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Annotated Bibliography, A CBDC has the potential to make payments easier,…

- - - - When a retail CBDC is released, an almost complete new set of policies are needed to enable the most stable value of the currency. As a result of these policies the central bank will likely have different strategies, compared to today, of managing the currency.
      - Under a retail CBDC banks lose some of their influence due to the flight from deposit accounts into the CBDC. This will likely cause lower interest rates, but could potentially lead to bank runs from the currency into.
      - The creation of a CBDC may create more financial inclusivity, by enabling people to save a larger pool of funds. Furthermore, CBDC transactions registers would be able to provide accurate purchase information, allowing for more precise credit scores.
      - A non-remunerated CBDC with limits on it has many benefits for the economy, and if it is left unregulated the central bank will be managing significant repercussions.
    - - "The use of CBDC transaction histories as an alternative data source for credit underwriting could reduce credit-risk information asymmetry, lowering lending interest rates, and expanding access to credit." (Das 15)
      - "Under financial market stress, there is greater risk of a flight to safety from retail bank deposits into CBDCs.This would strengthen the impact on monetary policy transmission from increased competition for bank deposit funding, increased wholesale funding, and lower bank profits." (Das 22)
      - "The potential margin for gains in financial inclusion is large, particularly in developing countries. Globally, 1.4 billion adults... still lack access to a financial account. Women, the poor, the young, rural residents, and those outside the workforce all continue to have lower account ownership rates on average. Tan finds that the financial inclusion impact of CBDCs can be particularly large in developing countries with large unbanked populations..." (Das 12)
  - - - A retail non-remunerated CBDC has the potential to serve as a catalyst in the banking industry and others. The architecture of our financial system would most likely have to drastically adapt to the new meet the new demands of a CBDC.
      - A CBDC has the potential to improve the overall welfare of society by removing some of the financial hurdles the unbanked and underbanked face. Furthermore, the interest rate for loans would likely be lower and more competitive. Another way that welfare may be improved as a result of a CBDC would be increasing liquid assets and allowing for an efficient monetary exchnage between people.
    - - "We identify several avenues through which the introduction of a CBDC could improve welfare. First, CBDC could ameliorate some of the financial frictions in deposit or loan markets, likely from more competitive pricing of deposits, loans, or both. Second, a CBDC could serve as a catalyst for private-sector technological innovations in banking and payments.Third, partly through induced technological change, it could enhance the efficiency of the domestic retail payments system, making transactions faster, safer, and less expensive." (Infante 3)
      - "A deposit-like CBDC, on the other hand, would be a substitute for bank deposits, inducing banks to set higher deposit interest rates and accept lower levels of deposits and lending. Notwithstanding this crowding-out of bank intermediation, the introduction of a CBDC increases the aggregate stock of liquid assets, promoting more efficient exchange and ultimately improving social welfare." (Infante 9)
      - "A CBDC could also adversely affect the stability of the banking sector by expanding direct access to central bank liabilities, by creating a public alternative to bank deposits, and by changing the business models of banks. More generally, competition for bank liabilities from CBDC could change the architecture of the financial system by either crowding out deposits and forcing banks to rely on alternative sources of funding, or crowding out banks’ other sources of short-term private debt." (Infante 15)
      - " ...the more attractive the alternative to bank deposits is in terms of liquidity and safety, and the more easily depositors can shift out of deposits and into the alternative asset, the more run-susceptible deposits become. However, if the central bank recycled its CBDC liabilities back to the economy through banks or directly to borrowers, it might mitigate the increase in run risk or even decrease it, enhancing financial stability." (Infante 17)
  - - - Americans in general tend to be hesitant to the adoption of a CBDC. Some people are concerned about their privacy and the extent of the supervision conducted by the government. Other issues that were shown in surveys included people who supported the CBDC to help prevent illegal activities.
      - Americans tend to favor CBDCs when considering the possible benefits of financial inclusivity, improving access to the underbanked, and even helping smooth out economic recessions.
