0007 | Provide households and businesses a:
|
|
| B0009 | Provide faster and cheaper payments (including cross-border payments) | US Dollars in the form of cash are used in many parts of the world. As of 2018, the U.S. had $1,671 billion in circulation. As much as half that value is estimated to be in circulation abroad. 3) Many of these bills are in the former Soviet Union countries and in Latin America. They are often used as hard currency in day-to-day transactions. https://www.thebalance.com/world-currency-3305931#citation-12 |
| B0013 | Provide immediate access to transferred funds | Sine the digital cash is for all intents and purposes cash, the same accessibility as cash should apply |
| B0018 | Allow the general public to make digital payments | Digital cash should be immediately transferrable to traditional cash, and therefore, it should be at least as usable for digital payments as actual cash, but can also be used online just like Direct Pay, Credit, or Debit Cards. |
| B0019 | Provide the safest digital asset available to the general public, with no:
| With cash, there is no need for credit and by definition it is liquid. See Liquidity Risk |
| B0020 | Maintain public confidence by not requiring mechanisms, such as deposit insurance | The only need for https://www.omgwiki.org/dido/doku.php?id=dido:public:ra:xapend:xapend.a_glossary:d:deposit_insurance is when there is not enough cash in hand to pay for liabilities. By definition, a cash-based CBDC would have enough cash. |
| B0022 | Provide a CBDC that is:
| By definition, cash is considered private and is widely transferable unless the quantity of cash makes it too onerous. |
| B0024 | Provide transactions finalized and completed in real-time | Since there is no need to do a background check on the participants in a cash transaction, the transaction is real-time. |
| B0028 | Offer the general public broad access to digital money:
| Cash is by definition does not require credit and inherently no Liquidity Risk. |
| B0029 | Support basic purchases of:
| There is no federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law that says otherwise. https://www.federalreserve.gov/faqs/currency_12772.htm, Therefore, the same can be applied to Digital Cash. Although it is currently possible to pay Federal taxes in cash, it is more difficult than paying online with Direct Pay, Credit, or Debit Cards. |
| B0034 | Generate new capabilities to meet the speed and efficiency requirements of the digital economy | Although cash is quick and efficient during face-to-face transactions, it is difficult ver long distances or when the payments become large. |
| B0036 | Preserve the dominant international role of the U.S. dollar | See: B0009 |
| B0040 | Provide micropayment support | As long as the micropayment is larger than the cost of conducting the transaction, micropayments are feasible. However, if the cost of the micropayment is very small, then there is probably a need for an account for accumulating the micropayments until it becomes financially viable to process the micropayment. |
| B0042 | Preserve the dominant international role of the U.S. dollar | See: B0009 |
| P0004 | Protect consumer privacy | Since there is no need for an account or identification with cash, consumers' privacy is protected. |
| P0027 | CBDC a risk-free asset | As long as the CBDC is tied to the US Dollar, it will have the same risk as to the US Dollar. |
| P0029 | The Federal Reserve is committed to ensuring the continued safety and availability of cash | The Cash Model for CBDC treats the CBDC as a form of cash when the cash model is used. |
| R0013 | CBDC offers no associated credit or Liquidity Risk | In the cash model of the CBDC, this is definitely true. |
| D0001 | Design should be for a non-interest-bearing CBDC, for example, would be less attractive as a substitute for commercial bank money | CBDC using the cash model would be just another form of cash, and therefore should not offer interest |
| D0006 | Design should allow an increase in CBDC supply to provide an adequate buffer, so there is little effect on the federal funds rate | The same rules would apply as used with traditional cash |
| D0007 | Design should allow the Federal Reserve to increase the level of reserves on average, in order to provide an adequate buffer against unanticipated increases in CBDC | Under the CBDC cash model, the Federal Reserve would treat CBDC reserves similarly to cash reserves |
| D0009 | Design should allow for significant foreign demand for CBDC, furthering complicate monetary policy implementation | See: B0009 |
B = Benefit Considerations |
||
P = Policy Considerations |
||
R = Risk Considerations |
||
D = Design Considerations |
||
Digital Account Model
Many of the OMG CBDC WG identified requirements found in the Money, and Payments: The U.S. Dollar in the Age of Digital Transformation White Paper during the White Paper Analysis appear to be appropriate of a CBDC “Account Model”. The “Account Model” uses Digital Money in an analogous model as Accounts for CBDC. For example, the requirement B0005 is a requirement to “Protect against criminal activity| In this context, criminal activity is either Money Laundering or Fraud. Fraud is an intentionally deceptive action designed to provide the perpetrator with an unlawful gain or to deny a right to a victim. Types of fraud include tax fraud, credit card fraud, wire fraud, securities fraud, and bankruptcy fraud. Fraudulent activity can be carried out by one individual, multiple individuals, or a business firm as a whole” is easily associated with Accounts.
