Evaluation of Central Bank-issued Digital Currency (CBDC) Implementation Designs using Transaction Cost Economics Perspective

Abstract

The advancement in digital technology provides room for innovations in many sectors, including in the financial sector. The development of digital currencies is one example of digital advancements in this sector. Digital currencies can take many forms, and cryptocurrency is one of the most popular forms of digital currencies today. Bitcoin and other cryptocurrencies (or altcoins) have slowly been adopted around the world as a means of payment. However, Bitcoin and altcoins are not issued by the central banks or other central authorities, making it difficult to regulate. At the same time, in several countries, the use of cash is declining to a very low rate. As the response to these economic phenomena, central banks in some countries are investigating the possibility of introducing their own version of digital currency which is called central bank-issued digital currency or CBDC. This research shows how to implement transaction cost economics (TCE) framework to characterize transaction costs in several CBDC design options through in-depth semi-structured interview sessions. The interviewees were the experts from central banks, commercial bank, regulatory bodies, and relevant NGOs in the European developed economies. The results of the interview sessions showed several findings. First, according to the experts, there are three main CBDC design options: Retail CBDC, Wholesale CBDC, and Full-reserve Depository Banks CBDC. Second, among the three transactional dimensions of TCE (uncertainty, transaction frequency, and asset specificity), the uncertainty aspect provides a significant contribution to overall transaction costs. Third, the central bank and commercial banks are the ones that bear most of the transaction costs, especially in Retail CBDC design option, while the households and non-financial institutions do not need to bear any transaction costs.