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Transcript of DANMARKS NAINALBANK - · PDF fileIt is difficult to see what central bank ... Structure and...
DANMARKSNATIONALBANK 1 5 D E C E M B E R 2 0 1 7 — N o. 2 8
ANALYSIS
Itisdifficulttoseewhatcentralbankdigitalcurrencywouldbeabletocontributethatisnotalreadycoveredbythepaymentsolutionswhichexisttoday.Denmarkhasasecureandeffectivepaymentsinfrastructureanddigitalcurrency,intheformofbankdeposits,alreadyexists.
CentralbankdigitalcurrencywouldfundamentallychangeDanmarksNationalbank’sroleinthefinancialsystemandmakeDanmarksNation-albankadirectcompetitortothecommercialbanks.Theintroductionwouldleadtorisksoffinancialinsta-bility,forexamplebyincreasingtheriskofsystemicbankruns.
Thepotentialbenefitsofintroducing centralbankdigitalcurrencyforhouseholdsandbusinessesinDen-markwouldnotmatchtheconsid-erablechallengeswhichthisintro-ductionwouldpresent.DanmarksNationalbankthereforehasnoplanstoissuecentralbankdigitalcurrency.
Introductionandsummary
Shouldcentralbanksissuedigitalcurrencytohouseholdsandbusinesses,asasupplementtophysicalcashanddepositswithcommercialbanks?Thisisanissuethatiscurrentlybeingdebatedinternational-ly.1Oneoftheargumentsinfavourofintroducingcentralbankdigitalcurrencyistoachieveamoreeffectivepaymentsystem.Anotheristoensurethathouseholdsandbusinessesstillhaveaccesstoasafeasset,astheuseofcashdeclines.Athirdargumentistheadvantageofestablishingabackupsystemfortheexistingpaymentsinfrastructure.
InaDanishcontext,itisunclearwhatcentralbankdigitalcurrencywouldbeabletocontributethatisnotalreadycoveredbythecurrentpaymentsolutions.Denmarkhasasecureandeffectivepaymentsinfrastructure,whichamongotherthingsprovidesforimmediatesettlementofpayments–forexampleviaMobilePay,theprivatelydevelopedmobilepay-mentsolution.Furthermore,depositsofuptoeuro100,000arecoveredbythedepositorguaranteescheme,andeveryconsumerhasastatutoryrighttoabasicpaymentaccount.
ThepotentialbenefitsofintroducingcentralbankdigitalcurrencyinDenmarkarenotassessedtomatchtheconsiderablechallengesthatthisintroduc-tionwouldpresent.IfDanmarksNationalbankweretoissuecentralbankdigitalcurrency,thiswouldfundamentallychangeitsroleinthefinancialsystem,andwouldleadtorisksoffinancialinstability.Cen-tralbankdigitalcurrencycould,forexample,haveagreatimpactonthebanks’businessmodeland
1 Seee.g.SverigesRiksbank(2017),Callesen(2017),Mersch(2017),Ni-colaisen(2017),Broadbent(2016),Skingsley(2016),BechandGarratt(2017),Grymetal.(2017),BarrdearandKumhof(2016),andBordoandLevin(2017).
CentralbankdigitalcurrencyinDenmark?
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increasetheriskofsystemicbankruns.Dependingonhowitmightbedesigned,issuingcentralbankdigitalcurrencycouldalsopresentchallengeswithrespecttoDenmark’sfixedexchangeratepolicy,andwouldimposesignificantlegalandadministrativechallengesonDanmarksNationalbank,withoutanyclearbenefitsforsociety.
Incountriesthatareinadifferentsituation,forexamplethosewithalesswelldevelopedpaymentsystem,thebalancebetweenbenefitsandrisksmightbedifferent.
IntheanalysisthevariousreasonsforintroducingcentralbankdigitalcurrencyinaDanishcontextareconsidered.First,centralbankdigitalcurrencyiscomparedtocash,bankdepositsandthe”cryptocurrencies”.ThentheeffectofcentralbankdigitalcurrencyonDanmarksNationalbank’scoretaskswithregardtopaymentsystems,financialstabilityandmonetarypolicyisexamined.
Whatiscentral bankdigitalcurrency?
A new type of moneyCash,intheformofbanknotesandcoins,isaclaimonDanmarksNationalbank,whilebankdepositsareaclaimonthebankinwhichthecustomerholdsanaccount.HouseholdsandbusinessescannotholdclaimsonDanmarksNationalbankinelectronicform–butonlyasphysicalbanknotesandcoins.Thebanks,ontheotherhand,doholdelectronicclaims,sincetheyholdaccountsatDanmarksNational-bank.Likeothercountries’centralbanks,DanmarksNationalbankisbankertothebanks.
Centralbankdigitalcurrency(CBDC)2wouldbeanewtypeofmoney,coexistingwithcashanddepositsatthecommercialbanks.Likecash,CBDCwouldbeaclaimonDanmarksNationalbank,althoughitwouldbedigital,likedepositswiththecommercialbanks.3
2 Intherestofthisanalysis,theabbreviationCBDCisusedforcentralbankdigitalcurrency.
3 SeealsoBechandGarratt(2017)foradiscussionofhowCBDCrela-testoothertypesofmoney.
Inthepublicdebate,CBDCisoftenlinkedtothecryptocurrencies,suchasbitcoin.YetCBDCandprivatecryptocurrenciesdonotsharethesamecharacteristics,cf.thenextsection.ThislinkagemayreflectthatCBDCisoftenassociatedwiththeblock-chaintechnologyonwhichthecryptocurrenciesarebased.4ThistechnologyisdescribedinfurtherdetailinAnnex1.
YetCBDCdoesnotneedtobebasedonblock-chaintechnology,butcanbecreatedusingexistingtechnology,withatraditionalaccountstructureandbookkeepingatDanmarksNationalbank.Grymetal.(2017)arguethatblockchaintechnologyinitscurrentformisnotasuitablebasisforCBDC.However,newtechnologiessuchasblockchaincanstillbeusedintheDanishfinancialsectorwithoutintroducingCBDC.
Characteristics of CBDCThefactthatCBDCisaclaimonDanmarksNational-bankmeansthat,likecash,itisriskfree.However,theDanishdepositorguaranteeschemeentailsthatdepositswithcommercialbanksofuptoeuro100,000,oraroundkr.750,000,arecoveredbytheGuaranteeFund.TheGuaranteeFund,previouslytheDepositorGuaranteeFund,istheDanishDepositorandInvestorGuaranteeScheme.ItspurposeistocoverdepositorsandinvestorsifaDanishbankfails.5 TheGuaranteeFund’stargetlevelis0.8percentofthedepositscovered.6IfthisamountisnotsufficienttofulfiltheGuaranteeFund’sobligations,itcanraise
4 CentralbankdigitalcurrencybasedonblockchainandsimilarnewtechnologiesisalsosometimescalledCBCC,CentralBankCryptoCurrency.Thereasoningintheanalysisisindependentoftheun-derlyingtechnology,andthereforeCBDCisusedconsistently.Intheinternationaldebate,adistinctionisalsosometimesdrawnbetweenCBDCforhouseholdsandforfinancialenterprises,calledretailandwholesaleCBDC,respectively.Here,thefocusisonCBDCthat,asaminimum,ismadeavailabletohouseholds,andpossiblytofinancialandnonfinancialenterprisesaswell.SeeBechandGaratt(2017)forataxonomyofvarioustypesofCBDC.
5 TheGuaranteeFundwasestablishedbytheDanishActonaDe-positorandInvestorGuaranteeScheme,cf.ConsolidatedActno.917of8July2015(asamended).TheGuaranteeFundcoversbothnaturalandlegalpersons,butnotfinancialenterprises.BranchesofforeignbanksmayjointheGuaranteeFundasasupplementtotheguaranteeschemeinthecountryinwhichtheyareregistered,iftheDanishschemeismorefavourablethantheschemeinthatcountry,cf.Section4.BranchesofbanksoutsidetheEUmustjointheDanishscheme,cf.Section3(1)5).
6 Extraordinarycontributionsmaybeleviedonthebanks,iftheGuaranteeFunddoesnothavesufficientfunds,cf.Section7(6)oftheActonaDepositorandInvestorGuaranteeScheme.
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astateguaranteedloan.Netdepositsexceedingkr.750,000arenotcoveredbytheGuaranteeFund,anddepositorswithlargerdepositsmaythereforerisklosses.
Bymaintainingafixedexchangerateagainsttheeuro,DanmarksNationalbankensuresstablepricedevelopmentinDanishkronerterms.Thismeansthattheamountofgoodsandservicesthatcanbepurchasedforkr.100,forexample,doesnotfluctu-atemuchfromyeartoyear.Inotherwords,moneyissuedbyDanmarksNationalbankmaintainsitsrealvalue.Thesameappliestobankdeposits,sincetheyarealsodenominatedinkroner.
Ontheotherhand,thepriceofcryptocurrencies,suchasbitcoins,canfluctuatesignificantly,cf.Chart1.Thisisbecausethereisnocentralissuertounder-pintheirvalue.Thevalueofbitcoinsisbasedsolelyonsomeonebeingwillingtoacquirethematthepriceinquestion.Thesesignificantpricefluctuationslimitthevalueofbitcoinsforpaymentsandstoringvalue.7
Thespecialcharacteristicofcashisthatitistangible,takingthephysicalformofeitherabanknoteoracoin.Cash,bankdeposits,CBDCandcryptocurrenciesthushavesimilaritiesanddifferencesintermsofissuer,tangibilityandretentionofvalue,cf.Chart2.
CBDC can be designed in several ways …CBDCcanbedesignedinseveralwaysintermsofwhoistohaveaccess,howitcanbeused,andwhetheritistoaccrueinterest.
