Payment Flows, Bank Lending, and Central Bank Digital Currencies

This paper examines how the degree of user anonymity built into a central bank digital currency (CBDC) affects bank lending decisions and what this implies for the optimal design of CBDC anonymity. “Anonymity” in the paper’s sense is the lender’s inability to discern whether a borrowing entrepreneur is diverting funds—a moral hazard problem that arises because CBDC transactions, if unobservable to lending banks, prevent the screening that banks currently perform using deposit (card-based) transaction records. In a signaling model where entrepreneurs choose a payment instrument to influence bank refinancing decisions, moderate CBDC anonymity is shown to produce an inefficient pooling equilibrium in which both high- and low-quality borrowers choose CBDC, preventing banks from screening. To avoid this pooling inefficiency, CBDC anonymity should be set either low—making CBDC less attractive to entrepreneurs seeking to obscure diversion—or high—discouraging bank lending through CBDC entirely—with high anonymity optimal when CBDC significantly benefits sales, and low anonymity otherwise. Competition between bank deposits and CBDC may impede the implementation of the low-anonymity optimum.

Yuteng Cheng | Macro Paper Warehouse

Payment Flows, Bank Lending, and Central Bank Digital Currencies