Revisiting the Monetary Sovereignty Rationale for CBDCs
The Bank of Canada published a paper on the potential role of central bank digital currency (CBDC) in protecting a country’s monetary sovereignty. According to the monetary sovereignty argument, private and foreign digital currencies could displace domestic currencies (“currency substitution”), threatening the central bank’s ability to conduct monetary policy and act as a lender of last resort. The paper concludes that CBDC may be a useful defense mechanism for countries with strong monetary systems where currency substitution is driven more by the attractiveness of new digital currencies than by fundamental economic weaknesses in the country. However, for countries that have deeper macroeconomic and financial issues, CBDC issuance is unlikely to prevent currency substitution. [Read more]
CBDC and Banking: Macroeconomic Benefits of a Cash-Like Design
Another Bank of Canada paper shows that an interest-bearing cash-like CBDC is more effective than a deposit-like CBDC in promoting consumption and welfare. It can also increase bank intermediation, even in the absence of bank market power. The cash-like CBDC’s interest rate makes payments more efficient, which increases demand and generates positive spillovers on other types of transactions. As a result, deposit taking and lending, and thus intermediation, increase. The theoretical model used to draw these conclusions introduces new general equilibrium linkages across different types of retail transactions (including cash, deposits and credit) as well as feedback effects from transactions to deposit creation. [Read more]
US CFPB Opens Inquiry into “Buy Now, Pay Later” Credit
The US Consumer Financial Protection Bureau (CFPB) issued a series of orders to five companies offering “buy now, pay later” (BNPL) credit. The orders to collect information on the risks and benefits of these fast-growing loans went to Affirm, Afterpay, Klarna, PayPal, and Zip. The CFPB is concerned about accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology. [Read more]
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