… Structure and accessForexample,DanmarksNationalbankcouldalloweveryonetoholdadepositaccountatDanmarksNationalbank.Thiswouldrequireconsiderationofwhethertheseaccountsshouldonlybeofferedtohouseholds,orshouldalsobemadeavailabletobusinesses.Inthissituation,adistinctioncouldbemadebetweenfinancialandnonfinancialbusinesses.Itmightbedifficult,however,toexcludespecifictypesofbusinessesinasituationwherebothbanksandhouseholdsholdaccountsatDanmarksNationalbank.Asetofruleswouldalsohavetobe
7 SeeLaursenandKyed(2014)foradiscussionofthecharacteristicsofcryptocurrencies.
drawnup,toensurethattherestrictionsconcerningaccesstoCBDCcannotbecircumvented.
ItwouldalsohavetobeconsideredwhetheraccesstoCBDCshouldbelimitedto,forexample,busi-nessesdomiciledinDenmark,andpersonsresidentorlegallyresidentinthiscountry,andhowtheserestrictionscouldbehandledinpractice.Theconse-quencesofapersonorbusinessnolongerfulfillingtherequirementwouldalsohavetobeconsidered.Forexample,wouldapersonwhomovesabroadbeobligedtomoveanydepositwithDanmarksNationalbanktoanaccountinacommercialbank?WouldapersonwhoworksinDenmark,butisnotresidenthere,haveaccesstoCBDC?
Itwouldalsohavetobeconsideredhowanyre-strictionsconcerningaccesstoCBDCwouldcomplywiththeEUsinglemarket,includingtherulesforthefreemovementofpeopleandcapital.Withrespecttoconsumers,theDanishActonPaymentAccounts8 requiresthebankstoofferabasicpaymentaccountnotonlytoDanishconsumers,butinprinciplealsotoconsumersintherestoftheEU,oranycountrywithwhichtheEUhasanagreementinthefinancial
8 Actno.375of27April2016(asamended).
The value of bitcoins fluctuates significantly
Chart1
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6
8
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12
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1,000dollarperbitcoin
2013 2014 2015 2016 2017
Note: Thechartshowsdailyobservationsoftheaveragemarketpriceacrossthelargestbitcoinexchanges.Latestdatapointis10December2017.
Source: Blockchain.info.
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area.TheActdoesnotapplytoDanmarksNationalbank,sinceconsumerscannotopenaccountsatDanmarksNationalbank9.IfthispremiseweretoceasewiththeintroductionofCBDC,theregulatoryauthoritywouldhavetoassesstheconsequences–forinstancewhetherallEUconsumerswouldhavetherighttoaCBDCaccount.TheconsequencesofintroducingaCBDCwoulddependonwhoistohaveaccesstoit.
Asanalternative–orpossiblyasasupplement–toanaccountbasedCBDC,DanmarksNationalbankcouldissueCBDCasaprepaidmeansofpayment,suchasacard(likeRejsekort–theDanishelectronictravelpaymentcard),ordigitally(likePayPal)
9 Cf.Section1(3)oftheActonPaymentAccountsandFolketingstiden-deA,20152016,Billno.L103,page16.
inamobilewallet.IfCBDCweretobeissuedasaprepaidmeansofpayment,itwouldbeimpossibletorestrictaccesstoselectedgroups,suchashouse-holds.
Likecash,aprepaidCBDCwouldprobablybeusedprimarilyforsmallerpayments.Ontheotherhand,itwouldbelesssuitableforlargerpayments,orforstoringvalue–amongotherthings,thereisariskoflosingthedeviceonwhichthevalueisstored.TheeffectsofissuingaprepaidCBDC–includingtherisksidentifiedbelow–wouldthereforebelessextensivethanforanaccountbasedCBDC.Ontheotherhand,theopportunitiesforuse,andtherebytheexpecteddemand,alsoappeartobelimited,asalsoempha-
Characteristics of cash, bank deposits, CBDC and cryptocurrency Chart2
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sisedbyGrymetal.(2017).TheanalysisthereforefocusesprimarilyonanaccountbasedCBDC.
… InterestPhysicalcashdoesnotearninterest.Cashhasafixed,nominalvalue–afteroneyear,a100kronernotewillstillhaveanominalvalueofkr.100.Anac-countbasedCBDC,ontheotherhand,canbestruc-turedwithorwithoutinterest.IfCBDCaccruesinterestat2percentannually,apersonholdingCBDCforkr.100todaywillthusholdCBDCforkr.102inoneyear’stime.WhetherCBDCearnsinterestornotwillbeofsignificancetothefinancialsectorandtomonetarypolicy,cf.thesectionbelow.InterestearningCBDCwouldalsochallengetheperceptionthatmoneyissuedbyDanmarksNationalbankhasafixed,nominalvalue.ThiswouldattractparticularattentioninsituationswheretheinterestonCBDCisnegative–formonetarypolicyreasons,forexample.
IndependentlyofhowCBDCisdesigned,itmustbeassumedthatitwouldhavetobeequallysuitableformakingpaymentsasisthecasewithdepositswithcommercialbanks.ItwouldthereforebearequirementthatCBDCcanbetransferredbetweenpersonsandbusinesseswithoutdelay,atanytimeofthedayornight.CBDCintheformofanaccountatDanmarksNationalbankmustbeexpectedtobeofferedwithanumberofbasicservices,suchasonlinebankingandapaymentcard.Asdescribedinfurtherdetailinthesectionbelowconcerningpaymenthabitsandinfrastructure,itisunclearhowCBDCwouldcontributetoofferingDanishhouse-holdsandbusinessesmoreeffectivepaymentsthantheyhaveaccesstotoday.NorisitclearthatCBDCwouldmakepaymentsmoresecure,cf.below.
AnonymityCashisanonymous,i.e.cashpaymentscannotbetracked.Sometimescashpaymentismadefortransactionsinordertoconcealthemfromtheauthorities,forexampleinvolvingmoneylaundering,includingtaxevasion,andfinancingofterrorism.InDenmark,thisproblemislimitedbytherelativelysmallamount
ofcashincirculation.Inaddition,severallegislativeinitiativesaredesignedtolimitlargecashtransacti-ons.10IncountriessuchastheUSA,wherethecircula-tingcashvolumeismuchlarger,theuseofcashforillegalactivitiesisabiggerproblem.Thishasledtoproposalstoreducetheamountofcashincirculati-onbystartingtophaseoutbanknotesaboveacer-tainvalue,whilecoins,andpossiblyalsosmalldeno-minationbanknotes,wouldremainincirculation.11
Incontrasttocash,bankdepositsarenotanonymous.Banksandcertainotherundertakingsandper-sonsaresubjecttoextensiveregulation,toensurethatarecordismadeofwhoownsabankdeposit,andwhoistheremitter/recipientofanytransaction.Thismakesitpossibletotracktransactions,whichtheauthoritiescanusetosolvecrime.Therecordingofpaymentinformationmayalsoformthebasisforthebanks’reportingtoSKAT(theDanishCustomsandTaxAdministration),inordertopreventtaxevasion.
Dependingonthetechnicalsolutionusedtoesta-blishCBDC,itcan,inprinciple,bearrangedwhetherCBDCistobeanonymousornot.YetinpracticeitwillprobablynotbepossibletomakeCBDCcompletelyanonymous,sincealluseofinformationtechnologyleavestracks.Performingtransactionswithoutspe-cifyingremitterorrecipientwouldalsosignificantlyincreasetheriskofmoneylaundering,includingtaxevasion,andfinancingofterrorism.Ifthetechnicalsolutionwerealsotosupportinternationaltransfersinrealtime,itwouldbeimpossibletostoppaymentsthatareintendedtofinanceterrorism,forexample.12
ItwouldthereforenotbeappropriateoracceptabletomakeCBDCanonymous,sinceCBDCtransactionsmustbeexpectedtoachieveafargreatervolumethanthecashpaymentsmadetoday.
Non-anonymity would impose legal obligations on Danmarks NationalbankTheintroductionofaCBDCbasedonanonanonymoussolutionwouldimposeanumberoflegalobliga-
10 SeeDanishPaymentsCouncil(2016a).
11 SeeRogoff(2016).
12 InanyinvestigationofpossibleinfringementoftheDanishAntiMoneyLaunderingAct,informationheldbyDanmarksNational-bankmight,asrequiredbylegislation,bepassedonbyDanmarksNationalbanktoanotheradministrativeauthority.
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Rules concerning protection of personal data
Box2
IssuingCBDCmightresultinthefollowingchallenges
andobligationsforDanmarksNationalbankunderthe
rulesfortheprotectionofpersonaldata1:
• Securityrequirementsfortheprotectionofdata
disclosedtoDanmarksNationalbank.
• Theeffectiveerasureofdatathatisnolongerneces-
saryandrelevantmightpresentchallengesincertain
technicalsolutions,forexampleablockchain.
• Theregisteredparties’rightofaccesstotheirown
information.
1. Actno.429of31May2000(asamended))ontheProcessingofPersonalData.TheActwillbereplacedbythenewGeneralDataProtectionRegulation,Regulation(EU)2016/679oftheEuropeanParliamentandoftheCouncilof27April2016,whichwillenterintoforceon25May2018.TheRegulationissupple-mentedbytheDanishBillforaDataProtectionAct, Billno.L68,tabledon25October2017.
Obligations for Danmarks Nationalbank on issuing non-anonymous CBDC
Box1
IssuingnonanonymousCBDC,wherebyhouseholdsand
businessesbecomecustomersatDanmarksNational-
bank,wouldinteraliaimposethefollowingobligations
onDanmarksNationalbankunderantimoneylaundering
legislation1,andinordertocomplywithUNresolutions
implementedinEUlegislation:
• Theperformanceofcustomerduediligencemeas-
ures,i.e.obtainingproofofidentitydocumentsforall
customers,anddeterminingthepurposeandscope
oftheindividualcustomerrelationship.
• Acontinuousdutyofattentionandinvestigationcon-
cerningallcustomerrelationships,inordertobeable
toidentifyunusualtransactions.
• DocumentationoftransactionsusingCBDC.
• Identificationofremitterandrecipientforalltransac-
tions.
