A recent study by the Bank of Thailand reveals three key aspects to ensure that the central bank’s retail digital currency does not have a negative impact on financial stability.
The Bank of Thailand has released a new study on the impact of central bank-issued retail digital currencies (CDBCs) on Thailand’s financial sector.
Unlike wholesale CBDCs, retail CBDCs are only available to financial institutions and intermediaries and are open to the general public.
The Bank of Thailand, like many other central banks around the world, is conducting research and development on CBDCs and will begin testing CBDCs next year Unlike the BOT, not all of these central banks have committed to testing retail CBDCs.
The BoT has identified three key conclusions from its latest analysis to ensure that retail CBDC issuance will not create financial stability issues.
Having previously identified “flight to quality”-consumer preference for CBDCs over existing fiat money in some cases-as a key risk factor, the BoT’s study points to another issue: the potential negative impact on monetary policy transmission and existing financial institutions.
The study suggests that three factors are important to avoid this scenario.
“(1) CDCs, like cash, should be interest-free. (2) CDCs should be distributed to the general public through intermediaries such as financial institutions. (3) Standards or limits should be set for the conversion of CBDCs.
Such safeguards would help ensure that retail CBDCs do not compete with bank deposits and “preserve the role of intermediaries in collecting deposits, loans, and liquidity regulation in the broader financial system,” the BoT said. According to the BoT, the procedures will also protect against loss of control by financial institutions.
In particular, the BoT expects public demand for retail CBDCs to grow over time, and they are likely to replace cash and other electronic money as a means of payment in the future.
In addition to these findings, the BoT disclosed additional information about a planned real-world retail CBDC pilot.
The pilot will consist of two parts: The first, or “base track,” will begin in the second quarter of 2022 and will use the currency to a limited extent for cash-like transactions, such as paying for, receiving, and converting goods and services.
A second, more ambitious “innovation track” will examine how RCDC can be used for more creative use cases involving the private sector and technology developers.
The roadmap for this second track has not yet been finalized, and the World Bank said it is currently working on the format of the pilot project and determining which entities are eligible to participate.
As previously reported, the Bank of England has proposed to work with several large Asian banks to develop a cross-border CBDC, or multi-central bank digital currency bridge (m-CBDC), using distributed ledger technology.
Other participating banks include the Hong Kong Monetary Authority, the Central Bank of the United Arab Emirates, and the People’s Bank of China’s Digital Currency Institute.