The Bank of Lithuania is redoubling its efforts towards its central bank digital currency (CBDC) initiative. Leading the way in blockchain-based projects (LBChain and LBCOIN, both first-of-their-kind among central banks) and innovations in payment systems (CENTROlink), the Bank of Lithuania issued an analysis on CBDC design choices as well as monetary policy and financial stability implications.
This analysis was provided in anticipation of LBCOIN, a blockchain-based digital collector coin, expected to be issued at the beginning of 2020. In the context of the CBDC discussion, the paper elaborates on the regulatory sandbox approach in supervision. LBCOIN is a controlled experiment that can be consid red an in vitro test of multiple practical aspects relevant to the broader CBDC discussion.
“It is fascinating to follow how fast the area of digital assets and currencies is evolving. It is not prudent to be a casual observer, as this puts regulators and supervisors in the anxious position of a parent who is disgruntled to see that his “parental controls” are completely out of date. The preferred approach is to face the risks and gain hands-on experience in a controlled environment,” said Marius Jurgilas, Board Member of the Bank of Lithuania.
CBDC could serve as a new form of money issued by central banks. If it were introduced, it would complement cash and credit institutions’ reserves already provided by central banks, as well as commercial bank deposits and electronic money (which is offered by financial market participants under relevant licensing regimes). While the idea of CBDC is not new, it has recently attracted significant attention from academics and policymakers. This trend has been reinforced by the recent rapid development of technology, decreasing use of cash, and initiatives from the private sector to issue currency-like digital assets.
In light of all this, central banks around the world might find themselves better able to meet the changing financial needs of consumers and businesses by embracing new technology. As Marius Jurgilas highlighted, “If we truly aim to insulate the Eurozone from global technology-related threats and provide a competitive advantage to our businesses, European payment strategies must not be based on solutions of the past”.
The future of CBDC is related to the development of technologies such as blockchain. Notably, not only does the Bank of Lithuania monitor the evolution of innovative solutions, it also facilitates their development. In order to introduce public-service innovations and help Lithuanian and international companies gain knowledge and carry out blockchain-oriented research, the Bank of Lithuania is developing LBChain (the world’s first-of-its-kind blockchain-based technological sandbox, which was designed by a financial market regulator and combines regulatory and technological infrastructures), and LBCOIN (the world’s first blockchain-based digital collector coin).
The paper “CBDC: in a whirlpool of discussion” presents the CBDC concept and typology, surveys the existing literature, documents the initiatives undertaken by central banks around the world, and discusses policy implications from the perspectives of monetary policy and financial stability. The paper emphasises that CBDC could promote financial inclusion and cross-border trade, as well as support the economy by providing access to basic payment services and the ultimate safe asset. Yet, certain CBDC designs could contain some risks.