1. Actno.651of8June2017onMeasurestoPreventMoneyLaunderingandFinancingofTerrorismandRegulation(EU)2015/847oftheEuropeanParliamentandoftheCouncilof20May2015oninformationaccompanyingtransfersoffunds.
tionsonDanmarksNationalbankunderantimoneylaunderinglegislation,forexample,cf.Box1.
IfinformationconcerningCBDCbasedtransacti-ons,holdings,etc.couldbeattributedtoaspecificperson,thisinformationwouldalsobesubjecttotheprocessingrulesandsecurityrequirementslaiddownintheDanishActontheProcessingofPersonalData,cf.Box2.
IrrespectiveofwhetherDanmarksNationalbankweretooutsourcetheexecutionoftheaforementionedtaskstoanexternalcontractpartner,itwouldstillberesponsibleforcompliancewiththeregulationsandwouldhavetoverifycontinuouslythatthistaskisperformedinaccordancewiththerequirements.
Issuing CBDC would affect all of Danmarks Nationalbank’s core tasksDanmarksNationalbank’scoretasksaretomaintainasecurepaymentsystem,supportfinancialstabilityandensurestableprices.13Servingasbankertothebanksplaysasignificantroleinfulfillingallofthesethreeobjectives.Asprovidersofservicestohouseholdsandbusinesses,commercialbanksareencouragedtodevelopnewsolutionsforpaymentsandfinancialservices,basedondemandandneeds.
OfferingCBDCdirectlytohouseholdsandbusinesses,therebyservingastheirbank,wouldbeafundamentaldeparturefromtheexistingmodel.ItwouldhaveanimpactonallofDanmarksNational-bank’scoretasks,andthefinancialsectoringeneral. BelowitisanalysedhowaDanishCBDCwouldinfluencethepaymentsystem,financialstabilityandmonetarypolicy.
Paymenthabits andinfrastructure
Denmarkhasamodernandwellfunctioningpay-mentsmarket.Besidescash,thereareanumberofelectronicpaymentsolutionsofferedbyprivateoperators.ThesolutionsincludetheDankort(nationaldebitcard),internationalcreditanddebitcards,and
13 SeeSection1ofActno.116of7April1936(asamended)onDan-marksNationalbank.
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Payments at retailers by payment type and age
Chart4
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1529years
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5059years
6069years
7079years
1579years
Cash Paymentcards Otherpaymentsolutions
Percent
Note: Paymentsbypaymenttypeandcompiledbynumberofpayments.Thissolelyincludespaymentsatphysicalretailers,sothatInternetshoppingisnotincludedinthefigures.
Source: DanmarksNationalbank.
Declining use of cash for payments Chart3
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00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Cash payments
Cheque payments
Card payments
Note: Thechartshowsretailturnover,etc.bypaymentmethodused.PaymentsusingMobilePaywithanassociatedpaymentcardareincludedincardbasedpayments.Chequeshavebyandlargenotbeenusedinrecentyears,andasfromtheendof2016Danishbanksnolongercashcheques.Turnoverintheretailsector,etc.isawidercompilationthanStatisticsDenmark’sretailturnoverstatistics.
Source: StatisticsDenmark,FinanceDenmark,Nets,DanmarksNationalbankandowncalculations.
theMobilePaymobilepaymentsolutionthatmakesitpossibletouseasmartphonetotransfermoneyelectronicallytobothpersonsandretailers.MobilepaymentsarenotuniquetoDenmark,sincebothSwedenandNorway,forexample,havesimilarsolu-tions,calledSwishandVipps,respectively.
Payment habits are changingInstepwiththeadvanceofelectronicpayments,theuseofcashforretailpaymentsisdeclining.Thistendencyhastakenplaceovermanyyears,cf.Chart3.ThesamedevelopmentcanbeseenintheotherNordiccountries.ThedeclininguseofcashisakeyreasonfortheanalysisbySverigesRiksbankofthepotentialforissuingCBDC,cf.SverigesRiksbank(2017).
In2017,cashaccountedfor23percentofpaymentsinphysicaltrade,cf.Chart4.Thisisinmarkedcon-trasttotheeuroarea,whereEsselinkandHernández(2017)findthat,onaverage,79percentofallphysicaltradewascashbasedin2016.
Thedeclininguseofcashreflectsthathouseholdsandbusinessestoagreatextentpreferelectronicpayment,becauseitisconvenient,andthatuptodatesolutions,suchasthecontactlessDankort,areavailable.AsurveybyDanmarksNationalbankshowsthat96percentofhouseholdsseldomor neverfindthatitisdifficulttobeabletopayincash.14Thedeclininguseofcashthereforedoesnotreflectproblemswithusingcash.
Thestatutoryuniversalrighttoabasicpaymentaccount,15combinedwiththedepositorguaranteescheme,whichprotectsthecustomer’sdepositsuptoapproximatelykr.750,000ifthebankfails,makesitsafetobothpayandstoremoneyelectronically.
Withregardtothepaymentsystem,therearenopracticalchallengesasaconsequenceofthede-clininguseofcash.Onthecontrary,theeconomiccostsofpayingcashfarexceedthecostsofDankortpayments,cf.DanishPaymentsCouncil(2016a).Moreover,thedeclininguseaffectsneitherthesta-
14 SeeDanmarksNationalbank(2017b).
15 TheDanishActonPaymentAccounts,Actno.375of27April2016(asamended)entailsthatallconsumershaveaccesstoholdabasicpaymentaccountinabank,cf.alsoDanishPaymentsCouncil(2016a)forfurtherdetails.
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Legal tender, freedom of contract and the cash rule
Box3
Danishbanknotesandcoins–cash–arelegaltenderinDenmark.Forbanknotes,thisislaiddownintheDan-
marksNationalbankAct,whileforcoinsitisstipulatedin
theDanishCoinAct.1Legaltenderisalegaltermwhich
denotesthemeansofpayment,whichcanbeusedto
fulfilapaymentobligation.Unlessagreedotherwisebe-
tweentheparties,orspecialstatutoryprovisionscurtail
therighttousecash,Danishbanknotesandcoinswill
alwaysbelegaltenderinDenmark.
UnderDanishlaw,thereisaprincipleoffreedomof
contract.Thismeansthat,asageneralrule,twoparties
canfreelyagreethatmeansofpaymentotherthancash
aretobeused.Withtheexceptionofpurchasesinshops
withcountersales,forexample,cf.thenextsection,itwill
inpracticetypicallybeagreedthatpaymentistotake
placeusingelectronicmeansofpayment.Inthisway,
theconceptoflegaltenderreferstothefulfilmentofa
contractthathasalreadybeenestablished,whereno
othermeansofpaymenthasbeenagreed.Inpractice,
thesignificanceofbanknotesandcoins’statusaslegal
tenderisthereforelimited.Thereis,however,alegal
obligationtoacceptcashinthecaseofa”countersale”,
cf.thenextsection.
The cash ruleInDenmark,apaymentrecipientofpaymentinstru-
ments,suchaspaymentcards,hasastatutoryobliga-
tiontoacceptcashinthecaseofacountersale.2This
meansthat,forexample,shopswhicharestaffedmay
notrefusetoacceptcash.Therearesomecases,how-
ever,wherethecashruledoesnotapply,namelytore-
motesales,suchasonlineshopping,andtopaymentin
unmannedselfserviceenvironments.Nordoesthecash
ruleapplytocasesthataresubjecttospeciallegisla-
tion,forinstanceinordertocombatmoneylaundering
orundeclaredwork.
Thestatutorycashruleconcerns“cash”.Itisdoubtful
whetherthistermwouldincludeCBDC.Thiswouldatany
raterequireamorespecificdefinitionintheAct.Itmust
beconsidered,however,whetherthiswouldbeappro-
priate,since–iftherequirementisforCBDCtooperate
onaseparateinfrastructure–thiswouldrequireshops
toestablishandmaintainatechnicalsetupthatenables
paymentinCBDC.
1. Section8ofActno.116of7April1936(asamended)onDan-marksNationalbank,andSection4(1)oftheDanishCoinAct,Actno.817of21December1988(asamended).Forfurtherdetailsregardinglegaltenderandthecashrule,seeBuchterandGürtler(2006)andDanishPaymentsCouncil(2016a).
2. On2June2017,theFolketing(Parliament)adoptedanewPay-mentsAct,Actno.652of8June2017,whichentersintoforceon1January2018.Italterstheobligationtoacceptcashinthecaseofacountersale,sothat,asageneralrule,thisobligationnolongerappliesduringeveningandnighthours.
bilityofthefinancialsectornorDanmarksNational-bank’sabilitytofulfilitsmonetarypolicyobjective,cf.therelevantsections.
Some groups of the population still prefer cashCashisstillpreferredbysomegroupsofthepopu-lation,especiallythoseagedover70.Theymakearound40percentoftheirpaymentsincash,cf.Chart4.Moreover,forchildrenandcertainvulnerablegroups,suchasthedisabledpeople,cashplaysaspecialroleasameansofpayment.
Asstatedabove,CBDCwouldprobablyhaveanaccountbasedstructure,andtherebyresemblebankdepositsratherthancash.CBDCwouldthereforenotbelikelytoappealtothesectionsofthepopulationwhoareunabletousetheexistingelectronicpay-mentsolutions,orwhopreferthetangibilityofcashforotherreasons,cf.Chart2.
Legal tenderInDenmark,cashislegaltender.Thismeansthatifabuyerofaproductorservicedoesnotwishtopayelectronically,heorsheisentitledtopayincash.Thisdoesnotapply,however,ifagreedotherwise,forinstancethatpaymentistotakeplaceusingelectronicmeansofpayment,orifspecialstatutoryprovisionsapply.Denmarkalsohasa”cashrule”that,withafewexceptions,requiresphysicalretailers,forexample,toacceptcashpayment,cf.Box3.
CBDCwouldprobablynotbecoveredbythestatutoryprovisionsconcerninglegaltender,sincetheseprovisionsrefertophysicalbanknotesandcoins.IfCBDCweretohavethestatusoflegaltender,thiswouldhavetobestipulatedbylaw,butinpracticeitwouldnotbeofanygreatsignificance.SinceCBDCcannotbedeemedsubjecttothecashrule,asaconsequenceofthefreedomofcontractthepartieswouldmerelyhavetoagreethatameansofpay-mentotherthanCBDCwouldbeused.
