CBDC: Account versus token

The debate about whether central bank digital currencies (CBDC) should be based on an account- or token-based system continues. A senior Bank of England representative was reported recently to have indicated that “it’s very unlikely any of us would issue a retail CBDC as a bearer instrument” and that “it would probably be some form of account-based instrument.” A retail account-based instrument would require the central bank to issue accounts to the general public. Undoubtedly, such approach is feasible and would have been for decades. But what would be the point? It would be an extension of existing payment systems, increase dependencies thereon and means little if any financial innovation.

Central bank money today exists as physical tokens (banknotes) and scriptural or account-based monies (reserves). The former is accessible to the general public and the latter to financial intermediaries mostly to settle large value payments. An account-based CBDC would be the same as reserves.

Among the most significant innovations in payments during the past 10 years were the introduction of digital tokens like bitcoin and its successors. The idea of a token-based libra gave rise to serious considerations about adopting CBDC in the first place. To now argue accounts do just fine seems to be saying that those innovations would have been possible using conventional systems. That is unlikely.

Digital tokens are for money what electric vehicles are for the motor car industry. It took a while for electric vehicles to be taken seriously by an industry heavily vested in the internal combustion engine. Electric vehicles brought progress in terms of engine efficiencies and other innovations that would unlikely have been made without them. Today, it seems safe to say that electric vehicles are critical for the survival itself of a country's car industry.

Digital tokens have properties akin to a bearer instrument. Bearer instruments hold all information needed for a transfer of ownership through a transfer of the token peer-to-peer, that is, the payment is the settlement, establishing direct monetary relations and significantly simplifying how payments are being made. Tokens reside in digital wallets that can securely be tied to an identity to ensure alignment with existing prudential standards. They live on a new financial market infrastructure, typically a blockchain or other distributed ledger technology platform, and can exhibit features like programmability and traceability offering new functionalities and utility.

CBDC is to equip the financial system with new capabilities, foster innovation, diversification and competition. It is also about ensuring access to central bank money is equitable across a wider range of financial market infrastructures. It is to help make central bank money future proof to preserve its anchor function in the financial system.

The innovation with CBDC is the digital token. It is similar to the introduction of modern banknotes during the nineteenth century. At the time, banknotes—highly controversial then—were to complement specie payments—silver and gold coins—to respond more effectively to changing payment needs. Central banks have a historical opportunity to signal support for financial innovation and shape a new format of money itself. It would only be the second time during the past 150 years that central bank money has seen some significant innovation.