    - - "Overwhelming majorities would oppose the adoption of a CBDC if it meant that the government could control what people spend their money on (74%), that the government could monitor their spending (68%), that a CBDC would abolish all U.S. cash (68%), that a CBDC would attract cyberattacks (65%), that the government could charge a tax on those who don’t spend money during recessions (64%), or that the government could freeze the digital bank accounts of political protesters (59%)"
      - "Some potential advantages of a CBDC garnered greater support than opposition. Pluralities would support a CBDC if it reduced the risk of money laundering and fraud (42%) or if it meant that the government could ensure welfare payments were spent on their intended purpose (40%)."
      - "Less than a quarter of Americans (22%) say they would likely use a CBDC if one were offered. Far more (78%) say they would be unlikely to use a CBDC. Further, 55% say they would be “very unlikely” to use one."
      - "Americans are about evenly supportive or opposed if a CBDC made instantaneous financial transactions possible (27% favor), made it easier for people without bank accounts to gain equitable access to the banking system (33% favor), or helped the Federal Reserve combat economic recessions (32% favor)"
  - - - Different methods that regions or countries around the world are using to develop a CBDC that meet their needs. China with the intent to increase the accuracy of its social credit system, the EU to protect investors and privacy, while the US is still skeptical.
      - The FED does not want to fall behind the curve on technology, so it did promote the issuance of stablecoins to banks. This would be similar to the idea of a wholesale currency.
      - The EU utilized tokenization in their CBDC adding a layer or privacy, but restricting the overall oversight of the government. This makes it an unpopular decision.
      - With many countries introducing a CBDC it will likely lead to the demise of the USD. It may not be due to just one currency, but rather the adoption of several over time. To stop this the US would need to take specific actions for the USD to remain the world's reserve currency.
    - - "China has proclaimed a “managed privacy” regime where information belonging to businesses and individual users will be protected from each other, but open to the government—especially the security authorities. The “big three” data laws—the Cybersecurity Law, Personal Information Protection Law, and Data Security Law—have prescribed tight control of the collection, transfer, and use of data by companies and private organizations, especially involving the transfer of data to foreign entities." (Tran)
      - " Borrowing heavily from securities regulation rules, EU policymakers in 2022 promulgated the regulation of markets in crypto assets (MiCA), covering issuers of utility tokens, asset referenced tokens and stablecoins, and service providers such as trading venues and digital wallets. The aim was to protect investors and financial stability while fostering innovation and competition in the crypto asset sector. " (Tran)
      - " The Federal Reserve is now deeply cautious if not ambivalent, consistently resisting calls for it to issue a digital dollar ... On August 8, the Federal Reserve formally shifted its stance to promote stablecoin issuance by banks. The new policy at least on paper provides a mechanism for automatic but tacit approval of such issuance for banks that meet specific prerequisites. The most important prerequisite involves ensuring that the issuing bank’s digital architecture provides visibility and access to transaction-level data for the purpose of complying with anti-money laundering (AML) laws and rules. The open question is whether such a structure will enhance or hinder market usage of USD-backed stablecoins." (Tran)
      - "First, clusters of interoperable CBDCs will greatly reinforce the already growing tendency of using local currencies in bilateral and eventually plurilateral cross-border payments. At present, the dominant role of the USD remains unchallenged, accounting for 85 percent of the $7.5 trillion in global foreign exchange daily trading turnover. Increased interoperability among national CBDCs will reduce reliance on the USD as an intermediary currency in executing exchanges between pairs of currencies." (Tran)
      - "Historical precedent encourages economists and analysts to assume that only one global reserve currency can exist at any given moment. But a distributed financial system linked through electronic ledgers creates an alternative scenario for reserve currency shifts. No individual currency needs to replace the US dollar for it to lose its role as the main reserve currency. A gradual shift to multiple alternatives can achieve the same result." (Tran)
- - - - Mostly focused on the implications of data monopolies in markets with little competition. Also discussed the process in which data is collected and the implications data scraping has on the everyday person that may not realize is taking place.
      - Discusses CBDCs as a way to intermediate between consumers and companies when it comes to data collection.
      - Currently some ares of financial markets lack diversity and competition, and that difference is currently filled with cryptocurency assets. With the introduction of CBDC it would allow for a more regulated approach to bridging the missing areas.
