DANMARKSNATIONALBANK 1 5 D E C E M B E R 2 0 1 7 — N o. 2 8

ANALYSIS

Itisdifficulttoseewhatcentralbankdigitalcurrencywouldbeabletocontributethatisnotalreadycoveredbythepaymentsolutionswhichexisttoday.Denmarkhasasecureandeffectivepaymentsinfrastructureanddigitalcurrency,intheformofbankdeposits,alreadyexists.

CentralbankdigitalcurrencywouldfundamentallychangeDanmarksNationalbank’sroleinthefinancialsystemandmakeDanmarksNation-albankadirectcompetitortothecommercialbanks.Theintroductionwouldleadtorisksoffinancialinsta-bility,forexamplebyincreasingtheriskofsystemicbankruns.

Thepotentialbenefitsofintroducing centralbankdigitalcurrencyforhouseholdsandbusinessesinDen-markwouldnotmatchtheconsid-erablechallengeswhichthisintro-ductionwouldpresent.DanmarksNationalbankthereforehasnoplanstoissuecentralbankdigitalcurrency.

Introductionandsummary

Shouldcentralbanksissuedigitalcurrencytohouse­holdsandbusinesses,asasupplementtophysicalcashanddepositswithcommercialbanks?Thisisanissuethatiscurrentlybeingdebatedinternational-ly.1Oneoftheargumentsinfavourofintroducingcentralbankdigitalcurrencyistoachieveamoreeffectivepaymentsystem.Anotheristoensurethathouseholdsandbusinessesstillhaveaccesstoasafeasset,astheuseofcashdeclines.Athirdargumentistheadvantageofestablishingaback­upsystemfortheexistingpaymentsinfrastructure.

InaDanishcontext,itisunclearwhatcentralbankdigitalcurrencywouldbeabletocontributethatisnotalreadycoveredbythecurrentpaymentsolu­tions.Denmarkhasasecureandeffectivepaymentsinfrastructure,whichamongotherthingsprovidesforimmediatesettlementofpayments–forexampleviaMobilePay,theprivatelydevelopedmobilepay-mentsolution.Furthermore,depositsofuptoeuro100,000arecoveredbythedepositorguaranteescheme,andeveryconsumerhasastatutoryrighttoabasicpaymentaccount.

ThepotentialbenefitsofintroducingcentralbankdigitalcurrencyinDenmarkarenotassessedtomatchtheconsiderablechallengesthatthisintroduc-tionwouldpresent.IfDanmarksNationalbankweretoissuecentralbankdigitalcurrency,thiswouldfundamentallychangeitsroleinthefinancialsystem,andwouldleadtorisksoffinancialinstability.Cen-tralbankdigitalcurrencycould,forexample,haveagreatimpactonthebanks’businessmodeland

1 Seee.g.SverigesRiksbank(2017),Callesen(2017),Mersch(2017),Ni-colaisen(2017),Broadbent(2016),Skingsley(2016),BechandGarratt(2017),Grymetal.(2017),BarrdearandKumhof(2016),andBordoandLevin(2017).

CentralbankdigitalcurrencyinDenmark?

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increasetheriskofsystemicbankruns.Dependingonhowitmightbedesigned,issuingcentralbankdigitalcurrencycouldalsopresentchallengeswithrespecttoDenmark’sfixed­exchange­ratepolicy,andwouldimposesignificantlegalandadministrativechallengesonDanmarksNationalbank,withoutanyclearbenefitsforsociety.

Incountriesthatareinadifferentsituation,forexamplethosewithalesswell­developedpaymentsystem,thebalancebetweenbenefitsandrisksmightbedifferent.

IntheanalysisthevariousreasonsforintroducingcentralbankdigitalcurrencyinaDanishcontextareconsidered.First,centralbankdigitalcurrencyiscomparedtocash,bankdepositsandthe”crypto­currencies”.ThentheeffectofcentralbankdigitalcurrencyonDanmarksNationalbank’scoretaskswithregardtopaymentsystems,financialstabilityandmonetarypolicyisexamined.

Whatiscentral bankdigitalcurrency?

A new type of moneyCash,intheformofbanknotesandcoins,isaclaimonDanmarksNationalbank,whilebankdepositsareaclaimonthebankinwhichthecustomerholdsanaccount.HouseholdsandbusinessescannotholdclaimsonDanmarksNationalbankinelectronicform–butonlyasphysicalbanknotesandcoins.Thebanks,ontheotherhand,doholdelectronicclaims,sincetheyholdaccountsatDanmarksNational-bank.Likeothercountries’centralbanks,DanmarksNationalbankisbankertothebanks.

Centralbankdigitalcurrency(CBDC)2wouldbeanewtypeofmoney,co­existingwithcashanddepositsatthecommercialbanks.Likecash,CBDCwouldbeaclaimonDanmarksNationalbank,althoughitwouldbedigital,likedepositswiththecommercialbanks.3

2 Intherestofthisanalysis,theabbreviationCBDCisusedforcentralbankdigitalcurrency.

3 SeealsoBechandGarratt(2017)foradiscussionofhowCBDCrela-testoothertypesofmoney.

Inthepublicdebate,CBDCisoftenlinkedtothecryptocurrencies,suchasbitcoin.YetCBDCandprivatecryptocurrenciesdonotsharethesamecharacteristics,cf.thenextsection.ThislinkagemayreflectthatCBDCisoftenassociatedwiththeblock-chaintechnologyonwhichthecryptocurrenciesarebased.4ThistechnologyisdescribedinfurtherdetailinAnnex1.

YetCBDCdoesnotneedtobebasedonblock-chaintechnology,butcanbecreatedusingexistingtechnology,withatraditionalaccountstructureandbookkeepingatDanmarksNationalbank.Grymetal.(2017)arguethatblockchaintechnologyinitscurrentformisnotasuitablebasisforCBDC.How­ever,newtechnologiessuchasblockchaincanstillbeusedintheDanishfinancialsectorwithoutintro­ducingCBDC.

Characteristics of CBDCThefactthatCBDCisaclaimonDanmarksNational-bankmeansthat,likecash,itisrisk­free.However,theDanishdepositorguaranteeschemeentailsthatdepositswithcommercialbanksofuptoeuro100,000,oraroundkr.750,000,arecoveredbytheGuaranteeFund.TheGuaranteeFund,previouslytheDepositorGuaranteeFund,istheDanishDepositorandInvestorGuaranteeScheme.ItspurposeistocoverdepositorsandinvestorsifaDanishbankfails.5 TheGuaranteeFund’stargetlevelis0.8percentofthedepositscovered.6IfthisamountisnotsufficienttofulfiltheGuaranteeFund’sobligations,itcanraise

4 CentralbankdigitalcurrencybasedonblockchainandsimilarnewtechnologiesisalsosometimescalledCBCC,CentralBankCryptoCurrency.Thereasoningintheanalysisisindependentoftheun-derlyingtechnology,andthereforeCBDCisusedconsistently.Intheinternationaldebate,adistinctionisalsosometimesdrawnbetweenCBDCforhouseholdsandforfinancialenterprises,calledretailandwholesaleCBDC,respectively.Here,thefocusisonCBDCthat,asaminimum,ismadeavailabletohouseholds,andpossiblytofinancialandnon­financialenterprisesaswell.SeeBechandGaratt(2017)forataxonomyofvarioustypesofCBDC.

5 TheGuaranteeFundwasestablishedbytheDanishActonaDe-positorandInvestorGuaranteeScheme,cf.ConsolidatedActno.917of8July2015(asamended).TheGuaranteeFundcoversbothnaturalandlegalpersons,butnotfinancialenterprises.BranchesofforeignbanksmayjointheGuaranteeFundasasupplementtotheguaranteeschemeinthecountryinwhichtheyareregistered,iftheDanishschemeismorefavourablethantheschemeinthatcountry,cf.Section4.BranchesofbanksoutsidetheEUmustjointheDanishscheme,cf.Section3(1)5).

6 Extraordinarycontributionsmaybeleviedonthebanks,iftheGuar­anteeFunddoesnothavesufficientfunds,cf.Section7(6)oftheActonaDepositorandInvestorGuaranteeScheme.

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astate­guaranteedloan.Netdepositsexceedingkr.750,000arenotcoveredbytheGuaranteeFund,anddepositorswithlargerdepositsmaythereforerisklosses.

Bymaintainingafixedexchangerateagainsttheeuro,DanmarksNationalbankensuresstablepricedevelopmentinDanishkronerterms.Thismeansthattheamountofgoodsandservicesthatcanbepurchasedforkr.100,forexample,doesnotfluctu-atemuchfromyeartoyear.Inotherwords,moneyissuedbyDanmarksNationalbankmaintainsitsrealvalue.Thesameappliestobankdeposits,sincetheyarealsodenominatedinkroner.

Ontheotherhand,thepriceofcryptocurrencies,suchasbitcoins,canfluctuatesignificantly,cf.Chart1.Thisisbecausethereisnocentralissuertounder-pintheirvalue.Thevalueofbitcoinsisbasedsolelyonsomeonebeingwillingtoacquirethematthepriceinquestion.Thesesignificantpricefluctuationslimitthevalueofbitcoinsforpaymentsandstoringvalue.7

Thespecialcharacteristicofcashisthatitistan­gible,takingthephysicalformofeitherabanknoteoracoin.Cash,bankdeposits,CBDCandcryptocur­renciesthushavesimilaritiesanddifferencesintermsofissuer,tangibilityandretentionofvalue,cf.Chart2.

CBDC can be designed in several ways …CBDCcanbedesignedinseveralwaysintermsofwhoistohaveaccess,howitcanbeused,andwhetheritistoaccrueinterest.

… Structure and accessForexample,DanmarksNationalbankcouldalloweveryonetoholdadepositaccountatDanmarksNationalbank.Thiswouldrequireconsiderationofwhethertheseaccountsshouldonlybeofferedtohouseholds,orshouldalsobemadeavailabletobusinesses.Inthissituation,adistinctioncouldbemadebetweenfinancialandnon­financialbusi­nesses.Itmightbedifficult,however,toexcludespecifictypesofbusinessesinasituationwherebothbanksandhouseholdsholdaccountsatDanmarksNationalbank.Asetofruleswouldalsohavetobe

7 SeeLaursenandKyed(2014)foradiscussionofthecharacteristicsofcryptocurrencies.

drawnup,toensurethattherestrictionsconcerningaccesstoCBDCcannotbecircumvented.

