The introduction purposes and institutional design of Central Bank Digital Currency (CBDC), which is a digital currency issued by the central bank in each country, vary between nations. Furthermore, depending on how CBDC is designed, it can have a sig...
The introduction purposes and institutional design of Central Bank Digital Currency (CBDC), which is a digital currency issued by the central bank in each country, vary between nations. Furthermore, depending on how CBDC is designed, it can have a significant impact on the financial industry and market. The Bank for International Settlements (BIS) suggests a hybrid or intermediated CBDC design as a promising approach related to the CBDC structure and design.
Typically, CBDC types are classified into large-scale transaction-based and general transaction-based, and account-based CBDC and token-based CBDC, depending on their purpose, form, user range, and structure.
In this paper, I examine CBDC from a financial regulatory perspective, assuming a design based on an account-based CBDC. In this case, the central bank bears the obligation to secure appropriate means to mitigate any negative impact of CBDC issuance on the financial system and stability. Commercial banks can bring innovation in payment settlements by developing new products and services as CBDC handling opportunities amid intensified competition in payment methods. Even if private banks are responsible for the distribution of CBDC, the introduction of CBDC affects the functions of banks that perform financial intermediation and payment systems. However, depending on the CBDC design and under what conditions it is implemented, the concerns about the impact on banks may vary. That is because, assuming that CBDC is more advantageous than deposits from the perspective of CBDC individual holders before depositing, the migration of deposits to CBDC is more likely to occur.
On the other hand, the introduction of CBDC by the central bank can have various risks and impacts on the banks, such as reconsideration of banks' role in financial intermediation and resource allocation, responding to new regulatory issues and compliance related to CBDC, continuous decline in bank deposits, intensified non-intermediated banking, triggering digital runs in crises, reduced loan capacity of banks, intensified competition in payment settlement industry, and accelerated emergence of narrow banking or full-reserve banking. In other words, it means that there is a need to explore management measures for banks affected by CBDC introduction. In particular, when designing CBDC as a payment method that directly competes with payment methods provided under the Electronic Financial Transactions Act and the Specialized Credit Financial Business Act, there is a high probability that it will have a negative impact on banks and payment settlement industry. However, a structure that directly competes between CBDC based on the central bank's issuing power and payment methods based on market participants' credit is not desirable. When designing CBDC, it is desirable to minimize intervention in the existing financial intermediation and payment system, while considering the characteristics of CBDC as a new payment method.
When designing CBDC, the "principle of minimal intervention" should be applied to the current money mediation and payment system. This means that the basic principle should be to impose regulations on CBDC handling that are equivalent to those of cash and deposit currency handling, and to design a two-tier structure to ensure the safety and consistency of transaction data recording and management, promote innovation and participation in the banking industry, and maintain the stability and efficiency of the payment system. In addition, clear institutional measures are needed to address the following financial regulatory issues.
First, the legal status of banks as intermediaries is based on a delegated trust relationship, similar to the structure of national treasury collection agencies. In this case, the central bank ultimately assumes responsibility for any liabilities arising from account management duties (such as compensation for losses due to errors or misconduct). In the case o...