Denmark has a modern payments infrastructureEverydayinDenmark,electronicpaymentstakeplaceforavalueofapproximatelykr.24billion,asIn-ternetpurchases,inphysicalretailers,andtoprivateindividuals.16Thepaymentsaremadebytransferringbankdepositsfromthepaymentremitter’sbankac-
16 SeeDanmarksNationalbank(2017c).
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The transfer of funds through the systems Chart5
Danes' card use is among the highest in Europe
In Denmark, funds can be transferred within seconds
Denmark is a digital front-runner
Denmark has an efficient and up-to-date market for payments. Payments are settled quickly and
smoothly. Payments can be made between all bank accounts, and instant payments allow funds to be
transferred in seconds.
Instantly
The average Dane pays by credit cards about 300 times each year, an increase
of almost 50 per cent on 2011.
Denmark is one of the most digitised countries in the world. This is among other factors driven
by the public sector's focus on digitisation.
Danes are quicker to embrace new technology
Danes have become increasingly eager to adopt new payment options. MobilePay was adopted by about
three million users within three years. It took more than 15 years for the Dankort to be adopted by the same
number of users. Contactless payments are the latest example of how quickly Danes can change their payment
behaviour. In the course of a year and a half, 15 per cent of all Dankort payments have become contactless.
MOBILE PAYMENTS
THE STRAKS-CLEARING
DANMARKS NATIONALBANK
THE INTRA-DAGCLEARING
THE SUM-CLEARING
DEBIT CARD
CONSUMER
CREDIT CARD CREDIT TRANSFERS
Same dayOne business day
Per capita card payments in selected European countries
50,00
Danish digital highways
Denmark 300
Norway 391
Sweden 290
Finland 259
UK 224
Netherlands 204
France 154
Spain 64
Germany 45Italy 37
EU average 104
2011 2015
Connectivity Human
capital
Integration of
digital technology
Digital public
service
Use of
internet
European Commission's Digital Economy and Society Index, 2017
Denmark
Finland
Norway
Sweden
Netherlands
UK
Spain
Germany
France
Italy
806040200
EU avg.
1984 The Dankort
5 years0 year 10 years 15 years 20 years
1999 Online banking
2013 MobilePay
2015 Contactless
How long it has taken for new payment instruments to be adopted by 3 million users
50,00
counttothepaymentrecipient’sbankaccount.Likeotherhighlydevelopedcountries,suchasNorwayandSweden,Denmarkhasamodernpaymentsinfra-structurewhichensuresindividualsandbusinessesrapidandsecurepayments.
Inacashpaymenttransaction,therecipientreceivesthemoneyimmediately.Inanelectronicpaymenttransaction,therecipientwillnotalwaysreceivethemoneyimmediately.Thetimewhichelapses,calledthesettlementtime,dependsonthemeansofpay-mentused,cf.Chart5.ApaymentusingapaymentcardgoesthroughtheSumclearingsystem,andthesettlementtimeisonebankingday.
Foranaccounttoaccounttransfer,theremittermaychoosewhetherthepaymentistobesettledasaninstantpaymentviatheStraksclearingsystem,orviatheIntradagclearingsystemasanordinarypayment,whichtherecipienttypicallyreceivesinthecourseofafewhours.PaymentsusingMobilePayaretypicallysettledviatheStraksclearingandarealwaysreceivedbytherecipientwithinafewseconds.SeeBox4formoreinformationaboutMobilePay.
The payments infrastructure is still being developedThepaymentsinfrastructureiscontinuouslybeingdeveloped.ThedevelopmentintheDanishpaymentmarketispredominantlydrivenbyprivateagents.
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Act on Payments Box5
On2June2017,theFolketing(Parliament)adoptedthe
ActonPayments,whichentersintoforceon1January
2018.1Themainpurposeofthenewregulationsisto
ensurethattheframeworkfortheprovisionofelectronic
paymentservicesreflectsthetechnologicaldevelopment,
andthattheregulationsmakeiteasierforfinancialtech-
nologyenterprisestoofferpaymentservices.
UnderthisAct,thirdpartyproviders,i.e.aprovideroth-
erthanthepartyholdingtheuser’saccount,willbeable
toobtainauthorisationtoofferpaymentinitiationser-
vices,forexampletoperformpaymentsontheaccount
holder’sbehalf(suchasMobilePay),aswellasaccount
informationservices.TheActimposesanobligationon
thebankstogivesuchthirdpartyprovidersaccessto
customers’paymentaccounts,iftheaccountholderso
consents,sothatproviderscanoffertheirservices.
LikethecurrentDanishActonPaymentServicesand
ElectronicMoney,theActalsostipulatesanumberof
requirementsconcerninginformationtothepayment
remitterandpaymentrecipient,aswellasrightsand
obligationsregardingthedeliveryofpaymentservices.
IfDanmarksNationalbankweretoopenCBDCaccounts
andofferpaymentservicestoallhouseholdsandbusi-
nesses,theextentoftheaforementionedobligationsin
theActonPayments,towhichDanmarksNationalbank
wouldbesubject,wouldhavetobeclarified.Thesame
issuehasbeenidentifiedbySverigesRiksbank(2017).
1. Actno.652of8June2017.TheActimplementstheSecondPaymentServicesDirective(Directive2015/2366/ECoftheEuropeanParliamentandoftheCouncilof25November2015)andcontinuestheimplementationoftheSecondEMoney Directive(Directive2009/110/ECoftheEuropeanParliamentandoftheCouncilof16September2009)inDanishlaw.
Thismeansthatitistheproductofademandformorerapidandmoreeffectivepaymentsolutions.
ContributingtothisdevelopmentisinlinewithDan-marksNationalbank’sobjective.DanmarksNationalbankhasthereforeassistedthefinancialsectorinmodernisingtheinfrastructurewhichtodayenableshouseholdsandbusinessestomakepaymentswithinjustafewseconds.AnotherexampleisthatDanmarksNationalbankiscurrentlyreplacingtheexistingsystems,forsettlinglarge,timecriticalpay-mentswithanewmodernsystem,calledKronos2.Thesystemalsosupportsfinalsettlementbetweenthebanksofthepaymentsmadebyprivateindividualsandbusinesses.
ThereisnoimmediatereasontoassumethatthemoredirectinvolvementofDanmarksNationalbankbymakingCBDCavailablewouldgivehouseholdsandbusinessesaccesstoabetterormoreeffectivemeansofpaymentthanthesolutionsdevelopedbyprivateagents.
Important to consider competition in the payment marketThemarketforpaymentsolutionshastraditionallybeendominatedbythebanks,whichhavehadtheknowhowandsystemstohandlehouseholds’andbusinesses’payments.Inthefuture,thismaychange.MajorinternationaltechnologycompaniessuchasApplehavealreadymovedintothepaymentmarket,andotheragentscanbeexpectedtofollowsuit,facilitatedinDenmarkbythenewDanishActonPayments,cf.Box5.
BoththeDanishPaymentsCouncil(2016b)andSverigesRiksbank(2013)findthatnewagentscouldcontributetoincreasingthecompetitioninthemar-ketforpaymentsolutions.SverigesRiksbank(2013)furthermorearguesthat,inthelongerterm,theremaybeaconcentrationonafewsolutions.Themar-ketforpaymentsolutionsischaracterisedbysignifi-canteconomiesofscale.Thismeansthatthecostsofofferingapaymentsolutiondonotincreaseinlinearproportiontothenumberofusersandtransactions.Onthecontrary,thecostpertransactiondeclinesasthenumberofusersincreases,andthesolutioncanthusbeofferedatalowerprice,forthebenefitoftheuser.Ontheonehand,manyusersofthesamesolu-tionisabenefitforsociety,yetontheotherhand,ifthelackofcompetitionmeansthatapaymentserviceprovidercansetartificiallyhighprices,thiscouldleadtomonopolylikeconditionsinthemarket.
MobilePay Box4
In2013,theMobilePaymobilepaymentsolutionwas
launchedintheDanishpaymentmarket.Thismadeit
possibletotransferfundsbetweenprivateindividualsvia
smartphones.Today,MobilePayhasmorethan3.6million
users,whomakeover214millionpaymentsperyear.
Sinceitslaunch,MobilePayhasbecomeaseparatecom-
panyasapartnershipbetweentheDanishbanks.Inthis
model,paymentscantakeplaceasdirectaccounttoac-
countpaymentsbetweendifferentbanks’customers,
insteadofthecombinationofacardbasedpaymentand
anaccounttoaccountpayment.
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Cash circulation has been low for many years
Chart6
0
2
4
6
8
10
12
14
1875 1895 1915 1935 1955 1975 1995 2015
Percent ofGDP
Note: Cashcirculation(banknotesandcoins)asashareofGDPincurrentprices.
Source: Abildgren(2017).
Itisthereforeimportantthattherelevantauthoritiescontinuouslymonitorthetermsofcompetitionandinterveneifamarketfailureisobserved.Butifthemarketiswellfunctioning,societywillbenefitfromprivateagentscompetingforcustomers.Thiswillalsoencourageinnovation.
Foreign CBDC can influence Danish payment solutionsIfacentralbankinanothercountryissuesCBDC,thiscouldaffecttheuseoftheDanishpaymentsolutions.Ife.g.theEuropeanCentralBank(ECB)weretoissueeuroCBDC,itispossiblethatDanishhouseholdsandbusinesseswouldalsohaveaccesstothis,dependingonhowitweretobedesigned.Thismightaffecttheuseoftheexistingpaymentsolutions.EspeciallywithregardtocrossborderpaymentseuroCBDCwouldprobablybeanattractiveproposition.Thiswouldalsobeofsignificancetomonetarypolicyandfinancialstability,cf.therelevantsections.
CBDCasacontingencymeasure
Today,societyreliescompletelyonthesystemsthatareusedforelectronicpayments.Ifthesystemsdonotfunction,evenforshortperiods,thismayhavenegativeconsequencesforconfidenceinthefinancialsystem.
