Digitalization on Financial Services and Implications for Monetary Policy in Thailand

Thematic Study 2018

 Digitalization on Financial Services and
Implications for Monetary Policy in Thailand
 Thitima Chucherd Natta Piyakarnchana Bovonvich Jindarak
 Acharawat Srisongkram Suparit Suwanik Thiti Tosborvorn
 Thosapon Tonghui Thanaphol Kongphalee Aniya Shimnoi

 Monetary Policy Group, Bank of Thailand
 December 2018

Motivation
Financial innovation has been evolved over time in parallel with technological development
 e.g. e-Payment, e-Wallet, digital currencies e.g. high-speed internet, smartphones, information technology,
 block chain, and digital ledger technologies (DLT)
 1980s
 Social media
 Cellphone Smartphone
 Barter Gold/coin Paper Money e-Payment Cryptocurrency
 618 AD 2010s 1960s 1970s 1980s 1990s 2000s 2010s 2020s
 Personal computer 1G 2G 3G 4G 5G
 2000s Internet wolrd-wide-web WiFi
 1960s

 e-Payment has become increasingly important in most countries
 Change in value of non-cash payment/GDP

 countriessignificantly
 during 2016-2010 (times)

 Change in volume of non-cash payment/GDP during 2016-2010 (times)
 2 Remark: size of bubble = value of non-cash payment/GDP in 2016
 Sources: BIS statistics on payments and financial market infrastructures in the CPMI countries (Red Book statistics), Bank of Thailand

Scope of study
 A taxonomy of money
 Electronic/Digital Central bank-issued
 Universally accessible Virtual
 currency Peer-to-peer
 Bank deposit, Reserve
 Mobile money, accounts
 e-Money
Electronic payment Deposited CBDC Local
(e-Payment) currency (wholesale) currency
• payment method has been
 accounts Digital currencies
 developed and widely used, Crypto- • An asset stored in electronic
 commonly linked to either
 CBDC form that can serve essentially
 (retail) currency the same function as physical
 bank or the 3rd party account
 (wholesale) currency, namely, facilitating
 Retail e-payment Cash Crypto- payments transactions
 Card payments currency
 Internet and mobile banking Commodity e-money
 e-money money Crypto-currency
 CBDC
 Source: BIS (2017)

 ‘Digitalization’ in this paper
 3

Objectives, Research questions, and Methodolody
Objectives
This paper aims to evaluate the impacts of digitalization in financial services on monetary policy in Thailand:
 1. Understanding new development and trends pertaining to the digitalization including
 e-Payment and digital currencies and assessing its potential to permanently replace cash
 2. Analyzing the implications for transmission and effectiveness of monetary policy

Research questions Methodology
 e-Payment e-Payment
 • How much retail e-Payment could substitute cash usage in Thailand? - Literature review
 • How would e-Payment affect monetary aggregates, central bank's - Descriptive and empirical analysis
 balance sheet, velocity of money, money multiplier? How would this • Monetary statistics
 affect the transmission of monetary policy or monetary operations? • Substitution effect between
 Digital currencies cash and e-Payment (GMM)
 • How would the emergence of private digital currencies affect transmission • Monetary policy effectiveness
 of monetary policy in 5 traditional channels? with and without e-payment (FAVAR)
 • What are the policy options available to central banks, and how Digital currencies
 would this change the transmission of monetary policy? - Literature review
 - Scenario analysis
 4

Outline

 Part I e-Payment
 I.I Development of cash usage behaviors and challenges in Thailand

