collective investment of digital currencies


Following the detailed discussion in Section 3, we begin with cases where the digital currency – either a public or
a private initiative – is classified as a deposit scheme. We then present the case of a collective investment scheme
for a private initiative (stablecoin). In all scenarios, the initial shock is a withdrawal of 20% of the stock of MFI
deposits by both households and firms. Below in section 6 we will consider a wider range of shocks.
5.1. Digital Currency as a Deposit Scheme
In the case of a deposit scheme,

 at t=1 all changes in the bilateral exposures occur in the network of deposits.
We consider three separate options for the institutional classification of the digital currency. In option one, the
digital currency issuer is the central bank. In option two, the digital currency issuer is a private entity, operating
as part of the investment funds sector (INV). In option three, the issuer is a foreign stablecoin located in the
“rest of the world” sector (RoW) but with part of its global reserve fund assets denominated in the domestic
currency. The vehicle controlling the domestic fraction of the reserve fund is a locally licenced and supervised
subsidiary within the domestic investment funds (INV) sector.
5.1.1. Central Bank Digital Currency (CBDC)
Consider first the case of a CBDC. Figure 3 illustrates the impact of the introduction of the CBDC at t=1, step-bystep. Panel A depicts the network of deposits before the introduction of the CBDC (the status quo situation). In
Panel B, private non-financial-sector depositors have withdrawn 20% of their commercial bank (MFI) deposits
(the light blue arrows show the “weakened” deposit links after the withdrawals). In Panel C, the deposits
withdrawn from the commercial banks have been placed in accounts with the central bank (the dark blue
arrows), so that households and firms now hold direct claims against the central bank.

As explained in general terms in Section 4.2, the shifts in deposits trigger wider changes in the affected sectors’
balance sheet aggregates at t=2. We consider a non-exhaustive list of four alternative scenarios – each of which
describe a set of actions independently taken by the relevant agents – that are sufficient to complete the process.
A) The CB redeposits the funds with the commercial banks (MFIs) to offset the increase in its deposit
B) The MFI sells debt securities (assets) to offset the reduction in its deposit liabilities; the CB purchases
debt securities to offset the increase in its deposit liabilities;
C) The MFI redeems loans (assets) to offset the reduction in its deposit liabilities; the sector which loses
bank financing replaces loans by issuing its own debt securities; the CB purchases debt securities to
offset the increase in its deposit liabilities;
D) The MFI issues debt securities (liabilities) to offset the reduction in its deposit liabilities; the CB
purchases debt securities to offset the increase in its deposit liabilities.
As a result of all these transactions, the central bank’s balance sheet expands while the commercial banks’
balance sheet either shrinks (in cases B and C) or remains unchanged (in cases A and D). This does not necessarily
have to be the case, however. The central bank could also decide to offset the increase in its liabilities by using
the CBDC as a substitute for other liability items, for example by retiring banknotes.

 while in cases B to D the commercial banks either sell securities from their portfolios or issue
securities as new liabilities, and the central bank simultaneously purchases securities, the sales and purchases
are made independently and do not necessarily match in terms of their composition. This is because the
securities holdings (portfolios) of each sector are different, and therefore the preferred sets of securities to be
purchased and sold are not the same. We return to this point shortly.
Figure 4 shows case A. The re-depositing of the funds by the CB to the commercial banks (MFIs) is shown by the
blue arrow. In practice, the transaction is a monetary policy operation whereby the banks tap the central bank
repo financing facility to cover their funding gaps. Although, in terms of balance sheet items, the loans from the
central bank fully offset the banks’ funding gaps, there are other characteristics that make the positions
heterogeneous. First, in terms of pricing, the banks’ funding has now shifted from cheaper retail deposits to
more expensive central bank repos. Second, central bank repo financing is collateralised, which means that a
relevant share of the banks’ securities portfolios will become encumbered. Third, central bank financing is shortterm and has to be rolled in the absence of alternative funding sources. By contrast, retail deposits, although in
theory mostly callable on demand, are in practice the most stable source of bank funding (Gropp and Heider,

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