Cash is not a contingency measureIfthesystemsusedtomakeelectronicpaymentsweretobeaffectedbyprolongeddowntime,orwereotherwiseunavailableforprolongedperiods,cashwouldnotbeacontingencymeasuretoelectronicpayments.Eventhoughcashdoesnotdependonelectronicsystemsandpaymentscanthereforetakeplacewithoutpaymentsystems,orevenelectricity,theamountofcashincirculationisnowherenearenoughtoeffectivelycoverthepaymentsofprivateindividualsandbusinesses.Thishasbeenthecaseformanyyears,cf.Chart6.
Sincethestartofthe1970s,cashincirculationhasaccountedforlessthan4percentofGDP.In2016,thiswasaroundkr.70billion.Sincehouseholdsalonemakeelectronicpaymentsforgoodsandservicesforavalueofapproximatelykr.24billionperday,itwouldnotbepossibletomeetthedemandthatwouldariseifelectronicpaymentswereunavailable.
CBDC as a back-up for other infrastructureSverigesRiksbank(2017)assessesthatifCBDCweretobedesignedsoastofunctionindependentlyoftheexistinginfrastructure,thiscouldmakethepaymentsystemsmorerobust.Inthisway,house-holdsandbusinesseswouldstillbeabletomakepayments,evenifpartofthepaymentsinfrastructurewereunavailable.Intermsofthesystem’susability,therewouldalsobedrawbacks,however,fromisolatingCBDCfromtherestoftheinfrastructure.
TheactualCBDCaccountswouldinallcircumstancesstillhavetobeheldinaseparatesystem,astheycannotbeheldinDanmarksNationalbank’sexistingpaymentsystem,Kronos.Firstly,Kronoshasnotbeentechnicallydevelopedtohandlemillionsofaccountsandrelatedtransactions.Secondly,KronosisapaymentsystemthatisprotectedundertheFinalityDirective,whichisimplementedinDenmarkintheDanishSecuritiesTradingAct.Theregulationgovernswhomayparticipateinthesystem,cf.Box6.
Onethingishowaccountswillbehandled,whileanotheriswhetherthereshouldbealinktotherestofthepaymentsinfrastructure.IfCBDCwerecompletelyseparatedfromotherpaymentsystems,itmightbedifficult,forexample,totransferfundsfromaCBDCaccounttoabankaccount.ItisdifficulttoimaginewidespreaduseofCBDCifitcannotbeusedtopayataretailerthathasanordinarybank
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Finality Directive Box6
Kronosisarealtimegrosssettlement(RTGS)system
forsettlementoflarge,timecriticalpaymentsinDanish
kronerthatisusedbyDanmarksNationalbank’saccount
holders(primarilybanksandmortgagecreditinstitutes).
Kronoshasbeennotifiedasadesignatedpaymentsys-
teminaccordancewiththerulesinPart18oftheDanish
SecuritiesTradingAct,whichimplementstheDirectiveon
settlementfinalityinpaymentandsecuritiessettlement
systems(theFinalityDirective).1
Kronosisthusapaymentsystemthatisprotectedby
theFinalityDirective.Thisprotectionconcernssuch
aspectsasthefinalityofpaymenttransactions,i.e.when
paymentsarefinalandcannolongerberevoked,irre-
spectiveofwhetheraparticipantinthesystemfails.Ifa
paymentorderweretoberevoked,thiswouldinterfere
withthecompletionofsettlementandhavederivedcon-
sequencesfortheotherparticipantsinthesystem.
TheFinalityDirectivegovernswhomayparticipatein
apaymentsystemprotectedbytheDirective,suchas
creditinstitutions,investmentcompaniesandpublic
authorities.Ifbusinessenterprisesandprivateindividuals
weretoparticipateinthesystem,itcouldnotbedesig-
natedasapaymentsystemprotectedbytheDirective.
ThesameissuehasbeenidentifiedbySverigesRiksbank
(2017).
1. Directive98/26/ECoftheEuropeanParliamentandoftheCouncilof19May1998onsettlementfinalityinpaymentandsecuritiessettlementsystems,implementedinPart18oftheDanishSecuritiesTradingAct,cf.ConsolidatedActno.251of21March2017.Asfrom3January2018,theActwillbereplacedbytheDanishActonCapitalMarkets,Actno.650of8June2017.
account.CBDCwouldthereforeneedtohavealinktotheexistingpaymentsystems.
Inaddition,liketheexistingpaymentsystems,CBDCwouldalwaysbefundamentallydependentontheelectricitynetwork,forexample.Itisthereforeneitherpossiblenorpracticaltocreateacompletelyisolatedsystem.Intoday’sDenmark,forbetterorworse,householdsandbusinessesdependoncen-tralinfrastructures,includingforelectronicpayments. The Danish payments infrastructure is secureThereiscontinuedfocusonmaintainingarobustpaymentsinfrastructure.Themostimportantsystemsthatsupportprivateindividuals’andbusi-nesses’paymentsusetwocenteroperation,forexample,wherebyasecondarycentercantakeoveriftheprimaryfails.Inthisway,householdsandbusinessescancontinuetotransactpaymentswhiletheoutageatoneoperatingcentreisrectified.Alsothecablingtoensurecommunicationbetweenthebanks,forexample,isdesignedtoensurethatcommunicationcantakeplaceviaseveralcables.Ifonecableisdisconnected,forexampleasacon-sequenceofexcavationwork,communication,andtherebyelectronicpayments,canstillcontinueviaothercables.
Moreover,Dankortandcertainothercardpaymentscantakeplaceoffline.Thismeansthatifaninternetconnectionfails,orthereistechnicaldisruption,foracertainperiodpaymentscantakeplaceofflineinshops.Onceagain,theaimistoensurethathouseholdsandbusinessesarenotaffectedbyminortechnicalproblems.
Finally,localcrisisresponseplanshavebeenestablishedbytheindividualfinancialinstitutions,forexampleNetsandDanmarksNationalbank,andacrossthefinancialsectorundertheauspicesoftheFinancialSectorForumforOperationalRobustness(FSOR).Thelocalcrisisresponseplansareactivatedintheeventofatechnicalfailureoracyberattackonasinglefinancialinstitution,andensurethatoperationsarerestoredasquicklyaspossible.ThesectorwideFSORcrisisresponseplanisactivatedintheeventofaseriouscrisiswithconsequencesfortheentirefinancialsector.Thecrisisresponseplans
ensurethatrolesandresponsibilitiesinacrisissituationaredefinedandthattherightinternalandexternalstakeholdersareinvolvedorinformed.
Thestakeholdersarealsocollaboratingcloselywithregardtonewthreatsfromcybercrime,forexample,inordertoenhancethesecurityofthefinancialin-frastructure,includingundertheauspicesofFSOR,cf.Box7.IncollaborationwiththeDanishFinancialSupervisoryAuthorityandDanmarksNationalbank,thestakeholdershaveassessedtherobustnesstowardscyberattacksandareworkingcontinuouslytoimprovesecurity.17
17 SeeDanmarksNationalbank(2017a).
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Financial Sector Forum for Operational Robustness (FSOR)
Box7
Togetherwithauthoritiesandkeystakeholdersinthe
financialsector,DanmarksNationalbankestablishedthe
FSORcooperationforumin2016.Itsaimistoenhance
thesector’soperationalrobustness,includingitsrobust-
nesstowardscyberattacks,andthereby
• continuetoprovideasecureandefficientinfrastruc-
ture,and
• supporttheDanes’continuedtrustinthedigitalsolu-
tionsoftheDanishfinancialsector.1
1. Cf.FSOR(2016).
DanmarksNationalbankoverseesthesystemicallyimportantpartsoftheinfrastructureandmakesrecommendationstotheownersofthepaymentsystemsifthereareareaswhichdonotcomplywithinternationalstandardsforfinancialmarketinfrastructures.18TheDanishFinancialSupervisoryAuthorityistaskedwithITsupervisionofthebanksandtheinfrastructurecompaniesprovidingITtotheDanishfinancialsector,forexampleNets.19 If securityisinadequate,theFinancialSupervisoryAuthoritycanorderbanksandinfrastructurecom-paniestoimprovetheirpractice.
IfthepurposeofintroducingCBDCistoensurethathouseholdsandbusinesseshaveaccesstoacon-tingencymeasure,ifotherpaymentsystemsshouldfail,fromaneconomicperspectiveitwouldbemoreprofitabletoinvestinbettersecuritymeasuresintheexistingsystems.Thisisalreadytakingplacetoagreatextenttoday,cf.above.
Significanceforthefinancial sectorandfinancialstability
IssuingCBDCwouldentailrisksforfinancialstabilityandchangeDanmarksNationalbank’sroleinthefinancialsystem.
CBDC would give everyone unlimited access to claims on the central bankTheavailabilityofariskfreeassetisnamedbySverigesRiksbank(2017)asoneoftheargumentsforissuingCBDC;astheuseofcashdeclines,issuingCBDCisconsideredtobeanimportanttaskforthecentralbank,sothathouseholdsandbusinessescanholdtheirassetssafely,andconfidenceinthemonetarysystemcanbemaintained.
Todayitisalreadypossibletotakesafeassetpositionsbyholdingcash(aclaimonDanmarksNationalbank)orbuyingaDanishgovernmentbond(aclaimontheKingdomofDenmark).InDenmarkthereisalsoadepositorguaranteeschemetoprotectdepositsincommercialbanks
18 SeeCPMIIOSCO(2012)andDanmarksNationalbank(2017d).
19 SeeDanishFinancialSupervisoryAuthority(2015).
uptoapproximatelykr.750,000.Householdsandbusinessescanthusplacetheirassetssafelybyholdingcash,buyinggovernmentbonds,ormakingdepositsincommercialbanks.Fullriskfreecovera-geoflargerdepositscanbeobtainedbyspreadingdepositsonseveralbanks,sothatthelimitofkr.750,000isnotexceededinanyonebank.