 I.II Empirical analysis of e-Payment and monetary policy

 5

Part I e-Payment
 Development of cash usage behaviors and challenges in Thailand
 Daily transactions in Thailand are mostly in cash
Teenager and early working-aged groups are more welcome to non-cash usage esp. mobile/internet banking
 Cash usage in selected countries e-Payment survey in Thailand (2017)
 Cash usage (classified by age groups)
 Cash usage Cash usage 18-29
 Country Period (% of (% of value) Non-cash
 transactions) 30-39 Cash
 40-49
 Thailand 2017 93 -
 50-59
 Euro area 2014–2016 79 54
 Greece 2015–2016 88 75 60+ No. of monthly transactions for each person
 Italy 2015–2016 86 68 0 50,000 100,000 150,000 200,000 250,000
 Germany 2014 80 55
 e-Payment usage (classified by age groups)
 France 2015–2016 68 28 ATM transfer Debit card payment Credit card payment
 Finland 2015–2016 54 33 Internet banking Mobile banking
 Netherlands 2016 45 27
 18-29
 UK 2016 44 15
 US 2016 31 8 30-39
 Denmark 2017 23 16 40-49
 Sweden 2018 13 - 50-59
 Norway 2017-2018 11 6 60+

 Sources: Retail payment services 2017 Report, Norges Bank 0% 20% 40% 60% 80% 100%
 Survey of e-payment usage in Thailand in 2017, Payment Policy Department, Source: Survey of e-payment usage in Thailand in 2017, Payment Policy Department,
 Bank of Thailand Bank of Thailand
 6

Part I e-Payment
 Development of cash usage behaviors and challenges in Thailand
 e-Payment usage in Thailand still be in the early stage esp. Internet/mobile banking
Value of payment per each transaction has been declined recently reflecting greater adoption of e-Payment in daily use
 Billion transactions
 4 No. of retail payment Life cycle of payment services
 ATM or branches

 Transactions
 3 internet and mobile Introduction Growth Saturation Decline
 2 cards 2018
 Credit card Cheque ATM Transfer
 e-Money 2008 Debit card
 1 Credit card
 0 Debit card Counter Transfer
 Credit Transfer ATM
 2550 2552 2554 2556 2558 2560 Internet banking Cheque
 Trillion baht Mobile banking
 40
 Value of retail payment e-Money
 Cash services
 30 e-Money at branch
 Thailand
 20
 10

 Transactions
 Introduction Growth Saturation Decline
 0 2018 EFTPOS (mainly card payment)
 2550 2552 2554 2556 2558 2560 Terminal Giros
 2003 Terminal Giros
 Value of retail payment / transaction Thousand baht Interbet banking ATM
 Thousand baht 200 Credit card Mail-based Giros
 3 cards Debit card
 150 e-Money Giros paid
 2 100 Mobile banking at counter
 internet and mobile (RHS)
 1 50 Cheque
 e-Money PC/Internet Giros
 0 0
 2550 2552 2554 2556 2558 2560 Norway
 Source: Gresvik and Owre (2003), Rungsun Hataiseree (2008), and author’s estimates.
 7
 Source: Bank of Thailand

Part I e-Payment
 Development of cash usage behaviors and challenges in Thailand
 Cash transaction has declined continuously consistent with decelerating growth of cash in circulation
 Growth of payment services Cash in circulation (classified by holders)
 Internet&Mobile Trillion baht %
 2.0 Currency held by Depository Corp. 85
 electronic

 Debit card Currency held by Gov.
 e-Money Currency outside DCs & Gov. 83
 1.5 Share of Currency outside DCs & Gov. (แกนขวา)
 Credit card 2557
 81
 Counter tranfser 2558 1.0
 semi

 ATM tranfser
 2559 79
 2560 0.5
 Cheque 77
 manual

 Counter withdraw 0.0 75
 ATM withdraw 2550 2551 2552 2553 2554 2555 2556 2557 2558 2559 2560
 -10% 0% 10% 20% 30% 40% 50% 60%
 24 CIC growth CIC to GDP (%) RHS 10
 Cash deposit and withdrawal 20 9
Billion baht
 40,000 Cash deposit Cash withdrawal 16
 30,000 12 Avg. = 9.2% 8
 20,000 8 Avg. = 5.3%
 10,000 7
 0 4
- 10,000 0 6
- 20,000
- 30,000 -4 5
 2550Q1
 2550Q3
 2551Q1
 2551Q3
 2552Q1
 2552Q3
 2553Q1
 2553Q3
 2554Q1
 2554Q3
 2555Q1
 2555Q3
 2556Q1
 2556Q3
 2557Q1
 2557Q3
 2558Q1
 2558Q3
 2559Q1
 2559Q3
 2560Q1
 2560Q3
 H2/2557

