The place of the central bank digital currency in the classification of types of money

Iskhakov Ildar Postgraduate student; Department of Banking and Monetary Regulation; Financial University under the Government of the Russian Federation 49 Leningradsky Ave., Moscow, 125057, Russia isilra22@mail.ru

Introduction

The development of technologies and their implementation in various spheres of life systematically leads to the emergence of innovations. Similar changes are affecting the financial sector. So, today, the so–called digital currencies of central banks (hereinafter referred to as central securities) are actively developing. It is an analogue of money issued by the central bank and has the same value as the existing money used in circulation. It is worth noting that the central bank's digital currency is not a new phenomenon, as there are projects to create a central bank in many countries.

Currently, the active involvement of central banks from different countries in the development and implementation of the Central securities market generates the need to study various aspects of this digital currency. In the light of the involvement of not only small countries in this process, but also Russia, the European Union and other large countries, works related to the analysis of CSF began to actively appear in the Russian scientific community. One of the topics that needs to be studied in the scientific community includes the analysis of the central bank's digital currency for the compliance of this digital currency with the "money" category. In addition, it is important to find a place for this phenomenon in the current classification of forms and types of money. This paper is devoted to the analysis of the above-mentioned issue.

Current status of central bank digital currency implementation projects

It is worth noting that the central bank's digital currency is not a new phenomenon, as there are projects to create a central bank in many countries. So, at the moment, the world has begun exploring the possibility of creating a central bank digital currency in more than 150 countries. ^[17] According to the latest data from the Bank for International Settlements, 94% of central banks are working on their own digital currency. At the same time, this number is constantly growing. Below is a world map showing the countries that are developing their own digital currency.

Fig. 1. Countries where their own digital currency is being developed ^[17]

Also below is a graph showing the change in the share of central banks working on creating their own central securities.

Fig. 2. Involvement of central banks in the work on the Central Securities Exchange ^[8]

It is worth noting that there are different models of digital currencies of the Central Bank, depending on the goals set by central banks. The main classification of central securities includes two models: retail and wholesale central securities. Retail digital currency is available to a wide range of users, which includes both individuals and legal entities. Wholesale digital currency is a digital currency that is intended for use by financial or other organizations, as well as for cross–border transfers. This type of digital currency is not available to individuals.

When choosing between these two types of central banks, central banks mostly opt for retail central banks, but most central banks are working on both models of central banks. This is evidenced by statistical data. So, in 2023, about 30% of central banks worked exclusively on retail digital currency, while only 2% are working on wholesale digital currency. The rest of the team is working on two models simultaneously. In general, this distribution has not changed much since 2018. The graph below shows.

Fig. 3. The focus of the Central Bank's work on Central securities market models ^[8]

At the same time, each central bank is at a certain stage in the development of its own digital currency of the Central Bank: more than half of the projects are at the proof-of-concept stage ("proof of concept" is the stage of the project, which demonstrates the feasibility of the project, in this case– the Central Bank). One third of all projects are pilot versions of the Central Bank's digital currencies. According to the calculations of the Bank for International Settlements, up to 15 digital currencies of the Central Bank will be launched by 2030.^[8]

At the moment, three projects have been launched:

· Sand Dollar in the Bahamas;

· eNaira in Nigeria;

· Jam-Dex in Jamaica.

The Central Bank's data has been fully launched and is used in payments within economies. At the same time, the level of implementation is quite low. This is due to the specific features of these countries, namely the low level of education of the population, lack of motivation for intermediaries. In order to remedy the situation, the Central Bank of the Bahamas subsequently decided to involve commercial banks in the project and provide customers with access to digital currency.

Nevertheless, the Central bank is a phenomenon that has not yet been fully studied, and there are gaps in scientific knowledge regarding digital central bank currencies. One of these issues is the question of the place of the central bank's digital currency in the specific composition of money. Before giving a specific answer to the question, it is necessary to analyze the existing classification of forms and types of money.

It is worth noting that developing countries and emerging economies are mainly showing particular interest in developing their own digital currency, while developed countries are more cautious about this issue. For example, in Russia, the Central Bank is actively engaged in introducing the digital ruble into retail circulation. In 2021, the Central Bank of the Russian Federation decided on the Concept of the digital ruble. A pilot version was launched in 2022. Access to the digital ruble is possible through any financial institution. This was done in order to ensure a high level of implementation in the initial stages. Thus, all the largest commercial banks in the country are involved in the Russian digital currency project. ^[10]

The Chinese Digital yuan (eCNY), which is a retail digital currency, has been actively introduced into circulation in 17 provinces as a pilot version and has been analyzed over the past few years. To ensure a high level of implementation, the authorities decided to make payments in digital yuan, in particular, salaries. A QR code payment system has also been introduced, which simplifies and shortens the customer journey.

In addition, a pilot retail digital currency settlement project was launched in India. About 5 million users have been actively using the digital rupee as a payment instrument since December 2022. To achieve this, a QR code system was developed for interacting with other payment methods, which allowed the digital currency to be launched not as a separate instrument, but interconnected with existing ones. ^[10]

Nevertheless, developed countries are actively allocating resources for the development and launch of CSDs. Thus, in November 2023, the European Central Bank moved from the initial stage of developing retail securities to the preparatory stage. At this stage, the ECB is tasked with laying the foundation for the future of the digital euro. The first draft of the code of rules was released in early 2024. (a set of rules and standards of procedures for standardizing payments in digital euros and ensuring the same customer experience using digital euros throughout the Eurozone) ^[18]. Next, the ECB will be directly involved in the development of the digital euro. The estimated earliest launch date is November 2025.

