Retail CBDCs and the Limits of Spending Limits

The push toward central bank digital currencies seems an inexorable one.

But among the issues that remain to be sorted out are the parameters of how they are used, where they might be used — and whether there may be limits to it all, especially when it comes to consumer-focused, retail use. 

But if digital currencies are limited, what might be the limits to the appeal of those digital offerings?

As reported, almost every single digital bank is considering or is in the midst of developing a CBDC. 

And this past week, Colombia’s central bank issued a report that said that limiting the CBDCs (the bank has not definitively stated it will issue its own CBDC) might be a path to follow.

In the report, “Expected Macroeconomic Effects of Issuing a Retail CBDC,” the central bank stated that an “important design consideration is the possibility of setting limits on users’ holdings and/or spending of CBDC. These limits could safeguard users from cyberattacks targeting their balances or transactions and reduce the demand for retail CBDC as store of value in competition with bank accounts.” The paper went on to state that the Colombian central bank “could offer digital wallets with small holding limits and a high level of privacy for people that place a high valuation to their transaction data.”

Wary of Stablecoins  

Elsewhere, the paper stated that, in the discussion of stablecoins, “Widespread adoption of stablecoins as a payment instrument could give rise to a variety of risks, related to higher difficulty in the prevention of illegal activities, loss of monetary sovereignty (and hence monetary policy effectiveness),” among other risks.

The Colombian central bank’s proposals to limit at least some aspects of a retail CBDC are not new. 

Earlier this year, in the U.K., a discussion by the Bank of England and other stakeholders contended that there should be limits to users’ digital CBDC holdings (in this case, the pound) to between 10,000 to 20,000 British pounds.

The limitations of a retail limit may become apparent if there are other options on the table. And in a separate paper published by the Bank of International Settlements, the BIS wrote that “Most importantly, while situations differ, the benefits of a widely accessible CBDC may be limited if fast (even instant) and efficient private retail payment products are already in place or in development.”  

Here in the States, the cautionary notes are there too: In June, the Federal Reserve published a paper that focused on retail CBDCs, stating that if enough scale were achieved, at least some holders might wish to substitute CBDC for traditional banking deposits — ultimately boosting interest rates.

“Demand for a retail CBDC will likely depend on several factors, including whether it is widely accessible, how transferrable or substitutable it will be with other retail payment platforms; whether there are limits on the size of holdings, [and] what degree of privacy it provides,” according to the paper.

“A bank may want to raise deposits by offering more attractive price and nonprice terms on their deposit products to lure customers from other institutions. Banks could also look beyond deposits to unsecured (such as federal funds or commercial paper) or secured (for example, engaging in repurchase agreements or seeking advances from Federal Home Loan Banks) markets for funding,” the paper noted, adding that “as banks rebuild their reserve positions, the general level of short-term interest rates in secured and unsecured markets could rise in the process.”

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