 H1/2558

 H2/2558

 H1/2559

 H2/2559

 H1/2560

 H2/2560

 H1/2561

 8
 Source: Bank of Thailand

Part I e-Payment
 Monetary statistics
Despite slowdown in cash usage, velocity of money and money multiplier in Thailand are quite stable

 2.5
 Monetary aggregate (seasonally adjusted) 25 Growth of monetary aggregate
 trillion baht. 18 %YoY
 2.0 Broad (RHS) 20 16 Broad
 CA 14
 1.5
 Narrow 15 12
 Avg. 8.6%
 Narrow
 10
 1.0 10 8
 6
 0.5 5
 CIC 4
 Base Avg. 5.3%
 0.0 0 2
 2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 2018Q1 0
 2001Q1 2004Q1 2007Q1 2010Q1 2013Q1 2016Q1

 3.00 Velocity of money 0.30 times Money multiplier
 14
 1.7
 2.50
 Broad (RHS) 0.25 1.6
 13

 0.20 1.5 Broad (RHS) 12
 1.4 11
 2.00 0.15 10
 Narrow 1.3
 9
 0.10 1.2
 1.50 1.1 8
 Base 0.05
 1.0 Narrow 7
 1.00 0.00 0.9 6
 2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 2018Q1 2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 2018Q1

 9
 Source: Bank of Thailand and authors’ calculation

Part I e-Payment
 Monetary statistics
 Unlike Sweden, cash in circulation continuously declines and velocity of money rises fast

Transition towards a cashless society in Sweden
 Cash/GDP Velocity of M0 Velocity of M1

 SEK bil.

 Velocity of M2 Velocity of M3

 Source: Dalebrant (2016)
 10

Part I e-Payment
 Substitution effect on demand for money
 Our empirical study also shows that e-Payment usage in Thailand slightly substitutes cash
 If Thai people use 1% more for retail e-Payment, demand for money will decline by 0.05 - 0.1%
However, e-Payment shows smaller impact on cash compared to economic activities and opportunity cost
 Macroeconomic + CEI
 variables
 Currency in
 circulation Opportunity cost - 3-m deposit interest rate SET return
 (CIC)
 e-Payment usage - Internet/mobile card payment e-Money
 (value)
 Model I Model II Model III Model IV
 Coincident economic index 0.497 *** 0.517 *** 0.491 *** 0.211 *
 ST interest rate -0.012 *** -0.014 *** -0.012 *** -0.013 ***
 Retail e-payment -0.058 **
 Card payment -0.089 ***
 Internet and mobile banking -0.054 **
 e-money 0.023
 SET return -0.085 *** -0.090 *** -0.083 *** -0.087 ***
 C 0.060 *** 0.060 *** 0.059 *** 0.048 ***
 Adjusted R-squared 0.393 0.344 0.394 0.358
 Source: Authors’ calculation
 Remark: This study employs generalized method of moments (GMM) approach, using monthly data from Jan10 to Jun18
 11 ***, **, * = statistical significance at 0.01, 0.05, and 0.1 respectively
 All variables, except for deposit rates, are in real terms and expressed in log with the first-difference form

Part I e-Payment
 Literature reviews
 Past studies in e-Payment and implication on monetary policy are mostly descriptive and focus in digital money
Growing use of digital money could lessen central bank’s ability to control money supply under monetary targeting framework.
 However, it will not affect monetary policy under inflation targeting

