Digitalisation is changing the payment market and consumer behaviour in many countries. This raises the question of whether it would be expedient to introduce an additional form of money that would meet the requirements of the digital age: a central bank digital currency.
  |   Alexey Zabotkin

Over the last two to three years, the possibility of issuing a central bank digital currency (CBDC) has been attracting more and more attention from many central banks around the world. By early 2020, according to a survey by the Bank for International Settlements (BIS), four out of five central banks in the countries that collectively account for 75% of the world’s population and 90% of the global output had been already working on CBDC in one way or another, from exploring the potential to implementing pilot projects. By mid-2020, according to the BIS, at least 36 central banks, including the Bank of Russia (in Russian), had published reviews of their CBDC research. Three countries have completed tests of their national digital currency (Uruguay, Ukraine, Ecuador), and in six other countries, including China, South Korea, and Sweden, pilot projects are underway.

Technological development, digitalisation of business processes in various sectors of the economy, a decreasing share of cash in transactions, and society’s growing demand for the use of advanced technologies in payments, the goal of increased availability of financial services while keeping payment systems stable and secure form just part of the list of reasons making central banks speed up their work on digital currencies and being ready to issue them, even if it is not yet fully known when exactly this need will arise and what technologies will be used.

Russia has achieved a high level of financial technology development and penetration. From 2017 to mid-2020, the share of cashless payments in retail, restaurant industry, and other services increased 1.75 times, exceeding two thirds (from 39 to 69%). The growing demand for online services and cashless payments is creating the trend for further digitalisation of the financial market and retail.

All this puts more and more emphasis on issuing a digital currency of the Bank of Russia, a digital ruble, which will supplement familiar forms of money: cash rubles and electronic rubles deposited with commercial banks. Just like cash and electronic rubles, the digital ruble will have all three basic functions of money: it will be used as a means of exchange, a unit of accounting, and a store of value. At the same time, digital ruble transactions may be less risky and more secure than cash and electronic transactions. The Digital Ruble Consultation paper published in October 2020 presents a number of possible options and ways to adopt this solution, as well as its functional requirements, to be discussed with experts, the financial sector, and society at large.

Models of digital money: options

Currently, there are two types of central bank money: cash, which can be used by all citizens and organisations, and non-cash, or electronic money, which can only be used by banks – these are the reserve (correspondent) accounts of commercial banks at the central bank. The rest of the money in the economy is produced by the banking sector (for example, a purchase loan a bank gives to its client becomes the income of the seller of the purchased goods, which he deposits in his bank account).

A banknote is a promissory note of the central bank to its bearer. The money in the private banks’ accounts with the central bank is the latter’s liability to the private banks. These liabilities are secured by the central bank’s assets (securities on its balance sheet, gold and foreign currency reserves, loans to the banking sector, etc.). The accounts of individuals and organisations in private banks, in turn, are liabilities of the banking sector to citizens and companies, secured by banks’ assets (securities, loans, etc.). The free exchange of private banks’ liabilities for those of the central bank and vice versa (that is, for example, transfer of electronic money in their account at a private bank into cash and vice versa) for all economic agents ensures the unity of the country’s monetary system.

There can be two types of central bank digital currency that are liabilities either only to the banking sector or to everyone. In the literature, these two types are commonly referred to as ‘wholesale’ digital currencies available only to financial institutions and ‘retail’ currencies available to both citizens and businesses. Having studied CBDCs’ functionality, the majority of central banks now prefer the second, retail type. And the Bank of Russia is no exception. It is the ‘retail’ digital ruble that will be able to perform the required functions and offer citizens and businesses supplementary payment infrastructure with new capacities.

Thus, the digital ruble is money issued by the Bank of Russia in digital form; it is the latter’s liability and is available to a wide range of users, all individuals, legal entities, and government bodies. Economically speaking, the key innovation related to the digital ruble is not the introduction of a new money form, but the provision of wider direct access of economic agents to the liabilities of the Central Bank.

Retail CBDC models, in turn, can also be divided into two major groups: single and double-level.

The single-level model suggests that citizens and entities can open digital CBDC wallets directly with the central bank, which will provide settlement and cash services itself without any participation of private banks. The advantage of this scenario is the decreased dependence of users on intermediaries. The disadvantage is an extremely high load on the core of the payment system and the required centralisation of KYC (know your client) and AML/CFT (anti-money laundering and combating the financing of terrorism).

The double-level model suggests that a central bank issues a digital currency, while private banks distribute it among their clients and service them. This scenario is more likely to allow banks and other financial intermediaries to incorporate the digital currency transactions into their services and offer competitive products based on the digital currency. This model is closer to the existing banking system, consisting of a central bank and a network of private banks.

At the same time, the double-level scenario offers several options. They are related to the level of transparency or what information on transactions in digital ruble banks and financial intermediaries have access to. The double-level scenario also suggests mechanisms ensuring the integrity of the digital ruble payment infrastructure, in which banks and intermediaries play a bigger role, and information security issues.

It is important to emphasise that the double-level model also suggests that all electronic wallets are opened on the central bank’s platform and transactions are carried out within its payment system. And this is why this system is fundamentally different from existing non-cash payment systems, in which money, or banks’ liabilities, are transferred by banks within their systems.

When choosing a model of digital ruble circulation, it is vital that the digital currency be in demand (which requires that it meet its users’ needs for fast, convenient, and reliable payments) and reduce risks in the monetary system rather than creating new ones.

Impact on the monetary policy and financial stability

Now, the money of the population and businesses is either cash or in bank accounts. The introduction of the digital ruble will lead to a partial outflow of funds to digital ruble wallets, i.e. a redistribution of funds, including between bank deposits and the central bank digital currency.

This may change the structural balance of liquidity in the banking sector, which will affect banks’ need for transactions with the central bank. The Bank of Russia has all possibilities to adjust its tools to the changes. In particular, the central bank can switch from absorption to provision of liquidity if a considerable structural surplus of liquidity observed in recent years turns into a structural deficit. The amount of collateral for liquidity provision is sufficient for such an adjustment in our operations. These changes will not prevent the central bank from achieving its operational monetary policy objective, i.e. keeping money market rates near its key rate.

To enable banks to forecast the volume of transactions with the central bank needed to fund financial flows among money forms, some requirements can be worked out for converting funds in the bank account into digital rubles similar to the cash-withdrawal rules in place. For example, a bank should be notified in advance if a withdrawal from the account exceeds a certain amount.

Financial flows into digital rubles may also affect the monetary transmission mechanism. The Bank of Russia will closely monitor the changes and take them into account when making monetary policy decisions. That is partly the reason why if a decision to issue the digital ruble is made, it will be implemented gradually.

If these factors are taken into account, the introduction of the digital ruble will support financial stability overall. The development of global monetary systems (stablecoins), private digital assets, including cryptocurrencies, are challenging both for banking systems and central banks. The digital ruble will reduce the risks generated by the use of less reliable payment solutions in the digital world. The additional payment infrastructure created for the digital ruble will further support the reliability and continuity of the country’s payment system, which is also important for financial stability.

More information about the Bank of Russia’s digital ruble initiative can be found in the ‘Digital Ruble’ report for public consultations.