Short Reads

A digital counterpart to cash? DNB’s findings

A digital counterpart to cash? DNB’s findings

A digital counterpart to cash? DNB’s findings

29.04.2020 NL law

Central banks, the IMF and various other organisations have been conducting research for several years with respect to a safer way to deposit money than exclusively with commercial banks, and the role of central banks in this respect.

On 21 April 2020, the Dutch Central Bank (De Nederlandsche Bank, “DNB”) published a study on the introduction of Central Bank Digital Currency (“CBDC”). CBDC is a digital currency, issued by a central bank, that can fulfil two functions of money: as a medium of exchange for goods and services (the way money traditionally works) and as a way to store value (similar to savings with a bank).

According to DNB, there are two reasons for the increased public attention for issuing a digital currency:

  1. the use of cash in the Netherlands, and in other countries, is declining; and
  2. initiatives for cryptocurrencies, such as Facebook’s announcement of a new digital currency called Libra. Cryptocurrencies may help to create a faster, cheaper and more efficient payment system, but they also entail risks for monetary policy, financial stability, and competition.

Wholesale CBDC is already available to certain professional parties, mostly financial institutions and governments. This study goes a step further, and focusses on general purpose CBDC for the public.

DNB’s view on CBDC

DNB takes a positive stance towards making CBDC available to households and businesses. Central bank money is issued by a central bank, while commercial bank deposits are issued by commercial banks.  At the moment, the public can only hold central bank money in the form of coins and banknotes. The introduction of CBDC could therefore improve the proper functioning of the payment system. If CBDC were to be issued, households and business would also have access to accounts held at their central bank. This way they could not only exchange commercial bank deposits for central bank money at ATMs, but also transfer money to deposit accounts at a central bank.

Effects of CBDC

The DNB’s study describes the potential effects of CBDC on:  

  1. the proper functioning of payment services: payment services are considered a vital infrastructure in the Netherlands. Failure of or disruption to these payment services can result in severe social disruption and a threat to national security. The introduction of CBDC can function as a fallback to commercial bank deposits, in addition to cash (i.e. coins and banknotes). Also, CBDC could provide an alternative to future cryptocurrencies, which are vulnerable to financial crime and other criminal activity.
  2. monetary policy: the introduction of CBDC would affect the (monetary) policy of DNB. For example, the DNB balance sheet would likely change if people began depositing money into  DNB accounts. CBDC may also affect the transmission of monetary policy decisions. An interest bearing or remunerated CBDC may be used to steer the money market, capital market and interbank interest rates.  
  3. financial stability: CBDC should be designed in a way that it can function as a substitution away from commercial bank deposits to a certain socially desirable level, and discourages substitution above that level.  However, risks should be mitigated; for example, by using a penalty interest above a certain amount to prevent a bank run as a result of a rapid substitution from commercial bank deposits to CBDC.   
  4. supervision: additional (international) rules regarding liquidity and solvency may be required to manage bank funding and lending. For example, the substitution of commercial bank deposits for CBDC may make commercial banks increasingly dependent on private market funding.

Designing CBDC

DNB proposes some initial design parameters:

  1. The supply and demand of CBDC should be sufficient to meet the objectives;
  2. Introducing a CBDC would probably fall within the duties of the European System of Central Banks (“ESCB”). Further discussions are required to determine the applicable legal framework for issuing CBDC and processing CBDC transactions.

DNB also presents its design choices:

  1. Technology, provision of services and privacy: DNB opts for a design that makes use of proven technology, and innovations that are mature and ready to be implemented. DNB also opts for a central consensus mechanism, where transactions are validated by a central party. CBDC transactions may be initiated by licensed parties only. Information on balances and transactions will not be used by the central bank for commercial purposes.
  2. Monetary design: DNB opts for a CBDC accessible to all natural and legal persons within the euro area, and natural persons that have the nationality of one of the countries within the euro area even if they live abroad. This scope coincides largely with the jurisdiction of the European Central Bank. DNB further favours a two-tier system to monitor potentially undesirable implications or to steer usage in a certain direction. The two-tier system entails that a relative attractive remuneration rate is applied up to a certain quantitative ceiling, while a lower interest rate is applied for amounts beyond the threshold. This two-tier system can be combined with a cap. As a potential interest rate for such balances below the ceiling, DNB uses the policy interest rate and the average interest rate for commercial bank deposits.

Conclusions DNB and next steps

The introduction of CBDC is not expected in the short term. As a first step, more in-depth discussions will be necessary at a policy level, both within the broader eurozone (such as within the ESCB) and in the Netherlands.

If the European Central Bank decides to experiment with concrete types of CBDC, DNB is ready to play a leading role. According to DNB, the Netherlands would be a suitable testing ground for such an experiment.

Team

Related news

14.10.2021 NL law
NFTs: New legal challenges on the horizon

Short Reads - Non-Fungible Tokens, widely known as NFTs, have recently gained much attention due to their role in the transfer of digital artworks. The market for NFTs grew from USD 13.5m in the first six months of 2020 to USD 2.5bn in the first half of 2021 and is still growing at an expansive rate. Notwithstanding their increasing popularity in the world of art, NFTs have many potential applications. In this blog Maciek Bednarski, Annemijn Witkam and Roderik Vrolijk explain what NFTs are and describe some of the legal challenges they will bring about.

Read more

11.10.2021 NL law
Vervolgonderzoek van de AFM naar incidentmeldingen door asset managers

Articles - Sinds de uitbraak van het coronavirus wordt ook in de financiële sector meer op afstand samengewerkt. Dat brengt specifieke risico’s met zich mee. De Autoriteit Financiële Markten (AFM) gaat daarom vervolgonderzoek doen naar het melden van incidenten door asset managers. De reden is het uitblijven van een stijging van het aantal incidentmeldingen ondanks herhaalde oproepen daartoe.

Read more

15.10.2021 NL law
BRRD II implementation in the Netherlands

Short Reads - Recently, the Dutch bill for the implementation of BRRD II (i.e. Directive (EU) 2014/59 establishing a framework for the recovery and resolution of credit institutions and investment firms, as amended by Directive (EU) 2019/879) in the Netherlands was submitted to Dutch Parliament, where it is currently under debate.

Read more

01.10.2021 NL law
Vanaf 1 oktober strengere regelgeving voor verkoop van turbo’s aan particuliere beleggers

Short Reads - Turbobeleggers nemen veel risico’s en verliezen gemiddeld veel geld. De AFM vindt dat particuliere beleggers onvoldoende beschermd worden tegen de risico’s van turbo’s. De verkoop van turbo’s aan deze beleggers wordt daarom aan banden gelegd. Met ingang van 1 oktober geldt een hefboombeperking, een verplichte risicowaarschuwing en een verbod op handelsbonussen. Daarmee wil de Autoriteit Financiële Markten (AFM) particuliere beleggers beter beschermen tegen de risico’s van turbo’s.

Read more