 Area of study Implications for monetary policy
 Monetary - Reduce central bank’s control over money supply and complicate monetary operation
 operation under monetary targeting due to higher and more volatile velocity of money and money multiplier
 (Neda popovska-Kammnar 2014, Qin 2017)
 Central bank - Decline in CIC led to smaller amount of asset-backed currency and smaller size of central bank’s
 independence balance sheet that could affect monetary operation (Barentsen 1997, Rogoff 2014)
 - Decline in CIC could lessen seigniorage that could affect central bank’s revenue to pursue its mission
 (Fung et al 2014, BOK 2005). However, no central bank reported that its balance sheet has been effected
 from decline in CIC (BIS Survey 2000)
 Monetary policy - Credit channel e-money will turn cash usage in deposit transfer that could promote money creation process
 transmission (ธรรมรักษ์ 2011, Payment system insight 2013)
 - Information-based lending could facilitate greater credit approval (นันทวัลลิ์ 2018)
 - Digital money issuer (non-bank) and disintermidiation (Lagard, 2017)
 - Exchange rate channel e-Payment supports international trade via e-commerce. However, buyers and sellers
 might reduce their FX risk by using foreign currencies for domestic spending (dollarization). If this behavior
 becomes more popular, policy rate could have smaller impact on domestic spending (only via its local
 currency)
 - Asset price channel e-Payment reduces transaction cost that could make money demand more sensitive to
 interest rates (flatter money demand curve). When policy rates change, demand for money will adjust faster
 12
 (IMF, 2004)

Part I e-Payment
 Monetary policy implication
 Monetary Greater use of e-payment in Thailand has no direct impact on monetary operation under inflation
 operation targeting using short-term interest rate as operational target. However, it will affect central bank under
 monetary targeting framework since velocity of money and money multiplier are more unpredictable

 Monetary targeting framework (1998-2000) Inflation targeting framework (2000 - present)
 2) BOT will adjust interest rate corridor
 Interest rate
 following new policy rate
 Assess economic activities and 1) MPC hikes policy rate S1
 economic outlook S0 3) The demand for
 Ultimate target: GDP and Price (PY) i1 reserve curve shifts
 Estimate upward consistence
 velocity of money (V) D1 with the new
 from MV = PY i0 i0 liquidity
 Specify i=intermediate target: management
 D0 D0 behavior
 Money Supply (M = PY/V)
Estimate money R0 Reserve balance R1=R0
 multiplier (m)
 Excess Autonomous • CIC
 from M = mB reserve factors (e-Payment
 Specify operational target: not significantly
 Standing facilities affected this part
 Monetary Base (B = M/m)
 yet)
 Required • Government
 reserve OMOs deposit
 • FX intervention
 Increase or absorb: • Other factors
 to achieve operational target
 via R/P or swap
 Demand for reserves Supply of reserves
 13

 Source: FAQ issue 32 (Roong Mallikamas, 2554)

Part I e-Payment
 Monetary policy implication
 Central bank Despite more popular use of e-Payment in Thailand, cash still grows and seigniorage has not declined yet.
independence The BOT’s balance sheet expands overtime from FX reserve accumulation.
 However, decline in cash could impact BOT balance sheet by changing structure of liabilities with greater composition
 of interest-bearing liabilities from OMOs and smaller portion of cash (non-interest bearing) with lower seigniorage
 Assets Liabilities Bn THB BOT’s balance sheet Seigniorage
 8,000 ลลบ.
 Foreign assets Current account Asset 0.06
 (CA) 2
 6,000 0.05
 1 Domestic
 Domestic assets Notes issued asset
 0.04

 3 4,000 0.03
 … OMOs
 0.02

 1 Customers convert their cash to 2,000 0.01
 prepaid e-money (less cash usage) Net interest rate income
 International assets 0.00

 2005
 2006
 2007
 2008
 2009
 2010
 2011
 2012
 2013
 2014
 2015
 2016
 2017
 2 E-money issuers are required to 00
 deposit prepaid cash at the bank Open Market Operations Source: Bank of Thailand balance sheet (CUR)
 Payment system Act B.E. 2560 said that the e-money 2,000 (BOT Bond, BRP)
 Monetary seigniorage
 issuers have to deposit the float to the commercial bank
 ∆ − 
 only e-money spending purpose =
 4,000 
 Equity
 Under excess liquidity condition, Banknotes in circulation % of GDP
 3 banks will deposit this extra 6,000 1980-1985 1999-2001 2006-2017
 liquidity in CA at BOT and invest 0.3 0.1 0.08*
 in OMOs to earn interest income Liability and equity
 8,000 Source: Bank of Korea (2005)
 Source: Bank of Thailand and authors’ calculation
 2006
 2007
 2008
 2009
 2010
 2011
 2012
 2013
 2014
 2015
 2016
 2017