ItisnotpartofDanmarksNationalbank’sobjectivestomakeunlimitedclaimsonthecentralbankavailabletothegeneralpublic,butinsteadtosupportstableprices,financialstabilityandsecurepayments,cf.above.
CBDC would entail a fundamental change in the banks’ business modelDespitethedepositorguaranteescheme,house-holdsmightconsideraclaimonDanmarksNational-banktobemoresafethanaclaimonacommercialbank.IftherewasfreeaccesstoCBDC,householdsmightchoosetoconvertalargeproportionoftheirbankdepositstoCBDC,whichwouldhaveagreatimpactonthebanks’fundingopportunities.Today,depositsareanimportantfundingsource,especial-lyforsmallerbanks,whilethelargerbanks(whichviatheirmortgagecreditinstituteshavesignificantmortgagecreditlendingontheirbalancesheets),obtainfinancingdirectlyinthemarkettoagreaterextent,cf.Chart7.
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Structure of the banks’ liabilities Chart7
0
20
40
60
80
100
Largebanks Smallbanks
Totalshareofliabilities,percent
Issued mortgage bonds
Equity
Deposits
Other debt
Note: ThelargeandsmallbanksarebanksintheDanishFinan-cialSupervisoryAuthority’sgroups1and3,respectively.Dataisasat30June2017andcompiledatGrouplevel.
Source: DanishFinancialSupervisoryAuthorityandowncalcula-tions.
The banks’ reserves comprise current-account deposits and certificates of deposit
Chart8
-400
-300
200
-100
0
100
200
300
400
500
Certificatesofdeposit CurrentaccountbalanceLoan Netposition
Kr.billion
05 06 07 08 09 10 11 12 13 14 15 16 17-400
-300
200
-100
0
100
200
300
400
500
Monetarypolicyloans CurrentaccountdepositsCertificatesofdeposit Netposition
Kr.billion
05 06 07 08 09 10 11 12 13 14 15 16 17
Source: DanmarksNationalbank.
ThedirecteffectofatransferofbankdepositstoCBDC,equivalenttoadecreaseinthebanks’de-posits,isacorrespondingreductionofthebanks’assetsintheformofadecreaseintheirreservesatDanmarksNationalbank.Thereserves,comprisingcurrentaccountdepositsandcertificatesofdeposit,fluctuateovertime,andamountedtokr.195billioninmidNovember2017,cf.Chart8.
IfthehouseholdsweretotransferasignificantshareoftheirbankdepositstoCBDC,thebankswouldnothaveadequatecentralbankreservestooffsetthedeclineindeposits.Inthissituation,abankcouldincreaseitsmarketfinancing,oralternatively,borrowfromDanmarksNationalbank,inordertocoverthebank’sliquiditydeficitinkroner,cf.Chart9.Yetthebanksandhouseholdscannotoverallincreasetheirmarketfinancing,sinceakronedenominatedclaimwillalwaysbeoffsetbyakronedenominatedliabilityelsewhere.Thekronemarketisthusaclosedsystemandtransfersofdepositsbetweenbanksdonotaf-fecttheiroverallreservesatDanmarksNationalbank.ThismeansthatthebankswouldhavetoborrowfromDanmarksNationalbank,ifthedemandforCBDCweretobesufficientlyhigh.Theimpactonthebanks’fundingneedswouldbegreaterifbusinessesalsoconvertedbankdepositstoCBDC.
Itisnotaproblemassuchthatthebanksarenetborrowersfromthecentralbank,ratherthannetdepositors.YetitisimportantthatthebanksdonotbasetheirbusinessmodelonbeingabletoborrowfromDanmarksNationalbank.Thisprincipleisalsoreflectedinfinancialregulation,wherebyliquidityrequirementsareintendedtoensurethatthebankscanfundthemselvesandhavesufficientliquiditytooffsetashortlivedliquiditystress.
Ifthebanks’depositbasebecomeslessstableasaconsequenceofCBDC,thiswillincreasethedemandsonthebanks’liquidityandfundingmanagement.
Greaterfluctuationinthebanks’depositsisreflectedingreaterfluctuationinthebanks’reserves,andtherebyintheirnetpositionvisàvisDanmarksNationalbank.Thiscanaffectthetransmissionoftheofficialinterestratestothemoneymarketinterestrates,cf.below.
CBDC can change Danmarks Nationalbank’s role in the financial systemTheissueofCBDCwouldfundamentallychangeDanmarksNationalbank’sroleinthefinancialsystem.
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Example of new liabilities structure in the banks after the introduction of CBDC Chart9
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Kr.billion
Other assets
Lending
Current-account and certificates of deposit
Deposits households
Deposits businesses
Bonds
Other liabilities
Monetary-policy loans
Assets Liabilities Liabilities with CBDC
Note: Datashowingthebanks’balancesheetstructure,endJune2017.Itisassumedthathouseholdstransfer50percentoftheirbankdepositstoCBDC.Thebanksretaintheircurrentlevelofcurrentaccountsandcertificatesofdeposit,andreplacethedepositfinancingshortfallwithamonetarypolicyloanatDanmarksNationalbank.
Source: DanmarksNationalbankandowncalculations.
DanmarksNationalbankwouldbecomeabankforthegeneralpublic,ratherthanbankertothebanks.ThiswouldmakeDanmarksNationalbankadirectcompetitortothecommercialbanksbyofferingdepositaccountsandpaymentservices,forexample,whichlieoutsidethetraditionalroleofcentralbanks.
DanmarksNationalbank’sobjectiveisnottocom-petedirectlywiththebanks,buttocontributetosupportingfinancialstabilityandsecurepayments.Thelegislativeframeworktosafeguardthisincludesstatutoryrequirementsconcerningthebanks’capitalandliquidity,therighttoabasicpaymentaccountandadepositorguaranteescheme.Yettheframeworkalsocoversthesector’sworkoninstantpaymentsandcyberrisk,cf.thesectionsabove.Thisisimportantwork,towhichDanmarksNationalbankcontributesactively.
If Danmarks Nationalbank’s balance sheet were to be expanded, this would expose Danmarks Nationalbank to higher riskThedemandforCBDCwouldbeexpectedtoexceedthedemandforcash,sincecashiscumber-
sometohandleandstore,comparedtomodernpaymentsolutions.ThiswouldleadtoanexpansionofDanmarksNationalbank’sliabilitiesside,cf.Chart10.TheequivalentexpansionoftheassetssidemightentailanincreaseinDanmarksNationalbank’srisksintheformofincreasedlendingtothebanksand/orincreasedsecuritiesholdings.
TheintroductionofCBDCwouldleadtoincreasedmonetarypolicylending,totheextentthatthebanksdonotreducetheassetside,instepwithdecliningdeposits.BankscanborrowfromDan-marksNationalbankagainstadequatecollateral.Innormaltimestheycanprovidecollateralinliquidsecurities,intheformofDanishgovern-mentandmortgagebonds.Butinperiodsoffinancialunrestandagreaterneedforborrowing,DanmarksNationalbankmaydecidetoexpandthecollateralbasewithotherassets.DanmarksNationalbankhandlestheriskofachangeinthevalueofthepledgedcollateralduringthetermoftheloanbyonlylendinguptoacertainfractionofthevalueofthecollateralasoftheloandate.ThedeductionwhichDanmarksNationalbankmakes
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fromthepledgedcollateral’svalueisoftenreferredtoasahaircut.
CBDC entails risks of systemic bank runsOneofthegreatestriskstofinancialstabilityfromintroducingCBDCistheincreasedriskofsystemicbankruns.
Today,abank(orseveralbanks)maybeexposedtoabankrun,wherebysignificantdepositsarewithdrawnfromonebankatthesametime,andtransferredtoanotherbank.ButitismoredifficulttohavearunontheoverallDanishbankingsector. Thisisbecauseitisnotpossibleinpracticetocon-vertallbankdepositsintocash.Theonlypossibilityofasystemicbankrunisthatcustomerstransfertheirdepositstoforeignbanks.
WithCBDC,householdsandbusinesseswouldhaveanincentivetotransfertheirbankdepositstoCBDCinasystemiccrisissituation,unlesstherewereaceilingontheoutstandingamountofCBDC.Instepwithdecliningconfidenceinthebankingsector,thismighthappen,despitethedepositorguarantee
Expansion of Danmarks Nationalbank’s balance sheet after the introduction of CBDC Chart10
0
200
400
600
800
1,000
Kr.billion
Foreign reserve
Other assets
Monetary-policy loans
Other liabilities
Current-account and certificates
of deposit
CBDC-deposits
Notes and coins
Assets Assets with CBDC Liabilities with CBDCLiabilities
Note: Dataforend2016.Itisassumedthatthehouseholdstransfer50percentoftheirbankdepositstoCBDC.Thebanksretainthepresentlevelofcurrentaccountsandcertificatesofdeposit,andtheyreplacethelostfinancingfromdepositswithamonetarypolicyloanatDanmarksNationalbank.
Source: DanmarksNationalbankandowncalculations.
schemeandanyhigherinterestrateonbankdeposits.
Today,depositscaninprinciplebeconvertedtocash,butthepracticalchallengesconcerningcashmakethislessattractive.Furthermore,thegeneralconversionofbankdepositstocashwouldtaketime,whereasconversiontoCBDCcouldtakeplaceimmediately.CBDCmightthereforeincreasetheriskofbankruns.
Measures to counter risks of financial instabilityAsstatedabove,theremightbeariskoffinancialin-stabilityandnegativeeffectsonthebankingsystemfromintroducingCBDC.Theseriskscanbecounteredbyanumberofmeasuresthatmightalsolead toanumberofnewchallenges.
ThebankscancountertheriskofbankdepositsbeingconvertedtoCBDCbyincreasingdepositinterestratesinrelationtoanyinterestrateforCBDC,tomakeitmoreattractivetoholdbankdepositsthanCBDC.Dependingonthetermsof
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competitionbetweenthebanks,theymightcom-pensateforthelossofincomefrompayinghigherdepositinterestratesbyincreasinglendingrates,orcharginghigherfees.
