The Bank of Thailand has released the findings of a new study on how to handle the financial sector’s implications of issuing a retail central bank digital currency (CDBC).
The results of a new study from the Bank of Thailand point to three key considerations for making sure a retail central bank digital currency doesn’t adversely impact financial stability.
Unlike wholesale CBDCs, which are only available to financial institutions and intermediaries, retail CBDCs are generally available to the general people.
The Bank of Thailand, like many other central banks across the world, has been researching and developing CBDCs and will begin testing one next year. Unlike the Bank of Thailand, not all of these central banks have committed to testing retail CBDCs.
The BoT has released three major results from its most recent analysis in order to ensure that retail CBDC issuance does not pose a risk to financial stability.
After identifying a “flight to quality” as a primary risk factor — that is, consumers preferring CBDCs to existing fiat money in certain instances — the BoT’s analysis indicates that further problems might include an adverse effect on monetary policy transmission or existing financial institutions. To avoid this, the study recommends the following three measures:
“(1) the CBDC shall be cash-like and non-interest-bearing, (2) intermediaries such as financial institutions shall be the distributors of CBDC to the general public, and (3) conditions or limits for converting CBDC shall be established.”
Such restrictions, according to the BoT, will help to ensure that a retail CBDC does not compete with bank deposits and that “intermediaries continue to play an important role in collecting deposits, issuing credit, and maintaining liquidity in the wider financial system.” According to the BoT, these safeguards also provide a defence against financial institution runs.
Notably, the BoT believes that public demand for a retail CBDC would develop over time, perhaps making it an alternative method of payment to cash and existing forms of e-money in the future.
Along with these findings, the BoT has revealed more information about its planned retail CBDC trial in real-world scenarios.
There will be two tracks in the pilot. The “Foundation Track,” which will begin in Q2 2022, will comprise using the currency for limited cash-like transactions, such as payment or receipt for goods and services, as well as conversion.
The second, more ambitious “Innovation Track” will look into how a retail CBDC may be utilized for more innovative use cases, including input from private sector players and technology developers.
The roadmap for this second track has yet to be determined, and the BoT says it is still working on the format of the pilot and determining which actors will be allowed to participate in its execution.
As previously reported, the Bank of Thailand has teamed up with several major Asian banks to develop a prototype cross-border CBDC, or Multiple Central Bank Digital Currency Bridge (m-CBDC), that employs distributed ledger technology.
The Hong Kong Monetary Authority, the Central Bank of the United Arab Emirates, and the People’s Bank of China’s Digital Currency Institute are among the other participating banks.