 * Bank of Thailand and authors’ calculation
 14

Part I e-Payment
 Monetary policy implication
Transmission MP ST rate LT rate
 Mechanism bank lending
 bank reserves Supply of loan total demand
 balance sheet
 asset prices wealth

 Interest rate diff. exchange rate

 expectation

 Channels Effectiveness of monetary policy
 Interest rate Status quo depending on Banks’ balance sheet, the elasticity of interest rate on demand for deposits and
 the competition in banking sector.
 Credit Slightly more effective
 1. Banks can reduce cash operation and allocate larger amount of money kept in bank accounts for lending
 2. Digital banking help facilitate banks to gain benefit from information-based lending
 Asset price More effective Saver can switch their saving into various forms of financial assets easily with lower transaction cost
 Exchange rate Tend to be more effective e-Payment facilitates cross-border capital flows movement and promotes e-commerce
 transaction across countries. Exchange rate could be more volatile by greater volume of transactions
 Expectation Status quo depending on business and households' views on economic outlook and policy rate path

 15

Part I e-Payment Observed Variables
 Monetary policy implication
 Baseline model Alternative model
Empirical study of MP transmission mechanism in Thailand Inflation, CEI, RP Inflation, CEI, RP, e-Payment
Factor-Augmented Vector Autoregressive (FAVAR) model: 113 Unobserved Variables
 Ft F Consumption and investment 11
 = ф L t-i + νt
 Yt Yt-i Production, Expectation and Labor indicators 22
 Real estate and Price indicators 18
 where Ft = unobserved vector (k x 1) Interest rates 22
 Exchange rate 7
 Yt = observed vector (m x 1) Money and credit quantity aggregates 10
 ф L = coefficient matrix of lag order External sector and capital flow 7
 ν t = error term (zero mean with constant covariance matrix) Government sector 7
 Stock price, Oil price, Global policy rates 9
 Total 113

 Impulse response of selected variables to policy rate shock (+100 basis points)

 Base model
 Alternative Model

 16 FAVAR with 3(4) Observed Variables, 5 Factors and 1 lags. Sample: 2006M1-2018M6.
 The result shows Median and 90% Confidence Interval Source BOT Staff’s calculations

Part I e-Payment
 Monetary policy implication
 Impulse response of selected variables to policy rate shock (+100 basis points)

17 FAVAR with 3(4) Observed Variables, 5 Factors and 1 lags. Sample: 2006M1-2018M6.
 The result shows Median and 90% Confidence Interval Source BOT Staff’s calculations

Part I e-Payment
 Future trend of e-Payment

 Exponential growth of Role of foreign
 Crypto and its substitution effect
 e-Payment usage and non-bank
 on e-Payment usage
 payment policy e.g. Alipay, Wechat
 Regulatory and supervisory Consumer behavior Disintermediation
 role for private digital Large-scale competition
 money issuers

Promoting digital payment amid an increasing role of non-bank and FinTech
 • Streamline laws and regulations to support innovations
 • Build Interoperable Payment Infrastructures to support all sectors and further development
 • Enhance cross-border payment efficiency
 • Strengthen cyber resilience to maintain stability and trust
 • Increase adoption as well as improve literacy for a sustainable development

 “With the amount of electronic money still very small …, the effect on monetary policy
 is not yet absolutely determinable. However, the central banks and economists must try
 to anticipate the effects before it becomes more significant. ”
 Reynolds G. and Stephen F. (2013) Electronic money and monetary policy

18

Outline

 Part II Digital currencies
 II.I Current situation and looking ahead
 II.II Policy options