ItwouldalsohavetobeconsideredwhetheraccesstoCBDCshouldbelimitedto,forexample,busi-nessesdomiciledinDenmark,andpersonsresidentorlegallyresidentinthiscountry,andhowtheserestrictionscouldbehandledinpractice.Theconse-quencesofapersonorbusinessnolongerfulfillingtherequirementwouldalsohavetobeconsidered.Forexample,wouldapersonwhomovesabroadbeobligedtomoveanydepositwithDanmarksNationalbanktoanaccountinacommercialbank?WouldapersonwhoworksinDenmark,butisnotresidenthere,haveaccesstoCBDC?

Itwouldalsohavetobeconsideredhowanyre-strictionsconcerningaccesstoCBDCwouldcomplywiththeEUsinglemarket,includingtherulesforthefreemovementofpeopleandcapital.Withrespecttoconsumers,theDanishActonPaymentAccounts8 requiresthebankstoofferabasicpaymentaccountnotonlytoDanishconsumers,butinprinciplealsotoconsumersintherestoftheEU,oranycountrywithwhichtheEUhasanagreementinthefinancial

8 Actno.375of27April2016(asamended).

The value of bitcoins fluctuates significantly

Chart1

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4

6

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12

14

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1,000dollarperbitcoin

2013 2014 2015 2016 2017

Note: Thechartshowsdailyobservationsoftheaveragemarketpriceacrossthelargestbitcoinexchanges.Latestdatapointis10December2017.

Source: Blockchain.info.

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area.TheActdoesnotapplytoDanmarksNational­bank,sinceconsumerscannotopenaccountsatDanmarksNationalbank9.IfthispremiseweretoceasewiththeintroductionofCBDC,theregulatoryauthoritywouldhavetoassesstheconsequences–forinstancewhetherallEUconsumerswouldhavetherighttoaCBDCaccount.TheconsequencesofintroducingaCBDCwoulddependonwhoistohaveaccesstoit.

Asanalternative–orpossiblyasasupplement–toanaccount­basedCBDC,DanmarksNationalbankcouldissueCBDCasaprepaidmeansofpayment,suchasacard(likeRejsekort–theDanishelectron­ictravelpaymentcard),ordigitally(likePayPal)

9 Cf.Section1(3)oftheActonPaymentAccountsandFolketingstiden-deA,2015­2016,Billno.L103,page16.

inamobilewallet.IfCBDCweretobeissuedasaprepaidmeansofpayment,itwouldbeimpossibletorestrictaccesstoselectedgroups,suchashouse-holds.

Likecash,aprepaidCBDCwouldprobablybeusedprimarilyforsmallerpayments.Ontheotherhand,itwouldbelesssuitableforlargerpayments,orforstoringvalue–amongotherthings,thereisariskoflosingthedeviceonwhichthevalueisstored.TheeffectsofissuingaprepaidCBDC–includingtherisksidentifiedbelow–wouldthereforebelessextensivethanforanaccount­basedCBDC.Ontheotherhand,theopportunitiesforuse,andtherebytheexpecteddemand,alsoappeartobelimited,asalsoempha-

Characteristics of cash, bank deposits, CBDC and cryptocurrency Chart2

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sisedbyGrymetal.(2017).Theanalysisthereforefocusesprimarilyonanaccount­basedCBDC.

… InterestPhysicalcashdoesnotearninterest.Cashhasafixed,nominalvalue–afteroneyear,a100­kronernotewillstillhaveanominalvalueofkr.100.Anac-count­basedCBDC,ontheotherhand,canbestruc-turedwithorwithoutinterest.IfCBDCaccruesinter­estat2percentannually,apersonholdingCBDCforkr.100todaywillthusholdCBDCforkr.102inoneyear’stime.WhetherCBDCearnsinterestornotwillbeofsignificancetothefinancialsectorandtomonetarypolicy,cf.thesectionbelow.Interest­earn­ingCBDCwouldalsochallengetheperceptionthatmoneyissuedbyDanmarksNationalbankhasafixed,nominalvalue.ThiswouldattractparticularattentioninsituationswheretheinterestonCBDCisnegative–formonetarypolicyreasons,forexample.

IndependentlyofhowCBDCisdesigned,itmustbeassumedthatitwouldhavetobeequallysuitableformakingpaymentsasisthecasewithdepositswithcommercialbanks.ItwouldthereforebearequirementthatCBDCcanbetransferredbetweenpersonsandbusinesseswithoutdelay,atanytimeofthedayornight.CBDCintheformofanaccountatDanmarksNationalbankmustbeexpectedtobeofferedwithanumberofbasicservices,suchasonlinebankingandapaymentcard.Asdescribedinfurtherdetailinthesectionbelowconcerningpaymenthabitsandinfrastructure,itisunclearhowCBDCwouldcontributetoofferingDanishhouse-holdsandbusinessesmoreeffectivepaymentsthantheyhaveaccesstotoday.NorisitclearthatCBDCwouldmakepaymentsmoresecure,cf.below.

AnonymityCashisanonymous,i.e.cashpaymentscannotbetracked.Sometimescashpaymentismadefortrans­actionsinordertoconcealthemfromtheauthorities,forexampleinvolvingmoneylaundering,includingtaxevasion,andfinancingofterrorism.InDenmark,thisproblemislimitedbytherelativelysmallamount

ofcashincirculation.Inaddition,severallegislativeinitiativesaredesignedtolimitlargecashtransacti-ons.10IncountriessuchastheUSA,wherethecircula-tingcashvolumeismuchlarger,theuseofcashforillegalactivitiesisabiggerproblem.Thishasledtoproposalstoreducetheamountofcashincirculati-onbystartingtophaseoutbanknotesaboveacer-tainvalue,whilecoins,andpossiblyalsosmall­deno-minationbanknotes,wouldremainincirculation.11

Incontrasttocash,bankdepositsarenotanonym­ous.Banksandcertainotherundertakingsandper-sonsaresubjecttoextensiveregulation,toensurethatarecordismadeofwhoownsabankdeposit,andwhoistheremitter/recipientofanytransaction.Thismakesitpossibletotracktransactions,whichtheauthoritiescanusetosolvecrime.Therecordingofpaymentinformationmayalsoformthebasisforthebanks’reportingtoSKAT(theDanishCustomsandTaxAdministration),inordertopreventtaxevasion.

Dependingonthetechnicalsolutionusedtoesta-blishCBDC,itcan,inprinciple,bearrangedwhetherCBDCistobeanonymousornot.YetinpracticeitwillprobablynotbepossibletomakeCBDCcompletelyanonymous,sincealluseofinformationtechnologyleavestracks.Performingtransactionswithoutspe-cifyingremitterorrecipientwouldalsosignificantlyincreasetheriskofmoneylaundering,includingtaxevasion,andfinancingofterrorism.Ifthetechnicalsolutionwerealsotosupportinternationaltransfersinrealtime,itwouldbeimpossibletostoppaymentsthatareintendedtofinanceterrorism,forexample.12

ItwouldthereforenotbeappropriateoracceptabletomakeCBDCanonymous,sinceCBDCtransactionsmustbeexpectedtoachieveafargreatervolumethanthecashpaymentsmadetoday.

Non-anonymity would impose legal obligations on Danmarks NationalbankTheintroductionofaCBDCbasedonanon­anonym­oussolutionwouldimposeanumberoflegalobliga-

10 SeeDanishPaymentsCouncil(2016a).

11 SeeRogoff(2016).

12 InanyinvestigationofpossibleinfringementoftheDanishAnti­MoneyLaunderingAct,informationheldbyDanmarksNational-bankmight,asrequiredbylegislation,bepassedonbyDanmarksNationalbanktoanotheradministrativeauthority.

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Rules concerning protection of personal data

Box2

IssuingCBDCmightresultinthefollowingchallenges

andobligationsforDanmarksNationalbankunderthe

rulesfortheprotectionofpersonaldata1:

• Securityrequirementsfortheprotectionofdata

disclosedtoDanmarksNationalbank.

• Theeffectiveerasureofdatathatisnolongerneces-

saryandrelevantmightpresentchallengesincertain

technicalsolutions,forexampleablockchain.

• Theregisteredparties’rightofaccesstotheirown

information.

1. Actno.429of31May2000(asamended))ontheProcessingofPersonalData.TheActwillbereplacedbythenewGeneralDataProtectionRegulation,Regulation(EU)2016/679oftheEuropeanParliamentandoftheCouncilof27April2016,whichwillenterintoforceon25May2018.TheRegulationissupple-mentedbytheDanishBillforaDataProtectionAct, Billno.L68,tabledon25October2017.

Obligations for Danmarks Nationalbank on issuing non-anonymous CBDC

Box1

Issuingnon­anonymousCBDC,wherebyhouseholdsand

businessesbecomecustomersatDanmarksNational-

bank,wouldinteraliaimposethefollowingobligations

onDanmarksNationalbankunderanti­moneylaundering

legislation1,andinordertocomplywithUNresolutions

implementedinEUlegislation:

• Theperformanceofcustomerduediligencemeas-

ures,i.e.obtainingproofofidentitydocumentsforall

customers,anddeterminingthepurposeandscope

oftheindividualcustomerrelationship.

• Acontinuousdutyofattentionandinvestigationcon-

cerningallcustomerrelationships,inordertobeable

toidentifyunusualtransactions.

• DocumentationoftransactionsusingCBDC.

• Identificationofremitterandrecipientforalltransac-

tions.

1. Actno.651of8June2017onMeasurestoPreventMoneyLaunderingandFinancingofTerrorismandRegulation(EU)2015/847oftheEuropeanParliamentandoftheCouncilof20May2015oninformationaccompanyingtransfersoffunds.

tionsonDanmarksNationalbankunderanti­moneylaunderinglegislation,forexample,cf.Box1.

IfinformationconcerningCBDC­basedtransacti-ons,holdings,etc.couldbeattributedtoaspecificperson,thisinformationwouldalsobesubjecttotheprocessingrulesandsecurityrequirementslaiddownintheDanishActontheProcessingofPer­sonalData,cf.Box2.

