The Optimal Issuance Rate for Central Bank Digital Currencies

According to reports, BIS economists conducted macroeconomic research on the potential impact of introducing retail central bank digital currencies (CBDCs) and concluded that the optimal level of CBDCs is a issuance rate of 40% of gross domestic product (GDP). The report found that if the issuance rate is 30% of GDP, CBDC can increase a country’s output by nearly 6% and achieve welfare benefits of over 2%. However, the author believes that the optimal policy outcome accounts for an even higher proportion of GDP, reaching 40%. This CBDC issuance level is significantly higher than any currently proposed upper limit. For example, it is almost four times the upper limit of the digital euro being discussed, and a report by Morgan Stanley in 2021 found that this would result in a loss of 873 billion euros in bank deposits. However, this high number is due to researchers predicting that consumers will not hold the majority of CBDCs. Their model predicts that the CBDC stock will increase to 30% of GDP overnight, while commercial bank deposits will only decrease by 6%. The difference is that banks convert a significant proportion of their government bond holdings into CBDCs. In fact, the document predicts that bank deposits will return to their levels within six years and grow by 21.5% in the long term. From the government’s perspective, the central bank has increased its government bond holdings by 30% of GDP, which means it is the main bondholder.

BIS research shows that the optimal level of CBDC is 40% of GDP

Central Bank Digital Currencies (CBDCs) have become a hot topic in recent years, as governments worldwide explore the use of digital currencies as an alternative to cash. According to recent macroeconomic research conducted by BIS economists, the optimal level of CBDC issuance is 40% of the gross domestic product (GDP). In this article, we will delve into the details of the research and analyze its potential impact on the economy.

What is a Central Bank Digital Currency (CBDC)?

A Central Bank Digital Currency (CBDC) is a digital version of a country’s sovereign currency that aims to serve as a legal tender. It is issued and backed by the government or central bank and can be used for a variety of purposes, such as payments, investments, and store of value. Unlike cryptocurrencies, which are decentralized, CBDCs are centralized and operate under government control.

The Impact of CBDC on GDP

The BIS economists’ research found that the optimal issuance rate of CBDCs is 40% of GDP. This means that if a country’s GDP is $1 trillion, the central bank should issue CBDC worth $400 billion. This optimal issuance rate results in increased output and welfare benefits of over 2%.
On the other hand, if the issuance rate is lower, say 30% of GDP, CBDC can still increase the country’s output by nearly 6%. However, the BIS economists have found that the optimal policy outcome accounts for 40% of GDP, which is significantly higher than the upper limit being proposed by most countries.

Impact on Bank Deposits

The optimal issuance rate of CBDCs can have significant impacts on bank deposits. According to a report by Morgan Stanley in 2021, a 40% CBDC issuance rate would result in a loss of 873 billion euros in bank deposits. However, the BIS economists’ model predicts that the loss will only be 6%, implying that the consumers will not hold the majority of CBDCs. Instead, commercial banks will convert a significant proportion of their government bond holdings into CBDCs.
Furthermore, the research indicates that, in the long term, bank deposits will return to their current levels and grow by 21.5%. This is due to the increase in government bond holdings by the central bank, which means the central bank becomes the main bondholder.

Conclusion

In conclusion, according to the BIS economists’ research, the optimal issuance rate for CBDCs is 40% of GDP. This rate is higher than any currently proposed upper limit but can result in increased output and welfare benefits of over 2%. Although the optimal policy outcome accounts for an even higher proportion of GDP, commercial banks will shift towards CBDCs, causing a loss of around 6% of bank deposits, which will return to their previous levels in the long term.

FAQs

**Q1. Will CBDCs replace cash in the near future?**
A1. While some governments are exploring the use of CBDCs as an alternative to cash, it is unlikely that CBDCs will replace cash entirely in the near future.
**Q2. How will CBDC issuance impact inflation?**
A2. CBDC issuance can impact inflation by increasing the money supply. However, if the issuance rate is optimal, as found in BIS economists’ research, the increased output can offset the inflationary impact.
**Q3. Will CBDCs be subject to regulation like traditional currencies?**
A3. Yes, CBDCs will be subject to government regulation and will operate under government control.