    - - "Under this condition, the introduction of a CBDC would be effective in reducing market inefficiencies. Were the CBDC to offer the convenience of digital payments with a low usage fee, the monopolistic platform company would have to reduce its service fee and raise its bid price for personal data in order to avoid consumers abandoning it in favour of the CBDC. In addition, were the central bank to open up its digital payment infrastructure to all firms, the monopolistic firm would also need to reduce the fee for using its platform, ensuring a level playing field for a variety of payment-related service providers. In this case, the supply of services would increase and the usage fee for the payment service would decrease, thus improving economic efficiency." (Maruo)
      - "The economic literature suggests that the large number of market participants and differentiated business models reduces the incentive to collude, ensuring a competi-tive market and avoiding a data monopoly.16 In this situation, Japanese consumers can choose which payment instrument to use, depending on their needs." (Maruo)
      - (image from journal) https://ballstate-my.sharepoint.com/:i:/r/personal/lynden_chupp_bsu_edu/Documents/Second%20Semester/ENG%20104/ENG%20104%20paper%20graphic%20CBDC%20peyment%20pro%20and%20con.png?csf=1&web=1&e=nW4Zte
  - - - The integration of CBDC's into the Global Financial Network and the implications it will carry for the GFN. The integration of CBDC's across borders will be difficult due to the differences in the development of the currency and policy.
      - CBDC's will likely take on a decentralized structure, which carries many benefits if it is carried out with proper policy consideration at all levels of government.
      - In the current market the US dollar as a dominance. With many other countries creating their own CBDC's it will allow for them to have their own reserve currencies, thereby reducing the worlds dependance on the dollar as the world's reserve currency.
    - - "CBDC clusters may arise due to structural positions that may evolve through developments such as responses to tensions or sanctions. Some states, for these reasons, may want to pursue a decentralized international financial system and reduce their reliance on the dollar. For these states, CBDC could enable direct payments between states, bypassing US-dominated systems (Nelson, 2022). The revolutionary nature of CBDC may allow states to develop new systems, rather than reforming the status quo (Liu & Papa, 2022, p. 16). CBDCs accepted by a cluster of these states may become possible “nondollar club goods” (Liu & Papa, 2022, p. 16). New regional reserve currencies may emerge in these clusters (Committee on Payments and Market Infrastructures, et al., 2021, p. 18)." (Wang)
      - "Regulators are likely to encounter challenges in resources, experience, and expertise to address numerous technical and regulatory issues. Technical issues include the scale of CBDC adoption, the use of DLT and smart contracts, algorithms, cyber security protections, rectifying erroneous payments, and data quality (Didenko et al., 2020, p. 36). They require the capacity of central banks to staff and operate cyber-security and the CBDC life cycle support for a 24/7/365 CBDC system (Kiff et al., 2020, p. 20)." (Wang)
      - "Legal issues include constitutional issues, such as whether rules related to currency allow the issue of CBDC (Bossu et al., 2020, p. 28), and laws concerning central bank powers, currency issuance, and payment systems (Bossu et al., 2020, pp. 16–26). States will equally need to consider monetary law issues such as whether CBDC may be considered a new official means of payment, and whether the technical requirements raise “fundamental fairness and public policy concerns” creating unequal access to CBDC use (Bossu et al., 2020, pp. 29, 35, 39–40), as well as private law issues like whether CBDC would be subject to property law (Group of Thirty, 2020, p. 18)." (Wang)
      - "The centralized structure of the GFN is subject to change. Alongside deep changes following the global financial crisis, the GFN's structure is incrementally developing from a centralized one to a decentralized one with the rapid economic growth of BRICs and the Eurozone's increasing institutional importance incrementally affecting American centrality (Oatley et al., 2013, pp. 134, 146; Sarpong & Deodutt, 2019, p. 10)." (Wang)
  - - - The most effective structures to construct achieve the highest efficiency possible. How the CBDC should be utilized in two separate forms, retail and wholesale.
      - The pros and cons that come with the tokenization of the currency. How this could allow for easier payments and more security.
      - Talks about how policy should be formed surrounding a CBDC and hot to continue to monitor the effect it has.