IrrespectiveofwhetherDanmarksNationalbankweretooutsourcetheexecutionoftheaforementionedtaskstoanexternalcontractpartner,itwouldstillberesponsibleforcompliancewiththeregulationsandwouldhavetoverifycontinuouslythatthistaskisperformedinaccordancewiththerequirements.

Issuing CBDC would affect all of Danmarks Nationalbank’s core tasksDanmarksNationalbank’scoretasksaretomaintainasecurepaymentsystem,supportfinancialstabil­ityandensurestableprices.13Servingasbankertothebanksplaysasignificantroleinfulfillingallofthesethreeobjectives.Asprovidersofservicestohouseholdsandbusinesses,commercialbanksareencouragedtodevelopnewsolutionsforpaymentsandfinancialservices,basedondemandandneeds.

OfferingCBDCdirectlytohouseholdsandbusi­nesses,therebyservingastheirbank,wouldbeafundamentaldeparturefromtheexistingmodel.ItwouldhaveanimpactonallofDanmarksNational-bank’scoretasks,andthefinancialsectoringeneral. BelowitisanalysedhowaDanishCBDCwouldinfluencethepaymentsystem,financialstabilityandmonetarypolicy.

Paymenthabits andinfrastructure

Denmarkhasamodernandwell­functioningpay-mentsmarket.Besidescash,thereareanumberofelectronicpaymentsolutionsofferedbyprivateoperators.ThesolutionsincludetheDankort(nationaldebitcard),internationalcreditanddebitcards,and

13 SeeSection1ofActno.116of7April1936(asamended)onDan-marksNationalbank.

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Payments at retailers by payment type and age

Chart4

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Cash Paymentcards Otherpaymentsolutions

Percent

Note: Paymentsbypaymenttypeandcompiledbynumberofpayments.Thissolelyincludespaymentsatphysicalretailers,sothatInternetshoppingisnotincludedinthefigures.

Source: DanmarksNationalbank.

Declining use of cash for payments Chart3

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Cash payments

Cheque payments

Card payments

Note: Thechartshowsretailturnover,etc.bypaymentmethodused.PaymentsusingMobilePaywithanassociatedpaymentcardareincludedincard­basedpayments.Chequeshavebyandlargenotbeenusedinrecentyears,andasfromtheendof2016Danishbanksnolongercashcheques.Turnoverintheretailsector,etc.isawidercompilationthanStatisticsDenmark’sretailturnoverstatistics.

Source: StatisticsDenmark,FinanceDenmark,Nets,DanmarksNationalbankandowncalculations.

theMobilePaymobilepaymentsolutionthatmakesitpossibletouseasmartphonetotransfermoneyelectronicallytobothpersonsandretailers.MobilepaymentsarenotuniquetoDenmark,sincebothSwedenandNorway,forexample,havesimilarsolu-tions,calledSwishandVipps,respectively.

Payment habits are changingInstepwiththeadvanceofelectronicpayments,theuseofcashforretailpaymentsisdeclining.Thistendencyhastakenplaceovermanyyears,cf.Chart3.ThesamedevelopmentcanbeseenintheotherNordiccountries.ThedeclininguseofcashisakeyreasonfortheanalysisbySverigesRiksbankofthepotentialforissuingCBDC,cf.SverigesRiksbank(2017).

In2017,cashaccountedfor23percentofpaymentsinphysicaltrade,cf.Chart4.Thisisinmarkedcon-trasttotheeuroarea,whereEsselinkandHernández(2017)findthat,onaverage,79percentofallphys­icaltradewascash­basedin2016.

Thedeclininguseofcashreflectsthathouseholdsandbusinessestoagreatextentpreferelectronicpayment,becauseitisconvenient,andthatup­to­datesolutions,suchasthecontactlessDankort,areavailable.AsurveybyDanmarksNationalbankshowsthat96percentofhouseholdsseldomor neverfindthatitisdifficulttobeabletopayincash.14Thedeclininguseofcashthereforedoesnotreflectproblemswithusingcash.

Thestatutoryuniversalrighttoabasicpaymentaccount,15combinedwiththedepositorguaranteescheme,whichprotectsthecustomer’sdepositsuptoapproximatelykr.750,000ifthebankfails,makesitsafetobothpayandstoremoneyelectronically.

Withregardtothepaymentsystem,therearenopracticalchallengesasaconsequenceofthede-clininguseofcash.Onthecontrary,theeconomiccostsofpayingcashfarexceedthecostsofDankortpayments,cf.DanishPaymentsCouncil(2016a).Moreover,thedeclininguseaffectsneitherthesta-

14 SeeDanmarksNationalbank(2017b).

15 TheDanishActonPaymentAccounts,Actno.375of27April2016(asamended)entailsthatallconsumershaveaccesstoholdabasicpaymentaccountinabank,cf.alsoDanishPaymentsCouncil(2016a)forfurtherdetails.

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Legal tender, freedom of contract and the cash rule

Box3

Danishbanknotesandcoins–cash–arelegaltenderinDenmark.Forbanknotes,thisislaiddownintheDan-

marksNationalbankAct,whileforcoinsitisstipulatedin

theDanishCoinAct.1Legaltenderisalegaltermwhich

denotesthemeansofpayment,whichcanbeusedto

fulfilapaymentobligation.Unlessagreedotherwisebe-

tweentheparties,orspecialstatutoryprovisionscurtail

therighttousecash,Danishbanknotesandcoinswill

alwaysbelegaltenderinDenmark.

UnderDanishlaw,thereisaprincipleoffreedomof

contract.Thismeansthat,asageneralrule,twoparties

canfreelyagreethatmeansofpaymentotherthancash

aretobeused.Withtheexceptionofpurchasesinshops

withcountersales,forexample,cf.thenextsection,itwill

inpracticetypicallybeagreedthatpaymentistotake

placeusingelectronicmeansofpayment.Inthisway,

theconceptoflegaltenderreferstothefulfilmentofa

contractthathasalreadybeenestablished,whereno

othermeansofpaymenthasbeenagreed.Inpractice,

thesignificanceofbanknotesandcoins’statusaslegal

tenderisthereforelimited.Thereis,however,alegal

obligationtoacceptcashinthecaseofa”countersale”,

cf.thenextsection.

The cash ruleInDenmark,apaymentrecipientofpaymentinstru-

ments,suchaspaymentcards,hasastatutoryobliga-

tiontoacceptcashinthecaseofacountersale.2This

meansthat,forexample,shopswhicharestaffedmay

notrefusetoacceptcash.Therearesomecases,how-

ever,wherethecashruledoesnotapply,namelytore-

motesales,suchasonlineshopping,andtopaymentin

unmannedself­serviceenvironments.Nordoesthecash

ruleapplytocasesthataresubjecttospeciallegisla-

tion,forinstanceinordertocombatmoneylaundering

orundeclaredwork.

Thestatutorycashruleconcerns“cash”.Itisdoubtful

whetherthistermwouldincludeCBDC.Thiswouldatany

raterequireamorespecificdefinitionintheAct.Itmust

beconsidered,however,whetherthiswouldbeappro-

priate,since–iftherequirementisforCBDCtooperate

onaseparateinfrastructure–thiswouldrequireshops

toestablishandmaintainatechnicalset­upthatenables

paymentinCBDC.

1. Section8ofActno.116of7April1936(asamended)onDan-marksNationalbank,andSection4(1)oftheDanishCoinAct,Actno.817of21December1988(asamended).Forfurtherdetailsregardinglegaltenderandthecashrule,seeBuchterandGürtler(2006)andDanishPaymentsCouncil(2016a).

2. On2June2017,theFolketing(Parliament)adoptedanewPay-mentsAct,Actno.652of8June2017,whichentersintoforceon1January2018.Italterstheobligationtoacceptcashinthecaseofacountersale,sothat,asageneralrule,thisobligationnolongerappliesduringeveningandnighthours.

bilityofthefinancialsectornorDanmarksNational-bank’sabilitytofulfilitsmonetary­policyobjective,cf.therelevantsections.

Some groups of the population still prefer cashCashisstillpreferredbysomegroupsofthepopu-lation,especiallythoseagedover70.Theymakearound40percentoftheirpaymentsincash,cf.Chart4.Moreover,forchildrenandcertainvulner­ablegroups,suchasthedisabledpeople,cashplaysaspecialroleasameansofpayment.

Asstatedabove,CBDCwouldprobablyhaveanaccount­basedstructure,andtherebyresemblebankdepositsratherthancash.CBDCwouldthereforenotbelikelytoappealtothesectionsofthepopulationwhoareunabletousetheexistingelectronicpay-mentsolutions,orwhopreferthetangibilityofcashforotherreasons,cf.Chart2.

Legal tenderInDenmark,cashislegaltender.Thismeansthatifabuyerofaproductorservicedoesnotwishtopayelectronically,heorsheisentitledtopayincash.Thisdoesnotapply,however,ifagreedotherwise,forinstancethatpaymentistotakeplaceusingelectronicmeansofpayment,orifspecialstatutoryprovisionsapply.Denmarkalsohasa”cashrule”that,withafewexceptions,requiresphysicalretailers,forexample,toacceptcashpayment,cf.Box3.

CBDCwouldprobablynotbecoveredbythestatu­toryprovisionsconcerninglegaltender,sincetheseprovisionsrefertophysicalbanknotesandcoins.IfCBDCweretohavethestatusoflegaltender,thiswouldhavetobestipulatedbylaw,butinpracticeitwouldnotbeofanygreatsignificance.SinceCBDCcannotbedeemedsubjecttothecashrule,asaconsequenceofthefreedomofcontractthepartieswouldmerelyhavetoagreethatameansofpay-mentotherthanCBDCwouldbeused.

Denmark has a modern payments infrastructureEverydayinDenmark,electronicpaymentstakeplaceforavalueofapproximatelykr.24billion,asIn-ternetpurchases,inphysicalretailers,andtoprivateindividuals.16Thepaymentsaremadebytransferringbankdepositsfromthepaymentremitter’sbankac-

16 SeeDanmarksNationalbank(2017c).

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The transfer of funds through the systems Chart5

Danes' card use is among the highest in Europe

In Denmark, funds can be transferred within seconds

Denmark is a digital front-runner

Denmark has an efficient and up-to-date market for payments. Payments are settled quickly and

smoothly. Payments can be made between all bank accounts, and instant payments allow funds to be

transferred in seconds.