IfDanmarksNationalbankweretoissueCBDCwithoutinterest,CBDCmightbeperceivedprimarilyasasubstituteforcash–atleastduringperiodswhenthebanks’depositinterestrateswerepositive,andwhenthefinancialsystemwasconsideredtobestable.InterestearningCBDC,ontheotherhand,wouldtoahighdegreebeasubstituteforbankdeposits.Inthecurrentlowinterestrateenviron-ment,theinterestrateonabasicdepositaccountistypicallyzero,buthistorically,bankdepositshaveaccruedpositiveinterest.Innormaltimes,higherinterestratesforbankdepositsthanforCBDCwouldlimitthedemandforCBDC.Butinperiodsofmarketunrest,householdsandbusinessesmightmovetheirdepositsfromthebankstoCBDC,eveniftherewasaninterestratedifferentialbetweenthetwo.
UnlessthetotalissueofCBDCwaslimited,theinterestrateforCBDCwouldinpracticeconstitutethelowerboundonthebanks’depositinterestrates,cf.thesectionconcerningmonetarypolicyandthekroneratebelow.
TheriskofsystemicbankrunscouldalsobecounteredbysettingalimittohowmuchtheindividualpersonorbusinessmayholdasCBDC.ThelimitcouldbesetsoastomakeitpossibletouseCBDCfortransactions,butnotforsavings,forexampleas afixedratioofGDP.Limitationstotransaction size areknowntodayfromStraksclearing,forexample, inwhichapaymentmaynotexceedkr.500,000.
However,thereareanumberofproblemswithsettingaceilingforholdingsofCBDC.Afixedquotaperaccountholderwouldlimitthenumberorsizeofpayments,sincetherecipient’sceilingwouldhavetobeobservedforapaymenttotakeplace.Theceilingwouldthereforehavetobesetsufficientlyhighforcustomarytransactionsizestobeexecuted,sothatpaymentscouldnotberefused,andtheeffective-nessofthepaymentsystemcouldbemaintained.Nomatterhowhightheceilingweretobeset,some
mightprefertostayrelativelyclosetoit.Itisnotexpedientfortheceilingtobereached,sothatthepaymentcannottakeplace.
Alternatively,anoverallceilingcouldbesetfortheamountofCBDC.Thiswouldnotbeunproblematic,either.IftheoverallsupplyofCBDCwerelowerthandemand,itwouldnolongerbepossibletoconvert11betweenbankdepositsandCBDC.Thiswouldnotbeexpedient.
Monetarypolicy andthekroneexchangerate
Moderate significance for the implementation of monetary policyInDenmark,monetarypolicyisconductedbyDan-marksNationalbankinordertomaintainafixedexchangerateagainsttheeuro.Thistakesplacebysettingthelevelofthemonetarypolicyinterestrates,whichspecifytheinterestratesforthecom-mercialbanks’depositswithandborrowingfromDanmarksNationalbank.20
Inthecurrentsituation,inoveralltermsthebankshaveconsiderablereservesatDanmarksNational-bank–primarilyascertificatesofdeposit,cf.Chart8.Thismeansthattheinterbankinterestrates–themoneymarketinterestrates–arecloselylinkedtotheinterestrateforcertificatesofdeposit,cf.Chart11.
Themoneymarketinterestratesarecentraltomonetarypolicy.Firstandforemost,thedifferencebetweentheDanishmoneymarketinterestratesandthemoneymarketinterestratesintheeuroareadeterminesthedemandforDanishkronerandtherebythekrone’sexchangeratevisàvistheeuro.Themoneymarketinterestratesalsohaveastronginfluenceonthebanks’depositandlendingratesvisavistheircustomers.Historically,theseinterestrateshavebeencloselylinkedtotheofficialinterestrates,butsincetheintroductionofnegativeinterestrates
20 SeeSpangeandToftdahl(2014)foradescriptionofmonetarypolicyinDenmark.
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The money-market interest rates are linked to the interest rate for certificates of deposit
Chart11
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Chart12
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Source: DanmarksNationalbank.
in2012,thedepositinterestratehasadjustedmoresluggishly,cf.Chart12.Thisisbecausethebankshavebeenreluctanttointroducenegativedepositinterestratesforhouseholdsandsmallbusinesses.
IftherewassubstantialdemandforCBDC,thiswouldreducethebanks’reservesatDanmarksNational-bank,cf.thesectiononfinancialstability.Instead,thebanksmightneedtoborrowfromDanmarksNatio-nalbank.Inthissituation,DanmarksNationalbank’slendingratewouldsetthecourseforinterestratesinthemoneymarket.UnlessDanmarksNationalbank’slendingrateisequivalenttotherateofinterestforcertificatesofdeposit,thetransitionfromthecurrentsituation,inwhichthebanksneedtodepositfundsatDanmarksNationalbank,toasituationinwhichtheyarenetborrowers,wouldaffectinterestratesinthemoneymarket.Wherethereisanadverseimpactontheexchangerate,DanmarksNationalbankcanhandlethisbyinterveninginthecurrencymarketoradjustingtheleveloftheofficialinterestrates.
Whilethebanksplayacentralroleintheimplemen-tationofmonetarypolicy,DanmarksNationalbank’soutstandingswithhouseholdsdonotcurrentlyplayanyroleinthisrespect.ThedeclininguseofcashthusdoesnotweakenDanmarksNationalbank’sabilitytomaintainastablekronerateagainsttheeuro.Thiswouldalsobethecaseifthehouseholdsweretocompletelystopusingcashandexclusivelyrelyonbankdeposits.
The interest rate on CBDC could not be used as a monetary policy instrument in DenmarkAstheCBDCinterestratewouldaffecthouseholdsandbusinessesdirectly,itmightbeseenasastronginstrumenttoregulatetheprivatesector’sdemand,andtherebystabilisetheeconomy.21Asaconse-quenceofthefixedexchangeratepolicy,thelevelofDanmarksNationalbank’sinterestratesisdeterminedsolelybywhatiscompatiblewithastablekroneexchangerate.ThiswouldalsoapplytotheinterestrateforCBDC.InaDanishcontext,interestonCBDCwouldthereforenotpresentanynewmonetarypolicyopportunities,sincetheinterestrateonCBDCwouldbesettokeepthekroneexchangeratefixed.
21 BordoandLevin(2017)arguethattheinterestrateonCBDCwouldbetheprimarymonetarypolicyinstrument.SeealsoBarrdearandKumhof(2016)foradiscussionofhowtheinterestrateonCBDCcanbeusedasamonetarypolicyinstrument.
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The interest rate on CBDC would constitute a lower boundInreactiontothefinancialcrisisandthesubsequenteconomicslump,centralbanksallovertheworldhavereducedinterestratestoverylowlevels,cf.Chart13.Thereisalimittohowlowinterestratescanfall.Thisisbecausehouseholdsandbusinessescanavoidnegativeinterestratesbyholdingcash.Thelowerboundissomewhatbelowzero,sincetherearecostsassociatedwithholdingandusinglargeamountsofcash.
AnaccountbasedCBDCwouldbefreeofthefric-tionsapplyingtocash.UnlesstheoverallissueofCBDCisrestricted,theinterestrateonCBDCwouldthereforesetalowerboundforthedepositinterestratesfortheeconomicagentswithaccesstoCBDC.ThisreflectsthatCBDCwouldbeaverysafeandliquidasset.IftheinterestrateforCBDCwereatthesamelevelascouldbeachievedfromalternativepositions,householdsandbusinessesmightplacealloftheirsavingsinCBDC.Insituationswithfinancialinstability,householdsandbusinessesmightbewillingtoacceptalowerinterestrateforCBDCthantheycouldachieveelsewhere.
Today,householdstypicallyreceivelittleorverylowinterestontheirbankdeposits,whilebusines-ses’depositsareoftensubjecttonegativeinterestrates.Thisappliesespeciallytolargedepositsfrominstitutionalinvestors,forexample,suchasinsurancecompaniesandpensionfunds.ToavoidthesedepositsbeingconvertedtoCBDC,itwouldthereforebenecessarytohaveanegativeinterestrateforCBDC.Alternatively,thebankswouldbeobligedtoraisetheirdepositinterestrates.IssuingCBDCcouldthushaveconsequencesforinterestrateformationinthefinancialmarkets.Themarketsarecharacterisedbyhowliquidity,riskandotherconditionsenterintotheformationofprices,therebycontributingtothebestpossibleallocationofcapital.
Difficult to manage demand for CBDCTheamountofCBDCcouldberestrictedbyaceilingonhowmuchCBDCeachagentintheeconomycouldhold.Aceilingwouldalsohaveunintendedconse-quences,however,cf.thesectionconcerningfinancialstability.Alternatively,iftheinterestrateonCBDCisassumedtobezero,theremightbeamodelinwhichthegroupsofagentsthatsofarhaveexperiencednegativedepositinterestratesatthebankscouldbepreventedfromholdingCBDC.Inpractice,thiswouldmeanthatCBDCcouldonlybeofferedtohouseholds.
ThedemandforCBDCwoulddependonitsinterestrate,relativetothegenerallevelofinterestratesintheeconomy.IfCBDCwerenottoaccrueinterest,changesinthemonetarypolicyinterestrates,whichdeterminethegenerallevelofinterestratesintheeconomy,wouldthereforeaffectthedemandforCBDC.Inprinciple,thesameisthecasetodayforcash.Thepracticaldisadvantagesofcashmakethedemandrelativelyinelastic,however.ToavoidhouseholdsandbusinessestoagreatextentswitchingbackwardsandforwardsbetweenCBDCandbankdeposits,itmightbenecessarytohaveacloserelationbetweenCBDCinterestratesandthemonetarypolicyinterestrates.ItwouldnotbeappropriateifnoninterestaccruingCBDCweretoincreasefluctuationsinthebanks’deposits,whicharenormallyconsideredtobeastablefundingsource.