Table 3: List of requirements (i.e., desirements) identified in the White Paper indicating a Account Model.
| Requirement | Statement | Comment |
|---|---|---|
| B0005 | Protect against criminal activity | In this context, criminal activity is either Money Laundering or Fraud. Fraud is an intentionally deceptive action designed to provide the perpetrator with an unlawful gain or to deny a right to a victim. Types of fraud include tax fraud, credit card fraud, wire fraud, securities fraud, and bankruptcy fraud. Fraudulent activity can be carried out by one individual, multiple individuals, or a business firm as a whole. |
| B0010 | Expand consumer access to the financial system | A financial system is the entire set of non-cash-based institutions (i.e., banks, thrifts, insurance companies, stock exchanges, etc.) permitting and facilitating the exchange of funds. The expansion would entail adding people to these institutions |
| B0022 | Provide a CBDC that is:
| Intermediated generally implies accounts or digital wallets. Identity-Verified generally implies validating and verifying a person's identity to gain access to their accounts |
| B0038 | Allow private-sector innovators to focus on:
| These innovations would predominately be account-based. |
| B0047 | Lower transaction costs | Normally, there are no transaction costs for using cash |
| B0048 | Provide a secure way for people to save | People save money in accounts unless we are offering piggy banks |
| B0049 | Promote access to credit | Credit is, by definition, using cash you do not have access to. |
| B0051 | Generate data about users’ financial transactions similar to the current Commercial Bank4) and Nonbank Money | This kind of data is collected on the activity in accounts. |
| B0054 | Attract risk-averse users to CBDC | Risk Adverse investments usually pay little to no incentive to investors, but their value remains constant. Cash represents that kind of investment |
| P0002 | Provide Yield benefits more effectively than alternative methods | Cash generally offers no yield; therefore, this would require accounts |
| P0005 | Protect against criminal activity | See: B0005 |
| P0012 | The firms that operate interbank payment services are subject to federal supervision | These services typically use accounts to move payments unless it is referring to armored guards and vehicles |
| P0013 | Systemically important payment firms are subject to
| Refers to the accounting practices used by the payment firms |
| P0017 | The PWG report recommends CBDC complement existing authorities regarding
| Refers to the accounting practices for CBDC accounts |
| P0018 | The Federal Reserve Act does not authorize direct Federal Reserve accounts for individuals | Refers to accounts |
| P0019 | Federal Reserve accounts for individuals represent a significant expansion of the Federal Reserve’s role in the financial system and the economy | Refers to accounts |
| P0020 | The private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments | Refers to accounts |
| P0021 | The intermediaries would operate in an open market for CBDC services | Refers to accounts |
| P0023 | CBDC would need to be readily transferable between customers of different intermediaries | Intermediaries imply accounts |
| P0024 | CBDC would need to comply with the U.S. robust rules | Implies accounting and oversight rules |
| P0025 | CBDC intermediary would need to verify the identity of a person accessing CBDC | Intermediaries imply accounts |
| P0027 | CBDC a risk-free asset | See: B0054 |
| P0028 | Require significant international coordination to address issues such as:
| |
| P0030 | The Federal Reserve will only take further steps toward developing a CBDC if:
| See: B0054 |
| R0002 | Risk to the cost and availability of credit | See: B0054 |
| R0009 | Increased Risk of “runs” or other instabilities to the financial system | |
| R0012 | Risk of increased concern related to the potential for:
| See: B0054 |
| R0013 | CBDC offers no associated credit or liquidity Risk | See: B0054 |
| R0015 | Require mechanisms to reduce liquidity Risk | See: B0054 |
| R0016 | Require mechanisms to reduce credit Risk | See: B0054 |
| R0020 | Risk that interest-bearing CBDC could result in a shift away from other low-risk assets, such as shares in money market mutual funds, Treasury bills, and other short-term instruments. | See: B0054 |
| R0023 | Risk of financial panic causing outflows from Commercial Banks to CBDC without prudential supervision, government deposit insurance, and access to central bank liquidity | See: B0054 |
| D0001 | Design should be for a non-interest-bearing CBDC, for example, would be less attractive as a substitute for commercial bank money | Commercial bank money implies accounts |
| D0002 | Design should allow the central bank to limit the amount of CBDC an end-user could hold | These restrictions imply accounts |