Instantly

The average Dane pays by credit cards about 300 times each year, an increase

of almost 50 per cent on 2011.

Denmark is one of the most digitised countries in the world. This is among other factors driven

by the public sector's focus on digitisation.

Danes are quicker to embrace new technology

Danes have become increasingly eager to adopt new payment options. MobilePay was adopted by about

three million users within three years. It took more than 15 years for the Dankort to be adopted by the same

number of users. Contactless payments are the latest example of how quickly Danes can change their payment

behaviour. In the course of a year and a half, 15 per cent of all Dankort payments have become contactless.

MOBILE PAYMENTS

THE STRAKS-CLEARING

DANMARKS NATIONALBANK

THE INTRA-DAGCLEARING

THE SUM-CLEARING

DEBIT CARD

CONSUMER

CREDIT CARD CREDIT TRANSFERS

Same dayOne business day

Per capita card payments in selected European countries

50,00

Danish digital highways

Denmark 300

Norway 391

Sweden 290

Finland 259

UK 224

Netherlands 204

France 154

Spain 64

Germany 45Italy 37

EU average 104

2011 2015

Connectivity Human

capital

Integration of

digital technology

Digital public

service

Use of

internet

European Commission's Digital Economy and Society Index, 2017

Denmark

Finland

Norway

Sweden

Netherlands

UK

Spain

Germany

France

Italy

806040200

EU avg.

1984 The Dankort

5 years0 year 10 years 15 years 20 years

1999 Online banking

2013 MobilePay

2015 Contactless

How long it has taken for new payment instruments to be adopted by 3 million users

50,00

counttothepaymentrecipient’sbankaccount.Likeotherhighly­developedcountries,suchasNorwayandSweden,Denmarkhasamodernpaymentsinfra-structurewhichensuresindividualsandbusinessesrapidandsecurepayments.

Inacashpaymenttransaction,therecipientreceivesthemoneyimmediately.Inanelectronicpaymenttransaction,therecipientwillnotalwaysreceivethemoneyimmediately.Thetimewhichelapses,calledthesettlementtime,dependsonthemeansofpay-mentused,cf.Chart5.ApaymentusingapaymentcardgoesthroughtheSumclearingsystem,andthesettlementtimeisonebankingday.

Foranaccount­to­accounttransfer,theremittermaychoosewhetherthepaymentistobesettledasaninstantpaymentviatheStraksclearingsystem,orviatheIntradagclearingsystemasanordinarypayment,whichtherecipienttypicallyreceivesinthecourseofafewhours.PaymentsusingMobilePayaretypicallysettledviatheStraksclearingandarealwaysreceivedbytherecipientwithinafewseconds.SeeBox4formoreinformationaboutMobilePay.

The payments infrastructure is still being developedThepaymentsinfrastructureiscontinuouslybeingdeveloped.ThedevelopmentintheDanishpaymentmarketispredominantlydrivenbyprivateagents.

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Act on Payments Box5

On2June2017,theFolketing(Parliament)adoptedthe

ActonPayments,whichentersintoforceon1January

2018.1Themainpurposeofthenewregulationsisto

ensurethattheframeworkfortheprovisionofelectronic

paymentservicesreflectsthetechnologicaldevelopment,

andthattheregulationsmakeiteasierforfinancialtech-

nologyenterprisestoofferpaymentservices.

UnderthisAct,third­partyproviders,i.e.aprovideroth-

erthanthepartyholdingtheuser’saccount,willbeable

toobtainauthorisationtoofferpaymentinitiationser-

vices,forexampletoperformpaymentsontheaccount

holder’sbehalf(suchasMobilePay),aswellasaccount

informationservices.TheActimposesanobligationon

thebankstogivesuchthird­partyprovidersaccessto

customers’paymentaccounts,iftheaccountholderso

consents,sothatproviderscanoffertheirservices.

LikethecurrentDanishActonPaymentServicesand

ElectronicMoney,theActalsostipulatesanumberof

requirementsconcerninginformationtothepayment

remitterandpaymentrecipient,aswellasrightsand

obligationsregardingthedeliveryofpaymentservices.

IfDanmarksNationalbankweretoopenCBDCaccounts

andofferpaymentservicestoallhouseholdsandbusi-

nesses,theextentoftheaforementionedobligationsin

theActonPayments,towhichDanmarksNationalbank

wouldbesubject,wouldhavetobeclarified.Thesame

issuehasbeenidentifiedbySverigesRiksbank(2017).

1. Actno.652of8June2017.TheActimplementstheSecondPaymentServicesDirective(Directive2015/2366/ECoftheEuropeanParliamentandoftheCouncilof25November2015)andcontinuestheimplementationoftheSecondE­Money Directive(Directive2009/110/ECoftheEuropeanParliamentandoftheCouncilof16September2009)inDanishlaw.

Thismeansthatitistheproductofademandformorerapidandmoreeffectivepaymentsolutions.

ContributingtothisdevelopmentisinlinewithDan-marksNationalbank’sobjective.DanmarksNational­bankhasthereforeassistedthefinancialsectorinmodernisingtheinfrastructurewhichtodayenableshouseholdsandbusinessestomakepaymentswithinjustafewseconds.AnotherexampleisthatDanmarksNationalbankiscurrentlyreplacingtheexistingsystems,forsettlinglarge,time­criticalpay-mentswithanewmodernsystem,calledKronos2.Thesystemalsosupportsfinalsettlementbetweenthebanksofthepaymentsmadebyprivateindivid­ualsandbusinesses.

ThereisnoimmediatereasontoassumethatthemoredirectinvolvementofDanmarksNationalbankbymakingCBDCavailablewouldgivehouseholdsandbusinessesaccesstoabetterormoreeffectivemeansofpaymentthanthesolutionsdevelopedbyprivateagents.

Important to consider competition in the payment marketThemarketforpaymentsolutionshastraditionallybeendominatedbythebanks,whichhavehadtheknow­howandsystemstohandlehouseholds’andbusinesses’payments.Inthefuture,thismaychange.MajorinternationaltechnologycompaniessuchasApplehavealreadymovedintothepaymentmarket,andotheragentscanbeexpectedtofollowsuit,facilitatedinDenmarkbythenewDanishActonPayments,cf.Box5.

BoththeDanishPaymentsCouncil(2016b)andSverigesRiksbank(2013)findthatnewagentscouldcontributetoincreasingthecompetitioninthemar-ketforpaymentsolutions.SverigesRiksbank(2013)furthermorearguesthat,inthelongerterm,theremaybeaconcentrationonafewsolutions.Themar-ketforpaymentsolutionsischaracterisedbysignifi-canteconomiesofscale.Thismeansthatthecostsofofferingapaymentsolutiondonotincreaseinlinearproportiontothenumberofusersandtransactions.Onthecontrary,thecostpertransactiondeclinesasthenumberofusersincreases,andthesolutioncanthusbeofferedatalowerprice,forthebenefitoftheuser.Ontheonehand,manyusersofthesamesolu-tionisabenefitforsociety,yetontheotherhand,ifthelackofcompetitionmeansthatapaymentserviceprovidercansetartificiallyhighprices,thiscouldleadtomonopoly­likeconditionsinthemarket.

MobilePay Box4

In2013,theMobilePaymobilepaymentsolutionwas

launchedintheDanishpaymentmarket.Thismadeit

possibletotransferfundsbetweenprivateindividualsvia

smartphones.Today,MobilePayhasmorethan3.6million

users,whomakeover214millionpaymentsperyear.

Sinceitslaunch,MobilePayhasbecomeaseparatecom-

panyasapartnershipbetweentheDanishbanks.Inthis

model,paymentscantakeplaceasdirectaccount­to­ac-

countpaymentsbetweendifferentbanks’customers,

insteadofthecombinationofacard­basedpaymentand

anaccount­to­accountpayment.

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Cash circulation has been low for many years

Chart6

0

2

4

6

8

10

12

14

1875 1895 1915 1935 1955 1975 1995 2015

Percent ofGDP

Note: Cashcirculation(banknotesandcoins)asashareofGDPincurrentprices.

Source: Abildgren(2017).

Itisthereforeimportantthattherelevantauthoritiescontinuouslymonitorthetermsofcompetitionandinterveneifamarketfailureisobserved.Butifthemarketiswell­functioning,societywillbenefitfromprivateagentscompetingforcustomers.Thiswillalsoencourageinnovation.

Foreign CBDC can influence Danish payment solutionsIfacentralbankinanothercountryissuesCBDC,thiscouldaffecttheuseoftheDanishpaymentsolutions.Ife.g.theEuropeanCentralBank(ECB)weretoissueeuro­CBDC,itispossiblethatDanishhouseholdsandbusinesseswouldalsohaveaccesstothis,dependingonhowitweretobedesigned.Thismightaffecttheuseoftheexistingpaymentsolutions.Especiallywithregardtocross­borderpaymentseuro­CBDCwouldprobablybeanattract­iveproposition.Thiswouldalsobeofsignificancetomonetarypolicyandfinancialstability,cf.therelevantsections.

CBDCasacontingencymeasure

Today,societyreliescompletelyonthesystemsthatareusedforelectronicpayments.Ifthesystemsdonotfunction,evenforshortperiods,thismayhavenegativeconsequencesforconfidenceinthefinan­cialsystem.

Cash is not a contingency measureIfthesystemsusedtomakeelectronicpaymentsweretobeaffectedbyprolongeddowntime,orwereotherwiseunavailableforprolongedperiods,cashwouldnotbeacontingencymeasuretoelectronicpayments.Eventhoughcashdoesnotdependonelectronicsystemsandpaymentscanthereforetakeplacewithoutpaymentsystems,orevenelectricity,theamountofcashincirculationisnowherenearenoughtoeffectivelycoverthepaymentsofprivateindividualsandbusinesses.Thishasbeenthecaseformanyyears,cf.Chart6.