CBDC could intensify international capital movementsThekrone/euroexchangeratedependsontherelativedemandforthetwocurrencies.IfforeignagentsweretoconsideraDanishCBDCtobeat-tractive,thismightleadtoaninflowofcapital,forexample,ifDanmarksNationalbankintroducedanoninterestbearingCBDCinasituationwithverylowornegativeinterestrates.Inthissituation,anoninterestbearingclaimonDanmarksNational-
Very low official interest rates Chart13
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Source: ThomsonReutersDatastream.
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bankwouldbeattractivetoinvestorsintheeuroarea,forexample,ifthealternativewereamoney-marketpositionatanegativeinterestrate.Thefixedexchangeratepolicymeansthatinvestorsintheeuroareadonotincuranexchangerateriskbyinvestinginkronedenominatedassets,ratherthaneurodenominatedassets.
Anincreaseinthedemandforkronerwouldstrengthenthekroneagainsttheeuro.Tocounteractthis,DanmarksNationalbankwouldissuekroneragainstforeigncurrency,andtherebyincreasetheforeignexchangereserve.ThiswasthecaseinJanuaryandFebruary2015,cf.Chart14.Yetifthisinflowweretocontinue,itcouldbenecessarytolowerinterestrates,includingforCBDC,Inthesesituations,noninterestbearingCBDCwithaccessforforeignagentswouldnotbecompatiblewiththefixedexchangeratepolicy.
Inasituationwherethegenerallevelofinterestrateswasincreasingagain,noninterestbearingCBDCwouldgraduallybecomelessattractive,andcapitalmovementscouldbeassumedtobereversed.
CBDCcouldthus,inthelongerterm,leadtogreatercapitalmovementsbothintoandawayfromkroner,instepwithchangesintherelevantinterestratespreads.Thiscouldmakeitnecessarytohavealargerforeignexchangereservethantoday,toensureanadequatebufferifhouseholdsandbusinessessellkroner.
Also implications for monetary policy, if other countries issue CBDCIfothercountriesissueCBDC,thiscouldfurtherin-creasethefluctuationsincapitalmovements.Today,itisprimarilylargebusinessesandinstitutionalinvestorsthatdemandfinancialassetsinforeigncurrency,andtherebyinfluencethedemandforDanishkroner.ButifcentralbanksinothercountriesweretobegintoissueCBDC,itmightbemoreinterestingforhouseholdstomovetheirsavingsaroundbetweendifferentcurrencies.
Forexample,itmightbeattractiveforDanishhouseholdsandbusinessestoholdelectronicclaimsontheECB,sinceitwouldprobablybe easyforDanishshopstoreceivepaymentsineuroCBDC.Onthisbasis,DanishhouseholdsmightexchangepartsoftheirdepositsinDanishbanksforeuroCBDC.
The foreign-exchange reserve reflects the demand for kroner
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IftheissueofCBDCweretoleadtohouseholdsin-creasinglymovingtheirsavingsacrosscurrencies,thiswouldmakethedemandforkronermoreinterestratesensitive.Asaconsequence,DanmarksNationalbankwouldhavetomakemajorinterventionsinthecurrencymarket.Thepotentiallysubstantialcapitalmovementscouldbehandled,however,withintheexistingmonetarypolicyframework,cf.above.
Thechallengesinrelationtofinancialstabilitymightincrease,ontheotherhand,ifDanishhouseholdsandbusinessesweretohaveaccesstoCBDCissuedbyothercountries’centralbanks.IffinancialturmoilweretoariseinDenmark,itmightbeattractiveforDanishhouseholdsandbusinessestowithdrawtheirdepositsfromtheDanishbanksandinsteadholdCBDCissuedbytheECB.
Higher seigniorageWhenDanmarksNationalbankissuesmoney,thishashistoricallygeneratedsignificantrevenue,whichisoftencalledseigniorage.ThisariseswhenDan-marksNationalbankobtainsfinancingbyissuinginterestfreecashandinvestinginfinancialassetsatpositiveinterestrates.Thecostsofproducingbanknotesandcoinsmustbedeductedfromthis.Inthecurrentlowinterestrateenvironment,seigniorageisataverymodestlevel.
TheseigniorageispartofDanmarksNationalbank’sprofit,mostofwhichfallstothestate.Ifthedemandforcashdeclines,seignioragewillalsodecrease.
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ThiscouldpotentiallybeoffsetbyissuinganoninterestbearingorlowinterestCBDC.22YetitisnotDanmarksNationalbank’sobjectivetoachievethehighestpossibleprofit.
CBDC could entail political and reputational riskIssuingCBDCwouldincreasethedirectcontactbetweenDanmarksNationalbankandhouseholdsandbusinesses.ThiswouldincreasetheriskofdissatisfiedcustomersforDanmarksNationalbank.Thismightbeduetosystemfailure,orifthefacilitiesofferedinrelationtoCBDC–forexampletheuserinterfacewhichenableshouseholdsandbusinessestoaccesstheirCBDC–werenotconsideredtobesufficientlyuserfriendly.TheextenttowhichthistypeofcriticismofDanmarksNationalbankwouldinfluenceDanmarksNationalbank’scredibilitywithregardtothetaskofensuringfinancialstabilityandstablepricesisanopenquestion.
DependingonhowaCBDCisdesigned,thiscouldalsoexertpoliticalpressureonDanmarksNational-bank.Intheeventoffinancialunrest,theremightbepressurefrompoliticiansorthemediafortheCBDCceilingtoberaised,eveniftheceilingweretobefixedbeforehand.
Conclusion
Intheinternationaldebate,anumberofpotentialbenefitsofintroducingCBDCarementioned,includingopportunitiestoachieveamoresecureandeffectivepaymentsystemandtoestablishabackupsystemfortheexistingpaymentsinfrastructure.
However,thepotentialbenefitsofintroducingCBDCforhouseholdsandbusinessesinDenmarkarenotassessedtomatchtheconsiderablechallengesthattheintroductionwouldpresent.
InacountrylikeDenmark,withasecureandeffectivepaymentsystem,itisdifficulttoseewhatCBDCwouldcontributethatisnotalreadycoveredbytheexistingpaymentsolutions.InaDanishcontext,digitalcurrencythusalreadyexists,asbankdeposits.
22 BarrdearandKumhof(2016)emphasisetheincomefromissuingCBDCasapositiveeffectthereof.
Ontheotherhand,theanalysisshowsthattheintroductionofaCBDCwouldchangetheroleofDanmarksNationalbankinthefinancialsystemandcreateanumberofchallengeswithregardtofinancialstability.Dependingonhowitweretobede-signed,issuingCBDCwouldalsopresentchallengesinrelationtothefixedexchangeratepolicy.ThedrawbacksofintroducingCBDCinDenmarkarethusassessedtobeconsiderable.DanmarksNational-bankassessesthatthecentralbankmustcontinuetobethebankertothebanks,ratherthanthebankforallofDenmark’spopulation.
IfanothercentralbankweretodecidetointroduceaCBDC,thiswouldbeofsignificancetoDanmarksNationalbankandthefinancialsystem.Thismakes itimportanttomonitordevelopments.
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Annex1Blockchain
Ablockchainisachainof(information)blocksthatareconnectedbydigitalcryptographic”finger-prints”.Besidesanumberoftransactionsorotherinformation,eachblockcontainsareferencetothepreviousblock’scryptographicfingerprint.Thestructuremeansthatprevioustransactionscanonlybechangedbyupdatingallfingerprintsforthesub-sequentblocks.Theintegrityofablockchainisalsoverifiedacrossthepartiesthatshareinformationintheblockchain.Thistakesplacebyeachofthepartiesholdingacopyofthesharedblockchain,sothattheycancomparetheircopieswiththeotherparties’blockchain.Thisisalsocalledadistributedledger.
Toensurethatallpartieshavethesamecopyofthesharedledger,newblocksmustbeaddedtothelocalcopiesinthesamesequence.Thisisensuredbynewblocksbeingverifiedandorderedeitherjointlythroughanagreedconsensusmechanism,orviaaprocesscalledproofofwork.Aconsensusmechanismsetsrequirementsforthenumberofpartici-pantsandistypicallyusedinnetworkswithaccessrestrictions.Proofofwork,ontheotherhand,maybeusedonopennetworks,sinceoneparticipantcandesignatethenextnewblockbybeingthefirst
tosolveanenergyintensivecalculationlinkedtothespecificblock.
Theuniquesequencealsoensuresthatthesamemoneyisnotusedseveraltimes,whenablockchainholdsmonetarytransactions.
Cryptographicfingerprintsthusprotecttheintegrityoftheindividualblockchain,whilemaintaininguniformlocalcopiesofthesharedblockchainordistributedledgerensuresdataintegritybetweentheparties.Thisisthebasisforthetechnology’sbuiltinsecurityandforthepartiesbeingabletoestablishandmaintainasharedoutlook–eventhoughthereisnocentralindependentthirdpartytoestablishthis.
Inrecentyears,theblockchaintechnologyhasbeenusedinmanywaysinthefinancialmarkets,besidescryptocurrencies.Anexampleisinitialcoinofferings,ICOs,whichcanhelpnewstartupstoraisecapital.Thecompanyissuestokensonablockchain,whichresembleshares,andinvestorscanbuythem.InNo-vember2017,theEuropeanSecuritiesandMarketsAuthority,ESMA,warnedoftheconsiderablerisksofinvestinginICOs.23
23 Cf.ESMA(2017).
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DANMARKS NATIONALBANK
HAVNEGADE 5
DK-1093 COPENHAGEN K
WWW.NATIONALBANKEN.DK
This edition closed for contributions on 12 December 2017
Kirsten Elisabeth GürtlerLawyer
CORPORATE SERVICES
Søren Truels NielsenRetail Payments Senior Expert
FINANCIAL STABILITY
Kristine RasmussenPolicy Advisor
FINANCIAL STABILITY
Morten SpangeSenior Adviser, Economic Analysis
ECONOMICS AND MONETARY POLICY
ABOUT ANALYSIS
As a consequence of Danmarks National-bank’s role in society we conduct analyses of economic and financial conditions.
Analyses are published continuously and include e.g. assessments of the current cyclical position and the financial stability.
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