By Safari Kasiyanto
Issuing wholesale central bank digital currency would impact monetary policy. Notwithstanding, the impact would be highly determined by the design choices. That was the key takeaway of the latest Bank Indonesia (BI) research undertaken by the Economic and Monetary Policy Department (DKEM) at the end of last year.
As the name suggests, central bank digital currency (CBDC) is digital currency issued by the central bank to replace familiar banknotes and coins.
Research conducted by central banks in various jurisdictions and several international organisations has found that, in theory, there are two types of CBDC. First, wholesale CBDC that is only used by central banks and banking institutions for reciprocal transactions. Second, retail CBDC that would be used by the public instead of existing banknotes and coins.
This Bank Indonesia research rigorously examines the design options available for wholesale CBDC, including two main aspects, namely CBDC convertibility and CBDC remuneration.
In terms of CBDC convertibility, the research applies two analyses. First, central bank balance sheet analysis, the results of which indicated that wholesale CBDC issued by converting reserve deposits with the central bank would not enlarge the central bank balance sheet.
Second, analysis of conversion using bank assets in the form of tradeable government securities (SBN), the results of which indicated that converting SBN in the banking industry into CBDC would enlarge the assets and liabilities on the balance sheet of the central bank. In the post-pandemic era, where central banks are trying to reduce exposures, activities that increase the balance sheet should be avoided because the balance sheets of most central banks have increased significantly due to the quantitative policies issued during the Covid-19 pandemic to support the economy. Issuing wholesale CBBC, therefore, which could exacerbate the central bank balance sheet, is contrary to the exit policy implemented by the government and central bank.
On the other hand, issuing wholesale CBBC through SBN conversion is not a simple procedure because SBN involve a variety of yields, coupons, haircuts and maturities. Conversion into CBDC, therefore, is more complex because it must consider these components.
Furthermore, research on issuing wholesale CBDC by Bank Indonesia also looked at remuneration or interest. If CBDC is an interest-bearing instrument, the central bank must pay close attention to the interest offered on other monetary policy instruments, such as the deposit facility rate and lending facility rate. Interest-bearing CBDC would also have to take into account market rates, particularly the overnight interbank money market.
In general, therefore, wholesale CBDC remuneration affects whether the central bank would need to review the current monetary policy framework. Consequently, the central bank must be meticulous when determining the value of remuneration. The overarching goal of issuing CBDC by a central bank must be to have a positive impact on the effectiveness of monetary policy transmission.
For example, CBDC remuneration on par with the statutory reserve requirement (SRR) would not change the monetary policy framework. SRR is a requirement for banking institutions to maintain balances in their reserve account at the central bank. This is an effective monetary instrument for central banks to manage liquidity. Setting CBDC remuneration on par with the SRR would create an equilibrium point for overnight interbank money market transactions that is consistently below the deposit facility rate.
Meanwhile, setting CBDC remuneration at a level equivalent to the deposit facility rate would initiate change in the monetary policy framework and potentially strengthen monetary policy transmission. This would provide an incentive for banking institutions to hold excess reserves at the central bank for exchange with CBDC. Consequently, the liability side of the central bank balance sheet could potentially increase.
As wholesale CBDC would also function as a means of interbank payment, CBDC would maintain the interbank rate within the policy rate corridor.
