Navigating the Purpose and Provision of CBDC (IJPE)
In the International Journal of Political Economy (IJPE), George Pantelopoulos argues that one purpose of central bank digital currency (CBDC) is to preserve the fungibility of privately issued means of payment. Through the retail anchor function of central bank money, convertibility into banknotes bridges heterogeneities among forms of private money and forges a symbiosis between them, preventing commercial bank money from de-anchoring and thereby averting adverse selection and fractured monetary sovereignty. With banknotes declining as a means of payment, however, this convertibility risks becoming a merely theoretical rather than real-world construct — a gap that could justify introducing CBDC. Separately, the paper contends that genuine CBDC must be booked as a direct central bank liability; “synthetic CBDC” schemes, being central-bank-backed e-money issued by intermediaries, do not qualify. A two-tier architecture is presented as the most likely means of preserving this liability structure without requiring the central bank to hold retail accounts. [IJPE]
The Alchemy of Fungible Money: A Trilateral Approach to Bridging Heterogeneities (SSRN)
George Pantelopoulos and Paul Wessels posted a paper on the Social Science Research Network (SSRN) that challenges the prevailing “moneyness” policy focus on “singleness” – the property that payments denominated in the sovereign unit of account will be settled at par, even if they use different forms of privately and publicly issued monies. The authors argue that settlement at par is merely one component of true interchangeability. Even when instruments like commercial bank deposits, e-money, and stablecoins exchange at par, unmitigated heterogeneities in credit risk and accessibility can still trigger adverse selection and systemic instability during market stress. To achieve practical fungibility, they propose a trilateral framework of foundational (unit of account), enabling (convertibility, deterministic settlement finality, interoperability), and supportive (regulation, deposit insurance) elements. As physical cash usage declines, the analysis questions whether decentralized innovations like stablecoins and tokenized deposits can sufficiently replicate these complex institutional support mechanisms to achieve practical fungibility. [SSRN]
Tokenized Finance and The Perimeter of Central Banking (KC Fed)
Darrell Duffie presented a paper at the Kansas City Fed (KC Fed) Jackson Hole Conference that evaluates how central banks can support safe settlement for large-scale tokenized finance without expanding their operational perimeter. He analyzes infrastructure models based on financial stability, central-bank balance sheet size, and fragmentation costs, warning that poor interoperability will severely delay tokenization’s growth. Duffie assesses four approaches: (1) providing tokenized central-bank reserves, (2) synchronizing extended-hour conventional payment systems with programmable ledgers, (3) authorizing private-sector narrow banks to offer tokenized deposits via central-bank omnibus accounts, and (4) utilizing wholesale stablecoins. He predicts central banks will likely delegate tokenization to private-sector narrow banks (approach 3) to avoid building 24×7 programmable ledgers themselves. He dismisses stablecoins as inferior for financial stability; as claims on private issuers, they carry vulnerabilities like liquidity transformation and contagion, lacking the safety of central bank money. [KC Fed]
BTW if you want to see a complete database of my DFC-related posts going back years, including many that didn’t make the Daily Digest cut, click here.
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.