Sincethestartofthe1970s,cashincirculationhasaccountedforlessthan4percentofGDP.In2016,thiswasaroundkr.70billion.Sincehouseholdsalonemakeelectronicpaymentsforgoodsandservicesforavalueofapproximatelykr.24billionperday,itwouldnotbepossibletomeetthedemandthatwouldariseifelectronicpaymentswereunavailable.

CBDC as a back-up for other infrastructureSverigesRiksbank(2017)assessesthatifCBDCweretobedesignedsoastofunctionindependentlyoftheexistinginfrastructure,thiscouldmakethepaymentsystemsmorerobust.Inthisway,house-holdsandbusinesseswouldstillbeabletomakepayments,evenifpartofthepaymentsinfrastructurewereunavailable.Intermsofthesystem’susability,therewouldalsobedrawbacks,however,fromisol­atingCBDCfromtherestoftheinfrastructure.

TheactualCBDCaccountswouldinallcircumstancesstillhavetobeheldinaseparatesystem,astheycannotbeheldinDanmarksNationalbank’sexistingpaymentsystem,Kronos.Firstly,Kronoshasnotbeentechnicallydevelopedtohandlemillionsofaccountsandrelatedtransactions.Secondly,KronosisapaymentsystemthatisprotectedundertheFinalityDirective,whichisimplementedinDenmarkintheDanishSecuritiesTradingAct.Theregulationgovernswhomayparticipateinthesystem,cf.Box6.

Onethingishowaccountswillbehandled,whileanotheriswhetherthereshouldbealinktotherestofthepaymentsinfrastructure.IfCBDCwerecompletelyseparatedfromotherpaymentsystems,itmightbedifficult,forexample,totransferfundsfromaCBDCaccounttoabankaccount.ItisdifficulttoimaginewidespreaduseofCBDCifitcannotbeusedtopayataretailerthathasanordinarybank

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Finality Directive Box6

Kronosisareal­timegrosssettlement(RTGS)system

forsettlementoflarge,time­criticalpaymentsinDanish

kronerthatisusedbyDanmarksNationalbank’saccount

holders(primarilybanksandmortgage­creditinstitutes).

Kronoshasbeennotifiedasadesignatedpaymentsys-

teminaccordancewiththerulesinPart18oftheDanish

SecuritiesTradingAct,whichimplementstheDirectiveon

settlementfinalityinpaymentandsecuritiessettlement

systems(theFinalityDirective).1

Kronosisthusapaymentsystemthatisprotectedby

theFinalityDirective.Thisprotectionconcernssuch

aspectsasthefinalityofpaymenttransactions,i.e.when

paymentsarefinalandcannolongerberevoked,irre-

spectiveofwhetheraparticipantinthesystemfails.Ifa

paymentorderweretoberevoked,thiswouldinterfere

withthecompletionofsettlementandhavederivedcon-

sequencesfortheotherparticipantsinthesystem.

TheFinalityDirectivegovernswhomayparticipatein

apaymentsystemprotectedbytheDirective,suchas

creditinstitutions,investmentcompaniesandpublic

authorities.Ifbusinessenterprisesandprivateindividuals

weretoparticipateinthesystem,itcouldnotbedesig-

natedasapaymentsystemprotectedbytheDirective.

ThesameissuehasbeenidentifiedbySverigesRiksbank

(2017).

1. Directive98/26/ECoftheEuropeanParliamentandoftheCouncilof19May1998onsettlementfinalityinpaymentandsecuritiessettlementsystems,implementedinPart18oftheDanishSecuritiesTradingAct,cf.ConsolidatedActno.251of21March2017.Asfrom3January2018,theActwillbereplacedbytheDanishActonCapitalMarkets,Actno.650of8June2017.

account.CBDCwouldthereforeneedtohavealinktotheexistingpaymentsystems.

Inaddition,liketheexistingpaymentsystems,CBDCwouldalwaysbefundamentallydependentontheelectricitynetwork,forexample.Itisthereforeneitherpossiblenorpracticaltocreateacompletelyisolatedsystem.Intoday’sDenmark,forbetterorworse,householdsandbusinessesdependoncen-tralinfrastructures,includingforelectronicpayments. The Danish payments infrastructure is secureThereiscontinuedfocusonmaintainingarobustpaymentsinfrastructure.Themostimportantsys­temsthatsupportprivateindividuals’andbusi-nesses’paymentsusetwo­centeroperation,forexample,wherebyasecondarycentercantakeoveriftheprimaryfails.Inthisway,householdsandbusinessescancontinuetotransactpaymentswhiletheoutageatoneoperatingcentreisrectified.Alsothecablingtoensurecommunicationbetweenthebanks,forexample,isdesignedtoensurethatcommunicationcantakeplaceviaseveralcables.Ifonecableisdisconnected,forexampleasacon-sequenceofexcavationwork,communication,andtherebyelectronicpayments,canstillcontinueviaothercables.

Moreover,Dankortandcertainothercardpaymentscantakeplaceoffline.Thismeansthatifaninternetconnectionfails,orthereistechnicaldisruption,foracertainperiodpaymentscantakeplaceofflineinshops.Onceagain,theaimistoensurethathouse­holdsandbusinessesarenotaffectedbyminortechnicalproblems.

Finally,localcrisisresponseplanshavebeenestab­lishedbytheindividualfinancialinstitutions,forexampleNetsandDanmarksNationalbank,andacrossthefinancialsectorundertheauspicesoftheFinancialSectorForumforOperationalRobustness(FSOR).Thelocalcrisisresponseplansareactivatedintheeventofatechnicalfailureoracyberattackonasinglefinancialinstitution,andensurethatoperationsarerestoredasquicklyaspossible.ThesectorwideFSORcrisisresponseplanisactivatedintheeventofaseriouscrisiswithconsequencesfortheentirefinancialsector.Thecrisisresponseplans

ensurethatrolesandresponsibilitiesinacrisissituationaredefinedandthattherightinternalandexternalstakeholdersareinvolvedorinformed.

Thestakeholdersarealsocollaboratingcloselywithregardtonewthreatsfromcybercrime,forexample,inordertoenhancethesecurityofthefinancialin-frastructure,includingundertheauspicesofFSOR,cf.Box7.IncollaborationwiththeDanishFinancialSupervisoryAuthorityandDanmarksNationalbank,thestakeholdershaveassessedtherobustnesstowardscyberattacksandareworkingcontinuouslytoimprovesecurity.17

17 SeeDanmarksNationalbank(2017a).

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Financial Sector Forum for Operational Robustness (FSOR)

Box7

Togetherwithauthoritiesandkeystakeholdersinthe

financialsector,DanmarksNationalbankestablishedthe

FSORcooperationforumin2016.Itsaimistoenhance

thesector’soperationalrobustness,includingitsrobust-

nesstowardscyberattacks,andthereby

• continuetoprovideasecureandefficientinfrastruc-

ture,and

• supporttheDanes’continuedtrustinthedigitalsolu-

tionsoftheDanishfinancialsector.1

1. Cf.FSOR(2016).

DanmarksNationalbankoverseesthesystemicallyimportantpartsoftheinfrastructureandmakesrecommendationstotheownersofthepaymentsystemsifthereareareaswhichdonotcomplywithinternationalstandardsforfinancialmarketinfrastructures.18TheDanishFinancialSupervisoryAuthorityistaskedwithITsupervisionofthebanksandtheinfrastructurecompaniesprovidingITtotheDanishfinancialsector,forexampleNets.19 If securityisinadequate,theFinancialSupervisoryAuthoritycanorderbanksandinfrastructurecom-paniestoimprovetheirpractice.

IfthepurposeofintroducingCBDCistoensurethathouseholdsandbusinesseshaveaccesstoacon-tingencymeasure,ifotherpaymentsystemsshouldfail,fromaneconomicperspectiveitwouldbemoreprofitabletoinvestinbettersecuritymeasuresintheexistingsystems.Thisisalreadytakingplacetoagreatextenttoday,cf.above.

Significanceforthefinancial sectorandfinancialstability

IssuingCBDCwouldentailrisksforfinancialstabilityandchangeDanmarksNationalbank’sroleinthefinancialsystem.

CBDC would give everyone unlimited access to claims on the central bankTheavailabilityofarisk­freeassetisnamedbySverigesRiksbank(2017)asoneoftheargumentsforissuingCBDC;astheuseofcashdeclines,issuingCBDCisconsideredtobeanimportanttaskforthecentralbank,sothathouseholdsandbusinessescanholdtheirassetssafely,andconfidenceinthemon­etarysystemcanbemaintained.

Todayitisalreadypossibletotakesafeassetpositionsbyholdingcash(aclaimonDanmarksNationalbank)orbuyingaDanishgovernmentbond(aclaimontheKingdomofDenmark).InDenmarkthereisalsoadepositorguaranteeschemetoprotectdepositsincommercialbanks

18 SeeCPMI­IOSCO(2012)andDanmarksNationalbank(2017d).

19 SeeDanishFinancialSupervisoryAuthority(2015).

uptoapproximatelykr.750,000.Householdsandbusinessescanthusplacetheirassetssafelybyholdingcash,buyinggovernmentbonds,ormakingdepositsincommercialbanks.Fullrisk­freecovera-geoflargerdepositscanbeobtainedbyspreadingdepositsonseveralbanks,sothatthelimitofkr.750,000isnotexceededinanyonebank.

ItisnotpartofDanmarksNationalbank’sobjectivestomakeunlimitedclaimsonthecentralbankavail­abletothegeneralpublic,butinsteadtosupportstableprices,financialstabilityandsecurepayments,cf.above.

CBDC would entail a fundamental change in the banks’ business modelDespitethedepositorguaranteescheme,house-holdsmightconsideraclaimonDanmarksNational-banktobemoresafethanaclaimonacommercialbank.IftherewasfreeaccesstoCBDC,householdsmightchoosetoconvertalargeproportionoftheirbankdepositstoCBDC,whichwouldhaveagreatimpactonthebanks’fundingopportunities.Today,depositsareanimportantfundingsource,especial-lyforsmallerbanks,whilethelargerbanks(whichviatheirmortgage­creditinstituteshavesignificantmortgage­creditlendingontheirbalancesheets),obtainfinancingdirectlyinthemarkettoagreaterextent,cf.Chart7.