 19

Part II Digital currencies
 Definitions and current situation

Definitions Digital Currency (DC)
 An asset stored in electronic form that can serve essentially the same function as
 physical currency, namely, facilitating payments transactions (BIS 2015)

 Crypto-currency
 • a separate sub-class of digital currencies, with their distinguishing
 feature depending on the consensus mechanism applied for updating
 the ledger (Barrdear and Kumhof, 2016)
 Crypto-currency => Non-fiat backed currency

 Current • Crypto-currency performs very poorly the 3 functions of money
 situation (Ali et al., 2014)
  Medium of exchange: very few merchants accept them
  Unit of account: ambiguous as some merchants adjust prices according
 to exchange rate fluctuations vis-à-vis fiat currencies
  Store of value: more volatile than national currency pairs
 20

Part II Digital currencies
 Scenario analysis

 Uses of Digital Currency (not mutually exclusive)
 I. Wholesale (B2B)
 Means of exchange
 II. Retail (B2C and C2C)
 III. New Asset Class

 Note: limit scope to exclude lending/borrowing of digital currencies

21

Part II Digital currencies
 Scenario I: Wholesale

 Scenario I: Wholesale
• Digital currencies are popular among businesses, Implications for Monetary Policy Transmission
 while regular people still use cash at large Transmission channels Scenario I (Wholesale)
• DLT’s efficiency and traceability prompt some
 Interest rate Status quo
 businesses to adopt crypto as their means of
 exchange Credit Status quo
• This has already happened in some business Asset price Status quo
 sectors, e.g. Ripple
 Exchange rate Status quo
 Possibility: Very likely Expectation Status quo
 How to get here?
 • We’re already here!
 • If people trust this alternative system more,
 then more businesses will move here

 22

Part II Digital currencies
 Scenario II: Retail
 Scenario II: Retail Implications for Monetary Policy Transmission
• Digital currencies become a popular means of Transmission Scenario II (Retail)
 payment in everyday transactions due to their channels
 ease of use and side benefits like tracking
 expenses, information-based lending, etc. Interest rate Less effective: smaller portion of
 monetary instrument is affected
1. Pegged to THB => e-payment alike by interest rate

2. Non-pegged to THB => we focus on this case Credit Less effective: less demand for
 THB credit
• Spectrum: Various degree of popularity and Asset price Less effective: smaller portion of
 functions of money people’s wealth is affected by MP

 Possibility: Likely Exchange rate Less effective: improvement of
(without central bank’s intervention) entrepreneur’s competitiveness
 How to get here? via THB exchange rate is
 lessened
 • Non-banks are more superior than banks in
 creating the required network effects Expectation Indeterminate

 23

Part II Digital currencies
 Scenario III: New Asset Class
 Scenario III: New Asset Class Implications for Monetary Policy Transmission
• Digital currencies become digital assets instead Transmission Scenario III
 channels (New Asset Class)
 o e.g. cryptocurrencies, no longer functioned
 Interest rate Status quo
 as means of exchange, become a
 conventional asset like stock, gold, or other
 Credit Status quo
 commodities
 Asset price Indeterminate:
 Possibility: Likely • more asset choice for people
 How to get here? to invest in (Hawkins 2017)
 • Cryptocurrencies cannot become means of • the value of digital assets
 exchange depend on their properties.
 • The market becomes thicker, reducing the Exchange rate Status quo
 volatility of the asset Expectation Status quo

 24

Part II Digital currencies
 Scenario III: Summary of Scenarios

 Transmission Scenario I Scenario II Scenario III
 channels (Wholesale) (Retail) (New Asset Class)
Interest rate Status quo Less effective Status quo

Credit Status quo Less effective Status quo

Asset price Status quo Less effective Indeterminate

Exchange rate Status quo Less effective Status quo

Expectation Status quo Indeterminate Status quo
25

Part II Digital currencies
 Bottom line

 How to deal with these scenarios then?
 • Doing nothing?
 • e-Payment?
 • Stricter investment regulations on digital currencies?
 • CBDC as a policy tool?
 • If CB offers competing products that would enhance
 consumers’ retail payment experience, that would curb
 retail use of non-bank wallets

