To Tokenize, or Not to Tokenize: The Design Question for a CBDC (Bank of Canada)

The Bank of Canada published a paper that develops a general equilibrium model to assess whether a central bank digital currency (CBDC) should be tokenized—deployable on programmable ledgers to compete with stablecoins—or non-tokenized and confined to off-chain markets, where traditional and crypto banks coexist. Tokenization matters for equilibrium only when collateral use differs across sectors; the three governing structural parameters are crypto-bank pledgeability, crypto-asset scarcity, and the social valuation of on-chain transactions. For institutional design, tokenized CBDC crowds out stablecoins and improves welfare when crypto banks are unreliable and crypto collateral is scarce, whereas non-tokenized CBDC may dominate when on-chain activity is less socially desirable or bond-collateral reallocation to the crypto sector is itself welfare-improving; both forms reduce bank lending, posing a payment-efficiency-versus-intermediation trade-off. [Bank of Canada]

Patterns and Determinants of Global Cryptocurrency Flows (Bank of Canada)

The Bank of Canada published a paper that uses Chainalysis on-chain data for up to 162 countries (2020–2023) to document cross-border Bitcoin flow patterns, identify their determinants, and extend the analysis to four major stablecoins. Bitcoin flows behave distinctly from traditional capital flows in level and volatility, with net outflows concentrated in emerging market economies and net inflows in advanced economies. Panel analysis identifies seven motives—adverse current and past macro and financial conditions, weak institutions, underdeveloped financial systems, payments and remittances demand, capital control circumvention, and sanctions evasion—of which macro conditions and remittances are most robust; a COVID-19 difference-in-differences exercise corroborates both. The remittances finding suggests cryptocurrency fills gaps in cross-border payment infrastructure, while evidence of capital control and sanctions circumvention supports closer regulatory oversight; the Chainalysis country-attribution methodology, which relies on web traffic as a proxy for user location, remains an unresolved data limitation. [Bank of Canada]

I am honored to have been given the opportunity to contribute a chapter to the soon-to-be released book, Tokenisation of Money: From Fiat Currencies to Stablecoins, published by Springer! Expertly edited by Prof. Selim Yazıcı, Prof. C. Coşkun Küçüközmen, and Dr. Michael Salmony, it serves as a critical handbook for navigating the profound transformation of the global financial services industry. At a time when there is substantial confusion regarding new digital instruments, this book distinguishes reality from hype across the dimensions of CBDCs, stablecoins, and tokenized deposits. In my contribution, I provide an overview and reality check on global retail central bank digital currency (CBDC) developments. The book will be available via digital platforms by the end of May and you can pre-order the hard cover version here: https://link.springer.com/book/9783032229458!

FYI I produce a monthly digest of digital fiat currency (DFC) developments exclusively for the official sector (e.g., central banks, ministries of finance and international financial institution (e.g., the BIS, IMF, OECD, World Bank)) plus academics and firms that are active in the DFC space (commercial banks, technology providers, consultants, etc.). (DFCs include central bank digital currency (CBDC), stablecoins and tokenized deposits.) It goes out via email on the first business day of every month, and if you’re interested in being on the mailing list, please email me at john@kiffmeister.com.