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Structure of the banks’ liabilities Chart7

0

20

40

60

80

100

Largebanks Smallbanks

Totalshareofliabilities,percent

Issued mortgage bonds

Equity

Deposits

Other debt

Note: ThelargeandsmallbanksarebanksintheDanishFinan-cialSupervisoryAuthority’sgroups1and3,respectively.Dataisasat30June2017andcompiledatGrouplevel.

Source: DanishFinancialSupervisoryAuthorityandowncalcula-tions.

The banks’ reserves comprise current-account deposits and certificates of deposit

Chart8

-400

-300

­200

-100

0

100

200

300

400

500

Certificatesofdeposit Current­accountbalanceLoan Netposition

Kr.billion

05 06 07 08 09 10 11 12 13 14 15 16 17-400

-300

­200

-100

0

100

200

300

400

500

Monetary­policyloans Current­accountdepositsCertificatesofdeposit Netposition

Kr.billion

05 06 07 08 09 10 11 12 13 14 15 16 17

Source: DanmarksNationalbank.

ThedirecteffectofatransferofbankdepositstoCBDC,equivalenttoadecreaseinthebanks’de-posits,isacorrespondingreductionofthebanks’assetsintheformofadecreaseintheirreservesatDanmarksNationalbank.Thereserves,comprisingcurrent­accountdepositsandcertificatesofdeposit,fluctuateovertime,andamountedtokr.195billioninmid­November2017,cf.Chart8.

IfthehouseholdsweretotransferasignificantshareoftheirbankdepositstoCBDC,thebankswouldnothaveadequatecentralbankreservestooffsetthedeclineindeposits.Inthissituation,abankcouldincreaseitsmarketfinancing,oralternatively,borrowfromDanmarksNationalbank,inordertocoverthebank’sliquiditydeficitinkroner,cf.Chart9.Yetthebanksandhouseholdscannotoverallincreasetheirmarketfinancing,sinceakrone­denominatedclaimwillalwaysbeoffsetbyakrone­denominatedliabilityelsewhere.Thekrone­marketisthusaclosedsystemandtransfersofdepositsbetweenbanksdonotaf-fecttheiroverallreservesatDanmarksNationalbank.ThismeansthatthebankswouldhavetoborrowfromDanmarksNationalbank,ifthedemandforCBDCweretobesufficientlyhigh.Theimpactonthebanks’fundingneedswouldbegreaterifbusinessesalsoconvertedbankdepositstoCBDC.

Itisnotaproblemassuchthatthebanksarenetborrowersfromthecentralbank,ratherthannetdepositors.YetitisimportantthatthebanksdonotbasetheirbusinessmodelonbeingabletoborrowfromDanmarksNationalbank.Thisprincipleisalsoreflectedinfinancialregulation,wherebyliquidityrequirementsareintendedtoensurethatthebankscanfundthemselvesandhavesufficientliquiditytooffsetashortlivedliquiditystress.

Ifthebanks’depositbasebecomeslessstableasaconsequenceofCBDC,thiswillincreasethedemandsonthebanks’liquidityandfundingmanagement.

Greaterfluctuationinthebanks’depositsisre­flectedingreaterfluctuationinthebanks’reserves,andtherebyintheirnetpositionvis­à­visDanmarksNationalbank.Thiscanaffectthetransmissionoftheofficialinterestratestothemoneymarketinterestrates,cf.below.

CBDC can change Danmarks Nationalbank’s role in the financial systemTheissueofCBDCwouldfundamentallychangeDanmarksNationalbank’sroleinthefinancialsystem.

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Example of new liabilities structure in the banks after the introduction of CBDC Chart9

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Kr.billion

Other assets

Lending

Current-account and certificates of deposit

Deposits households

Deposits businesses

Bonds

Other liabilities

Monetary-policy loans

Assets Liabilities Liabilities with CBDC

Note: Datashowingthebanks’balancesheetstructure,end­June2017.Itisassumedthathouseholdstransfer50percentoftheirbankdepositstoCBDC.Thebanksretaintheircurrentlevelofcurrentaccountsandcertificatesofdeposit,andreplacethedepositfinancingshortfallwithamonetarypolicyloanatDanmarksNationalbank.

Source: DanmarksNationalbankandowncalculations.

DanmarksNationalbankwouldbecomeabankforthegeneralpublic,ratherthanbankertothebanks.ThiswouldmakeDanmarksNationalbankadirectcompetitortothecommercialbanksbyofferingdepositaccountsandpaymentservices,forexample,whichlieoutsidethetraditionalroleofcentralbanks.

DanmarksNationalbank’sobjectiveisnottocom-petedirectlywiththebanks,buttocontributetosupportingfinancialstabilityandsecurepayments.Thelegislativeframeworktosafeguardthisin­cludesstatutoryrequirementsconcerningthebanks’capitalandliquidity,therighttoabasicpaymentaccountandadepositorguaranteescheme.Yettheframeworkalsocoversthesector’sworkoninstantpaymentsandcyberrisk,cf.thesectionsabove.Thisisimportantwork,towhichDanmarksNationalbankcontributesactively.

If Danmarks Nationalbank’s balance sheet were to be expanded, this would expose Danmarks Nationalbank to higher riskThedemandforCBDCwouldbeexpectedtoexceedthedemandforcash,sincecashiscumber-

sometohandleandstore,comparedtomodernpaymentsolutions.Thiswouldleadtoanexpan­sionofDanmarksNationalbank’sliabilitiesside,cf.Chart10.TheequivalentexpansionoftheassetssidemightentailanincreaseinDanmarksNa­tionalbank’srisksintheformofincreasedlendingtothebanksand/orincreasedsecuritiesholdings.

TheintroductionofCBDCwouldleadtoincreasedmonetarypolicylending,totheextentthatthebanksdonotreducetheassetside,instepwithdecliningdeposits.BankscanborrowfromDan-marksNationalbankagainstadequatecollateral.Innormaltimestheycanprovidecollateralinliquidsecurities,intheformofDanishgovern-mentandmortgagebonds.Butinperiodsoffinancialunrestandagreaterneedforborrowing,DanmarksNationalbankmaydecidetoexpandthecollateralbasewithotherassets.DanmarksNationalbankhandlestheriskofachangeinthevalueofthepledgedcollateralduringthetermoftheloanbyonlylendinguptoacertainfractionofthevalueofthecollateralasoftheloandate.ThedeductionwhichDanmarksNationalbankmakes

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fromthepledgedcollateral’svalueisoftenreferredtoasahaircut.

CBDC entails risks of systemic bank runsOneofthegreatestriskstofinancialstabilityfromintroducingCBDCistheincreasedriskofsystemicbankruns.

Today,abank(orseveralbanks)maybeexposedtoabankrun,wherebysignificantdepositsarewith­drawnfromonebankatthesametime,andtrans­ferredtoanotherbank.ButitismoredifficulttohavearunontheoverallDanishbankingsector. Thisisbecauseitisnotpossibleinpracticetocon-vertallbankdepositsintocash.Theonlypossibilityofasystemicbankrunisthatcustomerstransfertheirdepositstoforeignbanks.

WithCBDC,householdsandbusinesseswouldhaveanincentivetotransfertheirbankdepositstoCBDCinasystemiccrisissituation,unlesstherewereaceilingontheoutstandingamountofCBDC.Instepwithdecliningconfidenceinthebankingsector,thismighthappen,despitethedepositorguarantee

Expansion of Danmarks Nationalbank’s balance sheet after the introduction of CBDC Chart10

0

200

400

600

800

1,000

Kr.billion

Foreign reserve

Other assets

Monetary-policy loans

Other liabilities

Current-account and certificates

of deposit

CBDC-deposits

Notes and coins

Assets Assets with CBDC Liabilities with CBDCLiabilities

Note: Dataforend­2016.Itisassumedthatthehouseholdstransfer50percentoftheirbankdepositstoCBDC.Thebanksretainthepresentlevelofcurrentaccountsandcertificatesofdeposit,andtheyreplacethelostfinancingfromdepositswithamonetarypolicyloanatDanmarksNationalbank.

Source: DanmarksNationalbankandowncalculations.

schemeandanyhigherinterestrateonbankde­posits.

Today,depositscaninprinciplebeconvertedtocash,butthepracticalchallengesconcerningcashmakethislessattractive.Furthermore,thegeneralconversionofbankdepositstocashwouldtaketime,whereasconversiontoCBDCcouldtakeplaceimmediately.CBDCmightthereforeincreasetheriskofbankruns.

Measures to counter risks of financial instabilityAsstatedabove,theremightbeariskoffinancialin-stabilityandnegativeeffectsonthebankingsystemfromintroducingCBDC.Theseriskscanbecoun­teredbyanumberofmeasuresthatmightalsolead toanumberofnewchallenges.

ThebankscancountertheriskofbankdepositsbeingconvertedtoCBDCbyincreasingdepositinterestratesinrelationtoanyinterestrateforCBDC,tomakeitmoreattractivetoholdbankdepositsthanCBDC.Dependingonthetermsof

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competitionbetweenthebanks,theymightcom-pensateforthelossofincomefrompayinghigherdepositinterestratesbyincreasinglendingrates,orcharginghigherfees.

IfDanmarksNationalbankweretoissueCBDCwithoutinterest,CBDCmightbeperceivedprimar­ilyasasubstituteforcash–atleastduringperiodswhenthebanks’depositinterestrateswerepositive,andwhenthefinancialsystemwasconsideredtobestable.Interest­earningCBDC,ontheotherhand,wouldtoahighdegreebeasubstituteforbankdeposits.Inthecurrentlow­interest­rateenviron-ment,theinterestrateonabasicdepositaccountistypicallyzero,buthistorically,bankdepositshaveaccruedpositiveinterest.Innormaltimes,higherinterestratesforbankdepositsthanforCBDCwouldlimitthedemandforCBDC.Butinperiodsofmarketunrest,householdsandbusinessesmightmovetheirdepositsfromthebankstoCBDC,eveniftherewasaninterestratedifferentialbetweenthetwo.

UnlessthetotalissueofCBDCwaslimited,theinter­estrateforCBDCwouldinpracticeconstitutethelowerboundonthebanks’depositinterestrates,cf.thesectionconcerningmonetarypolicyandthekroneratebelow.