26

Part II Digital currencies
 Central Bank Digital Currency (CBDC)

What are CBDCs?
 “central bank-issued money that combine cryptography and DLTs” (BBVA)

 Why are central banks considering them?
 o Digitize cash to improve efficiency in payments (BIS)
 o Develop a new monetary policy tool to overcome
 zero-bound interest rates (BBVA, BIS)
 o Maintain access to central bank money given increasing
 competition from private DCs and e-payment (BBVA, BIS)
 o Maintain control over financial conditions (BBVA, BIS)

 27

Part II Digital currencies
 Central Bank Digital Currency (CBDC)
 Design features
 Types of CBDC under consideration Limited
 Accessibility
 Universal
 • Design of each case is based on their purpose Interest-bearing
 • Operational aspects will be disregarded for brevity Zero Non-zero
 Anonymity
 Identified Anonymous
 Continuity
 9 to 5 24 / 7

 3 Design options of CBDC
 Objective Accessibility Interest-bearing Example

Design “A” For Interbank Settlement Restricted : Wholesale Unremunerated Project Inthanon

Design “B” Similar to cash Universal : Retail Unremunerated E-Krona

Design “c” Policy Tool Universal : Retail Remunerated ???
 28

Part II Digital currencies
 Assessment Framework

Analysis of impact on MP transmission will focus on how each case would affect balance sheet
composition of each agent, in terms of both quantity (q) and price (p)
Key assumptions
1) Supply of CBDC is controlled by the central bank through a market-based mechanism whereby
 cash/assets are exchanged for CBDC tokens in-kind.
2) No change in MP framework (IT). Policy rate is the main policy tool (no QE).

 Transmission Mechanism

 Balance Sheet
 Asset Liability

 29

Part II Digital currencies
 CBDC Designs

CBDC Designs

 Design A: Wholesale CBDC
 Design B: Unrenumerated Retail CBDC
 Design C: Renumerated Retail CBDC

30

Part II Digital currencies
 Design A – Wholesale CBDC
Wholesale CBDC is unlikely to affect MP transmission because it does not contend with the two-tier banking system
and is just a change in infrastructure intended to improve efficiency of RTGS systems (BIS, 2018).
 Central bank Comm. Bank Non-bank
 Bond Reserves Loans Borrowing Deposits Borrowing
 Bond Deposits Bond Others
 International reserves - CBDC 
 Reserves Other debt
 Other assets - CIC  
 Cash
 - CBDC Equity
 Other debt  - Cash CBDC
 Equity Other assets Other assets

 Implications for Monetary Policy Transmission
 MP Transmission channels Case A – Wholesale CBDC
 Interest rate Status quo
 Credit Status quo

 Asset price Status quo

 Exchange rate Status quo

 Expectation Status quo
 31

Part II Digital currencies
 Design B – Unrenumerated retail CBDC
 Unrenumerated Retail CBDC might affect MP transmission during stress because it is a safe asset that
 could be considered a ‘safer’ alternative to bank deposits.
 Central bank Comm. Bank Non-bank
 Bond Reserves Loans Borrowing  Deposits Borrowing
 Bond Deposits 
 International reserves - CBDC  Bond Others
 Reserves Other debt 
 Other assets - CIC  
 Cash
 - CBDC Equity
 Other debt   CBDC
 - Cash
 Equity Other assets Other assets

 Implications for Monetary Policy Transmission
 Channels Case B – Unrenumerated retail CBDC
Interest rate Status quo
Credit Status quo (except during stress: Shift from deposits to CBDC could impact bank
 funding and credit provision especially during stress periods (bank runs).) During normal
 times however, such shift is unlikely since deposits still pays interest.
Asset price Status quo
Exchange rate Status quo
Expectation Indeterminate (but might lead to higher ELB due to less carrying cost of ‘cash’)
 32