| D0003 | Design should allow a limit on the amount of CBDC an end-user could accumulate over short periods | These restrictions imply accounts |
| D0005 | Design could affect monetary policy implementation and interest rate control by altering the supply of reserves in the banking system | These restrictions imply accounts |
| D0008 | Design should allow for interest-bearing at levels of the CBDC to be controlled independently of other safe assets | These restrictions imply accounts |
| D0010 | Design should consider the potential for interest-bearing CBDC as a new policy tool on the channels of influence in monetary policy | These restrictions imply accounts |
| D0011 | Design should generate data about users’ financial transactions in the same ways that commercial bank and nonbank money generates data today | These restrictions imply accounts |
| D0012 | Design should address privacy concerns by leveraging existing tools already in use by intermediaries | These restrictions imply accounts |
| D0013 | Design should facilitate compliance with a robust set of rules already intended to combat
| These restrictions imply accounts |
B = Benefit Considerations |
||
P = Policy Considerations |
||
R = Risk Considerations |
||
D = Design Considerations |
||
Stablecoin / Research
The White Paper and summarized by the Object Management Group's
CBDC WG White Paper Analysis provide some insight as to “what's next” with CBDC. The White Paper is not intended to advance a specific policy outcome and takes no position on the ultimate desirability of a U.S. CBDC [P0008]. Furthermore, the Federal Reserve will only take further steps toward developing a CBDC if [P0030]:
- Research points to benefits for households, businesses, and the economy overall that exceed the downside risks
- Indicates that CBDC is superior to alternative methods
In addition, the Federal Reserve does not intend to proceed with the issuance of a CBDC without explicit support from [P0011]:
- the Executive Branch
- Legislative Branch
- ideally in the form of a specific authorizing law
The following topics are covered in the White Paper, which would require further research in order to garner broad public and cross-governmental support [P0031]:
- Note: Also see: 4.3 Stablecoins in context of Currency Models.
Table 4: List of requirements (i.e., desirements) identified in the White Paper that require further research
| Requirement | Statement | Comment |
|---|---|---|
| B0016 | Provide Stablecoins that are:
| Stablecoin is a specific solution |
| B0017 | Provide Stablecoins that are:
| Stablecoin is a specific solution |
| B0021 | Maintain value by not using backing by an underlying asset | Conflict with B0017 |
| P0015 | The PWG report recommends that Congress act promptly to enact legislation that would ensure payment of Stablecoins | Stablecoin is a specific solution |
| P0016 | The PWG report recommends payment Stablecoin arrangements are subject to a consistent and comprehensive federal regulatory framework | Stablecoin is a specific solution |
| R0010 | CBDC has Risk of significant energy footprint similar to Cryptocurrencies | Very different answers depending on CBDC mode, Cash rather than on Accounts |
| R0017 | Using private digital money could present Risks to both individual users and the financial system as a whole | Requires Research |
| R0019 | Risk of reducing the aggregate amount of deposits in the banking system, which could in turn increase bank funding expenses, and reduce credit availability or raise credit costs for households and businesses. | Requires Research |
| R0020 | Risk that interest-bearing CBDC could result in a shift away from other low-risk assets, such as shares in money market mutual funds, Treasury bills, and other short-term instruments. | Requires research |
| R0021 | Risk of reducing credit availability or raising credit costs for businesses and governments | Requires Research |
| R0022 | Risk of Stablecoins and other types of nonbank money shifting deposits away from banks even without a CBDC | Stablecoin is a specific solution |
B = Benefit Considerations |
||
P = Policy Considerations |
||
R = Risk Considerations |
||
D = Design Considerations |
||
1)
Internal Revenue Service,
Cash payment report helps government combat money laundering,
Accessed 2 March 2022,
https://www.irs.gov/newsroom/cash-payment-report-helps-government-combat-money-laundering
2)
Andrew Beattie,
Investopedia,
21 August 2021,
Accessed 2 March 2022,
https://www.investopedia.com/articles/pf/08/pay-in-cash.asp
3)
U.S. Currency Education Program. U.S. Currency in Circulation. Accessed 2 March 2022. https://www.uscurrency.gov/life-cycle/data/circulation
4)
Commercial banks include banks licensed either by federal or state banking agencies, credit unions, and thrifts from the White Paper.
cbdc/public/cbdc_omg/04_doc/20_comments/dsn/q15/start.txt · Last modified: 2022/06/17 19:22 by terrance
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