    - - "Wholesale CBDCs, meanwhile, are central to the payments landscape. The current policies and system for international payments works well in advanced economies, but is convoluted when extended to developing markets.34 Cross border payments need to be flexible and have the ability to adapt. There is a need to (i) maintain high regulatory standards, (ii) promote openness, (iii) promote competitiveness, (iv) deliver fair and pro-portionate regulations and (v) support economic growth through innovation.35" (Broby)
      - "Retail CBDCs are essentially ‘narrow money’. Wholesale CBDCs, meanwhile, refer to interbank transactions and their settlement by central bank reserves. In this respect, they are part of the national payment infrastructure and restricted to a limited group of users." (Broby)
      - (image from article) "Figure 1. The digital payments landscape https://ballstate-my.sharepoint.com/:i:/r/personal/lynden_chupp_bsu_edu/Documents/Second%20Semester/ENG%20104/ENG%20104%20paper%20outline%20of%20money%20system%20with%20CBDCs%20-%20Figure%201.png?csf=1&web=1&e=7c0YP2
      - "As mentioned, there are tokenised alternatives to CBDCs. From a policy perspective, it is worth considering the use of tokenisation to achieve a more efficient digital payments environment. Tokenisation is the process of exchanging identifiable financial data for non-identifiable data called ‘tokens’. These can take the form of payment/exchange tokens, utility tokens, or security tokens. Tokenisation facilitates atomic settlement, the instant exchange of assets, which is a function of wholesale markets.57 Such settlement requires policy makers to also make 54 rules relating to the liquidity, margin and the alignment of records in a real time environment. There are other advantages to tokenisation, namely improving record keeping and transfer of funds outside of the banking system (the latter also being a disadvantage)." (Broby)
  - - - Banks have been observing markets closely over the last few years to determine the efficacy in various markets.
      - Without knowing the direct effects it is hard to discern specific issues that may arise from the creation of a CBDC.
      - A CBDC would likely allow for faster and easier payments, but bring broad implications to both national and worldwide financial markets. These issues could range from bank disintermediation, a decline in financial stability, or even bank runs. Because of this this currency needs to be regarded with the necessary amount of caution and cogitation.
    - - "By manufacturing a close ‘digital’ substitute of fiat cash, the central bank would gain a new tool for implementing monetary policy, along with the possibility to maintain the power of public money." (Šapkauskienė)
      - "while the foundation of the current traditional banking system is based on the faci-litation of payments and deposit management, the release of retail CBDCs could have negative consequences for both. Thus, to no one’s surprise, commercial banks might bear a grudge, as they are the ones losing the most." (Šapkauskienė)
      - "central banks are now at a crossroads: how to fight the increased use of unregulated cryptocurrencies, and how to maintain their reputation of respectable authority by not losing monetary sovereignty, when the use of physical cash is decreasing. so the issue of a digital version of public money sounds like an attractive and valuable solution to keep up with the game." (Šapkauskienė)
      - "Nevertheless, if the balance between a CBDC and cash in the market does not happen in moderation, the whole banking system risks having spill-overs and bank runs. Lee et al. (2021) stress that if people are willing to switch drastically from bank deposits to a CBDC in a short period, or, as Bian et al. (2021) and williamson (2022) add, if there are no restrictions on the quantity of CBDCs in markets, it could potentially cause shortages in liquidity, and a credit crunch for financial intermediaries or even worse, the crowding-out effects on bank deposits and reserves could lead to market panic and bank disintermediation. Agur et al. (2022) and Gross and schiller (2021) add that this crowding-out affects credit provision, investment activi-ties and the output of banks. on the contrary, another simulation with CBDCs was addressed by Fernandez-Villaverde et al. (2021), and the authors conclude that an account-based CBDC could potentially make bank runs disappear and stabilise the financial system, or as Keister and Monnet (2022) suggest, would be able to provide better tools to cope with the crisis. (Šapkauskienė"
      - "If any shift between commercial banks and central banks hap-pens, it is expected indefinitely that dedicated and responsible authorities in the respective countries should take swift action in advance, and raise discussions about whether new legislation or regulatory requirements should be issued and implemented in order to curb the disturbances in financial stability. (Šapkauskienė)