Part II Digital currencies
 Design C – Renumerated retail CBDC
 Renumerated Retail CBDC could affect MP transmission significantly as it gives central banks stronger
 control over domestic financial conditions through the CBDC interest rate (policy rate).
 Central bank Comm. Bank Non-bank
 Bond Reserves  Loans Borrowing   Deposits Borrowing
  Bond Deposits  
 International reserves - CBDC  Bond Others
 Reserves Other debt 
 Other assets - CIC  
 Cash
 - CBDC Equity
 Other debt   CBDC
 - Cash
 Equity Other assets Other assets
 Implications for Monetary Policy Transmission
 Channels Case C – Renumerated retail CBDC
Interest rate More effective: Bank rates would become more sensitive to changes in the policy rate
 to prevent deposit flight (CPMI, 2017) and minimize opportunity costs. The policy rate
 would act as a interest rate floor/ceiling (Meaning et al, 2018).
Credit Less effective: Mass conversion from deposits to CBDC would affect bank’s lending
 capacity (Stevens, 2017; BIS, 2018).
Asset price More effective: Changes in policy rate directly affects wealth.
Exchange rate Status quo
Expectation More effective: No ELB allows central banks to send strong policy signals through
 33 extreme rate cuts, especially in the down cycle (Stevens, 2017)

Part II Digital currencies
 Summary of the implications of CBDC designs

 Channels Design A Design B Design C
 (Wholesale) (Unrenumerated Retail) (Renumerated Retail)
Interest rate Status quo Status quo More effective
 but may cause one-time
 shift in bank rates
Credit Status quo Status quo Less effective
 (except during stress)
Asset price Status quo Status quo More effective
Exchange rate Status quo Status quo Status quo
Expectation Status quo Indeterminate More effective

 34

Part II Digital currencies
 Are retail CBDCs really the solution to the autonomy problem?

Disintermediation of commercial banks / emergence of narrow-banking
• Retail banking would face direct competition from central banks narrow banking  with the result
 threat to aggregate credit (BBVA, 2017)
Validity of ELB argument
• Negative interest rate policy (NIRP) not be politically feasible.
• Eliminating larger bank notes to increases costs of holding cash lowers ELB (Rogoff, 2016; Engert, 2017)
Financial stability implications
• Banks may engage in high risk lending to offset higher funding cost (BIS, 2018)
• CBDCs allow for ‘digital runs’ towards the central bank with unpredecented speed and scale (BIS, 2018)
Autonomy problem
• Loss of seigniorage income might not an issue for some central banks (Engert, 2017)
• Unlikely that cryptocurrencies will completely replace fiat currencies unless there is massive lost of
 trust in the central bank. Central banks must maintain trust through credible policies (He, 2018)

Part II Digital currencies
 Bottom line

 • With increasing competition from private DCs would force central bank to move
 towards CBDCs.
 • However, central banks must carefully weigh the implications for financial stability
 and monetary policy of issuing each case of CBDC.

Issues for consideration Case “A” Case “B” Case “C”
Perform full functions of money   
Able to compete with retail crypto-currencies -  
Net Impact on MP transmission mechanism Status quo Status quo More effective
Financial stability issues - - • Narrow banking
 • Moral Hazard

Conclusion
 e-Payment & Digital Currencies
e-Payment
• How much retail e-payment could substitute cash usage in Thailand?
  Small substitution effect
• How would e-payment affect monetary aggregates, central bank's balance sheet, velocity of money,
 money multiplier? How would this affect the transmission of monetary policy or monetary
 operations?
  Not yet observe any negative impact from e-Payment on monetary operation in the transition
 toward less-cash society. E-payment trend strengthens MP transmission via credit and asset
 price channels.
Digital Currencies
• How would the emergence of private digital currencies affect transmission of monetary policy in 5
 traditional channels?
  Most likely affect through credit and asset price channels (depends on each scenario)
• What are the policy options available to central banks, and how would this change
 the transmission of monetary policy?
  e-Payment, Regulations, CBDC

“Central banks must maintain the public’s trust in fiat
currencies and stay in the game in a digital, sharing,
and decentralized service economy.”

 Dong He
 Deputy Director, IMF
 Monetary Policy in the Digital Age, June 2018

Thank you

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