Theriskofsystemicbankrunscouldalsobecount­eredbysettingalimittohowmuchtheindividualpersonorbusinessmayholdasCBDC.ThelimitcouldbesetsoastomakeitpossibletouseCBDCfortransactions,butnotforsavings,forexampleas afixedratioofGDP.Limitationstotransaction size areknowntodayfromStraksclearing,forexample, inwhichapaymentmaynotexceedkr.500,000.

However,thereareanumberofproblemswithsettingaceilingforholdingsofCBDC.Afixedquotaperaccountholderwouldlimitthenumberorsizeofpayments,sincetherecipient’sceilingwouldhavetobeobservedforapaymenttotakeplace.Theceilingwouldthereforehavetobesetsufficientlyhighforcustomarytransactionsizestobeexecuted,sothatpaymentscouldnotberefused,andtheeffective-nessofthepaymentsystemcouldbemaintained.Nomatterhowhightheceilingweretobeset,some

mightprefertostayrelativelyclosetoit.Itisnotexpedientfortheceilingtobereached,sothatthepaymentcannottakeplace.

Alternatively,anoverallceilingcouldbesetfortheamountofCBDC.Thiswouldnotbeunproblematic,either.IftheoverallsupplyofCBDCwerelowerthandemand,itwouldnolongerbepossibletoconvert1­1betweenbankdepositsandCBDC.Thiswouldnotbeexpedient.

Monetarypolicy andthekroneexchangerate

Moderate significance for the implementation of monetary policyInDenmark,monetarypolicyisconductedbyDan-marksNationalbankinordertomaintainafixedexchangerateagainsttheeuro.Thistakesplacebysettingthelevelofthemonetarypolicyinterestrates,whichspecifytheinterestratesforthecom-mercialbanks’depositswithandborrowingfromDanmarksNationalbank.20

Inthecurrentsituation,inoveralltermsthebankshaveconsiderablereservesatDanmarksNational-bank–primarilyascertificatesofdeposit,cf.Chart8.Thismeansthattheinter­bankinterestrates–themoney­marketinterestrates–arecloselylinkedtotheinterestrateforcertificatesofdeposit,cf.Chart11.

Themoney­marketinterestratesarecentraltomonetarypolicy.Firstandforemost,thedifferencebetweentheDanishmoney­marketinterestratesandthemoney­marketinterestratesintheeuroareadeterminesthedemandforDanishkronerandtherebythekrone’sexchangeratevis­à­vistheeuro.Themoney­marketinterestratesalsohaveastronginfluenceonthebanks’depositandlendingratesvis­a­vistheircustomers.Historically,theseinterestrateshavebeencloselylinkedtotheofficialinterestrates,butsincetheintroductionofnegativeinterestrates

20 SeeSpangeandToftdahl(2014)foradescriptionofmonetarypolicyinDenmark.

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The money-market interest rates are linked to the interest rate for certificates of deposit

Chart11

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The banks’ deposit and lending interest rates

Chart12

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Source: DanmarksNationalbank.

in2012,thedepositinterestratehasadjustedmoresluggishly,cf.Chart12.Thisisbecausethebankshavebeenreluctanttointroducenegativedepositinterestratesforhouseholdsandsmallbusinesses.

IftherewassubstantialdemandforCBDC,thiswouldreducethebanks’reservesatDanmarksNational-bank,cf.thesectiononfinancialstability.Instead,thebanksmightneedtoborrowfromDanmarksNatio-nalbank.Inthissituation,DanmarksNationalbank’slendingratewouldsetthecourseforinterestratesinthemoneymarket.UnlessDanmarksNationalbank’slendingrateisequivalenttotherateofinterestforcertificatesofdeposit,thetransitionfromthecurrentsituation,inwhichthebanksneedtodepositfundsatDanmarksNationalbank,toasituationinwhichtheyarenetborrowers,wouldaffectinterestratesinthemoneymarket.Wherethereisanadverseimpactontheexchangerate,DanmarksNationalbankcanhandlethisbyinterveninginthecurrencymarketoradjustingtheleveloftheofficialinterestrates.

Whilethebanksplayacentralroleintheimplemen-tationofmonetarypolicy,DanmarksNationalbank’soutstandingswithhouseholdsdonotcurrentlyplayanyroleinthisrespect.ThedeclininguseofcashthusdoesnotweakenDanmarksNationalbank’sabilitytomaintainastablekronerateagainsttheeuro.Thiswouldalsobethecaseifthehouseholdsweretocompletelystopusingcashandexclusivelyrelyonbankdeposits.

The interest rate on CBDC could not be used as a monetary policy instrument in DenmarkAstheCBDCinterestratewouldaffecthouseholdsandbusinessesdirectly,itmightbeseenasastronginstrumenttoregulatetheprivatesector’sdemand,andtherebystabilisetheeconomy.21Asaconse-quenceofthefixed­exchange­ratepolicy,thelevelofDanmarksNationalbank’sinterestratesisdeterminedsolelybywhatiscompatiblewithastablekroneexchangerate.ThiswouldalsoapplytotheinterestrateforCBDC.InaDanishcontext,interestonCBDCwouldthereforenotpresentanynewmonetary­policyopportunities,sincetheinterestrateonCBDCwouldbesettokeepthekroneexchangeratefixed.

21 BordoandLevin(2017)arguethattheinterestrateonCBDCwouldbetheprimarymonetary­policyinstrument.SeealsoBarrdearandKumhof(2016)foradiscussionofhowtheinterestrateonCBDCcanbeusedasamonetary­policyinstrument.

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The interest rate on CBDC would constitute a lower boundInreactiontothefinancialcrisisandthesubsequenteconomicslump,centralbanksallovertheworldhavereducedinterestratestoverylowlevels,cf.Chart13.Thereisalimittohowlowinterestratescanfall.Thisisbecausehouseholdsandbusinessescanavoidnegativeinterestratesbyholdingcash.Thelowerboundissomewhatbelowzero,sincetherearecostsassociatedwithholdingandusinglargeamountsofcash.

Anaccount­basedCBDCwouldbefreeofthefric-tionsapplyingtocash.UnlesstheoverallissueofCBDCisrestricted,theinterestrateonCBDCwouldthereforesetalowerboundforthedepositinterestratesfortheeconomicagentswithaccesstoCBDC.ThisreflectsthatCBDCwouldbeaverysafeandliquidasset.IftheinterestrateforCBDCwereatthesamelevelascouldbeachievedfromalternativepositions,householdsandbusinessesmightplacealloftheirsavingsinCBDC.Insituationswithfinan­cialinstability,householdsandbusinessesmightbewillingtoacceptalowerinterestrateforCBDCthantheycouldachieveelsewhere.

Today,householdstypicallyreceivelittleorverylowinterestontheirbankdeposits,whilebusines-ses’depositsareoftensubjecttonegativeinterestrates.Thisappliesespeciallytolargedepositsfrominstitutionalinvestors,forexample,suchasinsurancecompaniesandpensionfunds.Toavoidthesede­positsbeingconvertedtoCBDC,itwouldthereforebenecessarytohaveanegativeinterestrateforCBDC.Alternatively,thebankswouldbeobligedtoraisetheirdepositinterestrates.IssuingCBDCcouldthushaveconsequencesforinterestrateformationinthefinancialmarkets.Themarketsarecharacter­isedbyhowliquidity,riskandotherconditionsenterintotheformationofprices,therebycontributingtothebestpossibleallocationofcapital.

Difficult to manage demand for CBDCTheamountofCBDCcouldberestrictedbyaceilingonhowmuchCBDCeachagentintheeconomycouldhold.Aceilingwouldalsohaveunintendedconse-quences,however,cf.thesectionconcerningfinancialstability.Alternatively,iftheinterestrateonCBDCisassumedtobezero,theremightbeamodelinwhichthegroupsofagentsthatsofarhaveexperiencednegativedepositinterestratesatthebankscouldbepreventedfromholdingCBDC.Inpractice,thiswouldmeanthatCBDCcouldonlybeofferedtohouseholds.

ThedemandforCBDCwoulddependonitsinter­estrate,relativetothegenerallevelofinterestratesintheeconomy.IfCBDCwerenottoaccrueinterest,changesinthemonetarypolicyinterestrates,whichdeterminethegenerallevelofinterestratesintheeconomy,wouldthereforeaffectthedemandforCBDC.Inprinciple,thesameisthecasetodayforcash.Thepracticaldisadvantagesofcashmakethedemandrelativelyinelastic,however.ToavoidhouseholdsandbusinessestoagreatextentswitchingbackwardsandforwardsbetweenCBDCandbankdeposits,itmightbenecessarytohaveacloserelationbetweenCBDCinterestratesandthemonetarypolicyinterestrates.Itwouldnotbeappropriateifnon­interestaccruingCBDCweretoincreasefluctuationsinthebanks’deposits,whicharenormallyconsideredtobeastablefundingsource.

CBDC could intensify international capital movementsThekrone/euroexchangeratedependsontherelativedemandforthetwocurrencies.IfforeignagentsweretoconsideraDanishCBDCtobeat-tractive,thismightleadtoaninflowofcapital,forexample,ifDanmarksNationalbankintroducedanon­interestbearingCBDCinasituationwithverylowornegativeinterestrates.Inthissituation,anon­interestbearingclaimonDanmarksNational-

Very low official interest rates Chart13

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Source: ThomsonReutersDatastream.

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bankwouldbeattractivetoinvestorsintheeuroarea,forexample,ifthealternativewereamoney-­marketpositionatanegativeinterestrate.Thefixed­exchange­ratepolicymeansthatinvestorsintheeuroareadonotincuranexchange­rateriskbyinvestinginkrone­denominatedassets,ratherthaneuro­denominatedassets.

Anincreaseinthedemandforkronerwouldstrengthenthekroneagainsttheeuro.Tocounter­actthis,DanmarksNationalbankwouldissuekroneragainstforeigncurrency,andtherebyincreasetheforeignexchangereserve.ThiswasthecaseinJanuaryandFebruary2015,cf.Chart14.Yetifthisinflowweretocontinue,itcouldbenecessarytolowerinterestrates,includingforCBDC,Inthesesituations,non­interestbearingCBDCwithaccessforforeignagentswouldnotbecompatiblewiththefixed­exchange­ratepolicy.

Inasituationwherethegenerallevelofinterestrateswasincreasingagain,non­interestbearingCBDCwouldgraduallybecomelessattractive,andcapitalmovementscouldbeassumedtobereversed.

CBDCcouldthus,inthelongerterm,leadtogreatercapitalmovementsbothintoandawayfromkroner,instepwithchangesintherelevantinterestratespreads.Thiscouldmakeitnecessarytohavealargerforeign­exchangereservethantoday,toensureanadequatebufferifhouseholdsandbusinessessellkroner.

Also implications for monetary policy, if other countries issue CBDCIfothercountriesissueCBDC,thiscouldfurtherin-creasethefluctuationsincapitalmovements.Today,itisprimarilylargebusinessesandinstitutionalinvestorsthatdemandfinancialassetsinforeigncurrency,andtherebyinfluencethedemandforDanishkroner.Butifcentralbanksinothercoun­triesweretobegintoissueCBDC,itmightbemoreinterestingforhouseholdstomovetheirsavingsaroundbetweendifferentcurrencies.

Forexample,itmightbeattractiveforDanishhouseholdsandbusinessestoholdelectronicclaimsontheECB,sinceitwouldprobablybe easyforDanishshopstoreceivepaymentsineuro­CBDC.Onthisbasis,DanishhouseholdsmightexchangepartsoftheirdepositsinDanishbanksforeuro­CBDC.

The foreign-exchange reserve reflects the demand for kroner

Chart14

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IftheissueofCBDCweretoleadtohouseholdsin-creasinglymovingtheirsavingsacrosscurrencies,thiswouldmakethedemandforkronermoreinterestratesensitive.Asaconsequence,DanmarksNationalbankwouldhavetomakemajorinterventionsinthecurrencymarket.Thepotentiallysubstantialcapitalmovementscouldbehandled,however,withintheexistingmonetary­policyframework,cf.above.

Thechallengesinrelationtofinancialstabilitymightincrease,ontheotherhand,ifDanishhouseholdsandbusinessesweretohaveaccesstoCBDCissuedbyothercountries’centralbanks.IffinancialturmoilweretoariseinDenmark,itmightbeattractiveforDanishhouseholdsandbusinessestowithdrawtheirdepositsfromtheDanishbanksandinsteadholdCBDCissuedbytheECB.

Higher seigniorageWhenDanmarksNationalbankissuesmoney,thishashistoricallygeneratedsignificantrevenue,whichisoftencalledseigniorage.ThisariseswhenDan-marksNationalbankobtainsfinancingbyissuinginterest­freecashandinvestinginfinancialassetsatpositiveinterestrates.Thecostsofproducingbanknotesandcoinsmustbedeductedfromthis.Inthecurrentlow­interest­rateenvironment,seignior­ageisataverymodestlevel.

TheseigniorageispartofDanmarksNationalbank’sprofit,mostofwhichfallstothestate.Ifthedemandforcashdeclines,seignioragewillalsodecrease.

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Thiscouldpotentiallybeoffsetbyissuinganon­interestbearingorlow­interestCBDC.22YetitisnotDanmarksNationalbank’sobjectivetoachievethehighestpossibleprofit.

CBDC could entail political and reputational riskIssuingCBDCwouldincreasethedirectcontactbetweenDanmarksNationalbankandhouseholdsandbusinesses.ThiswouldincreasetheriskofdissatisfiedcustomersforDanmarksNationalbank.Thismightbeduetosystemfailure,orifthefacilitiesofferedinrelationtoCBDC–forexampletheuserinterfacewhichenableshouseholdsandbusinessestoaccesstheirCBDC–werenotconsideredtobesufficientlyuser­friendly.TheextenttowhichthistypeofcriticismofDanmarksNationalbankwouldinfluenceDanmarksNationalbank’scredibilitywithregardtothetaskofensuringfinancialstabilityandstablepricesisanopenquestion.

DependingonhowaCBDCisdesigned,thiscouldalsoexertpoliticalpressureonDanmarksNational-bank.Intheeventoffinancialunrest,theremightbepressurefrompoliticiansorthemediafortheCBDCceilingtoberaised,eveniftheceilingweretobefixedbeforehand.

Conclusion

Intheinternationaldebate,anumberofpotentialbenefitsofintroducingCBDCarementioned,includ­ingopportunitiestoachieveamoresecureandeffectivepaymentsystemandtoestablishaback­upsystemfortheexistingpaymentsinfrastructure.

However,thepotentialbenefitsofintroducingCBDCforhouseholdsandbusinessesinDenmarkarenotassessedtomatchtheconsiderablechallengesthattheintroductionwouldpresent.

InacountrylikeDenmark,withasecureandeffect­ivepaymentsystem,itisdifficulttoseewhatCBDCwouldcontributethatisnotalreadycoveredbytheexistingpaymentsolutions.InaDanishcontext,digitalcurrencythusalreadyexists,asbankdeposits.

22 BarrdearandKumhof(2016)emphasisetheincomefromissuingCBDCasapositiveeffectthereof.

Ontheotherhand,theanalysisshowsthattheintroductionofaCBDCwouldchangetheroleofDanmarksNationalbankinthefinancialsystemandcreateanumberofchallengeswithregardtofinan­cialstability.Dependingonhowitweretobede-signed,issuingCBDCwouldalsopresentchallengesinrelationtothefixed­exchange­ratepolicy.ThedrawbacksofintroducingCBDCinDenmarkarethusassessedtobeconsiderable.DanmarksNational-bankassessesthatthecentralbankmustcontinuetobethebankertothebanks,ratherthanthebankforallofDenmark’spopulation.

IfanothercentralbankweretodecidetointroduceaCBDC,thiswouldbeofsignificancetoDanmarksNationalbankandthefinancialsystem.Thismakes itimportanttomonitordevelopments.

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Annex1­Blockchain

Ablockchainisachainof(information)blocksthatareconnectedbydigitalcryptographic”finger-prints”.Besidesanumberoftransactionsorotherinformation,eachblockcontainsareferencetothepreviousblock’scryptographicfingerprint.Thestructuremeansthatprevioustransactionscanonlybechangedbyupdatingallfingerprintsforthesub-sequentblocks.Theintegrityofablockchainisalsoverifiedacrossthepartiesthatshareinformationintheblockchain.Thistakesplacebyeachofthepar­tiesholdingacopyofthesharedblockchain,sothattheycancomparetheircopieswiththeotherparties’blockchain.Thisisalsocalledadistributedledger.

Toensurethatallpartieshavethesamecopyofthesharedledger,newblocksmustbeaddedtothelocalcopiesinthesamesequence.Thisisensuredbynewblocksbeingverifiedandorderedeitherjointlythroughanagreedconsensusmechanism,orviaaprocesscalledproof­of­work.Aconsensusmech­anismsetsrequirementsforthenumberofpartici-pantsandistypicallyusedinnetworkswithaccessrestrictions.Proof­of­work,ontheotherhand,maybeusedonopennetworks,sinceoneparticipantcandesignatethenextnewblockbybeingthefirst

tosolveanenergy­intensivecalculationlinkedtothespecificblock.

Theuniquesequencealsoensuresthatthesamemoneyisnotusedseveraltimes,whenablockchainholdsmonetarytransactions.

Cryptographicfingerprintsthusprotecttheinteg­rityoftheindividualblockchain,whilemaintaininguniformlocalcopiesofthesharedblockchainordistributedledgerensuresdataintegritybetweentheparties.Thisisthebasisforthetechnology’sbuilt­insecurityandforthepartiesbeingabletoestablishandmaintainasharedoutlook–eventhoughthereisnocentralindependentthirdpartytoestablishthis.

Inrecentyears,theblockchaintechnologyhasbeenusedinmanywaysinthefinancialmarkets,besidescryptocurrencies.Anexampleisinitialcoinofferings,ICOs,whichcanhelpnewstart­upstoraisecapital.Thecompanyissuestokensonablockchain,whichresembleshares,andinvestorscanbuythem.InNo-vember2017,theEuropeanSecuritiesandMarketsAuthority,ESMA,warnedoftheconsiderablerisksofinvestinginICOs.23

23 Cf.ESMA(2017).

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Barrdear,J.andM.Kumhof(2016),Themacroeco-nomicsofcentralbankissueddigitalcurrencies, Bank of England Staff Working Paper,no.605.

Bech,M.andR.Garratt(2017),Centralbankcrypto-currencies,BIS Quarterly Review.

Bordo,MichaelD.andAndrewT.Levin(2017),Cen-tralbankdigitalcurrencyandthefutureofmonetarypolicy,Hoover Institution Working Paper,no.17104,August.

Broadbent,B.(2016),Centralbanksanddigitalcur-rencies,BankofEngland,speech,March.

Buchter,L.andK.Gürtler(2006),LegalTender,Dan-marksNationalbank,Monetary Review,Q3.

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Mersch,Y.(2017),DigitalBaseMoney:anassessmentfromtheECB’sperspective,ECB,speech,January.

NicolaisenJ.(2017),Whatshouldthefutureformofourmoneybe?,NorgesBank,speech,April.

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Spange,M.andM.W.Toftdahl(2014),Fixedex-changeratepolicyinDenmark,DanmarksNational-bank,Monetary Review,Q1.

SverigesRiksbank(2013),TheSwedishretail paymentmarket,Riksbank Studies,June

SverigesRiksbank(2017),TheRiksbank’se­kronaproject,report1,September.

DANMARKS NATIONALBANK

HAVNEGADE 5

DK-1093 COPENHAGEN K

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This edition closed for contributions on 12 December 2017

Kirsten Elisabeth GürtlerLawyer

CORPORATE SERVICES

Søren Truels NielsenRetail Payments Senior Expert

FINANCIAL STABILITY

Kristine RasmussenPolicy Advisor

FINANCIAL STABILITY

Morten SpangeSenior Adviser, Economic Analysis

ECONOMICS AND MONETARY POLICY

ABOUT ANALYSIS

As a consequence of Danmarks National-bank’s role in society we conduct analyses of economic and financial conditions.

Analyses are published continuously and include e.g. assessments of the current cyclical position and the financial stability.

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