The central bank's digital currency as a separate form of money

Over the long history of the global economy, there have been many different types of money. History remembers the creation of commodity money, the value of which depended on the material from which they were made. Commodity money was actually the so-called full-fledged money. Commodity-metal money is called full-fledged, in the role of which one or another product acts, which has its own value and usefulness. Over time, against the background of the development of industrial relations, it became clear that full-fledged money would eventually cease to be physically sufficient to meet the needs of economic turnover. This is how symbolic (defective) money appeared, which gradually replaced gold and silver coins with metal money. ^[2] In parallel with this, so-called quasi-money appeared, represented in the form of credit money, which is issued and used as debt obligations of banks. The assets of the issuing bank act as collateral for these debt obligations.

Over time, fiat money appeared, which is money familiar to the 21st century (in the form of banknotes and coins). Their peculiarity is the lack of asset security in the usual sense. The basis for issuing such money is trust in the state; the value of such money is guaranteed by the authority and authority of the state. ^[6] Of course, such money does not have an independent, internal value, or it is not commensurate with the face value. Modern monetary systems involve the issuance of fiat money.

Speaking about the modern classification of money, it is worth noting that the concept of types and forms of money should be distinguished. A type of money is a division of money based on its natural and functional characteristics. The form is a way of external expression and embodiment of a certain type of money. Examples of payment instruments can be given for each type and form of money.

Today, there are three main types of money:

· commercial;

· Tokens of value (paper money and coins);

· credit cards.

In the modern classification of forms of money, based on the nature of their movement, there are two main forms: cash and non-cash. Cash is the usual banknotes and coins, while non–cash is money in bank accounts, as well as deposit money: cash balances on settlement, current, deposit and other demand accounts. The non-cash form also includes term account balances and accrued interest.

Deposit money performs all the functions of money, has a credit basis, exists in the form of account entries, and is less liquid than cash. Another type of non-cash money is electronic money. They appeared at the moment when the technology for storing monetary value in electronic form was created. Initially, electronic money consisted of money on prepaid cards. Subsequently, virtual accounts were created in the form of records in the databases of the servers of electronic money operators. Later, electronic money received a legal basis for its existence with the entry into force of Federal Law No. 161-FZ dated 06/27/2011 "On the National Payment System", which established the concept of "electronic money". The main difference between electronic money and non–cash money is that there is no need to open a bank account with a credit institution that has the right to transfer electronic funds.

There is also a classification of types of money based on the issuer of funds.:

· government (banknotes, coins);

· private (deposit and electronic money). ^[1]

The issuer of public money is the State represented by the central bank. This is the most familiar type of money for the main participants in monetary relationships. It is based on centralized issuance and provision, as well as support from government agencies. Private money, in turn, is issued by private organizations.

Nevertheless, it is worth noting that in the scientific community, the issue of finding a place for digital currencies of central banks in the specific composition of money is quite acute. In order to answer this question, it is necessary to correctly analyze whether all types of digital currencies meet the criteria by which they can be classified as "money", and only later to state which type of money to classify as central securities.

Within the framework of monetary theory, it is customary to distinguish five functions of money:

· means of circulation;

· means of payment;

· Cost measure;

· a means of accumulation;

· World money.

Researchers often use a slightly different list of money functions in their work. This is most typical for foreign researchers, because they believe that the traditional classification of money functions is irrelevant and does not reflect the real functionality of money against the background of its change and transformation.

The use of a shortened list of money functions can be traced, for example, in the work of Mancini-Griffoli and co-authors.^[13] The authors of this study, saying that when launching the Central Securities Exchange project, central banks play a key role, since they are on the supply side, note that any new form of money that is issued by the central bank should Perform the three main functions of money: a measure of value, a means of payment, and a means of accumulation. Other researchers, in order to consider a particular phenomenon in the context of monetary functions, often resort to a shortened list of money functions: a medium of circulation, a means of payment, a measure of value and a means of accumulation. A similar classification of money functions is considered in the work of Lee and co-authors ^[11], as well as in the work of Horvath ^[9].

Turning to the Central Bank, it is worth noting that there is a consensus in the scientific community as to whether central bank digital currencies can generally be classified as a new form or type of money. This is mentioned in various scientific papers by various authors, as well as in publications by central banks of different countries. For example, the Bank of England report mentions that three forms of money are widely used in the UK monetary system: cash, bank deposits, and commercial bank reserves at the central bank. These reserves, like banknotes, represent the obligations of the Bank of England. ^[16] The authors of the report note that the central bank's digital currency can perform three main functions of money: a measure of value, a medium of circulation, and a means of accumulation, however, in order for the central bank to be practical in use, it is necessary to provide the technical ability to convert central bank securities into cash and deposits. At the same time, the report notes that as a means of payment, the central bank's digital currency will be even more convenient for households and businesses. ^[16] A similar point of view is expressed in the work of Nieborak, as well as in the IMF study. The central bank is a new form of money issued digitally by the central bank and intended to be used as a legal tender. ^{[13; 15]}

It is worth noting that the Central Bank of Russia is actively working on its own Digital Ruble project. The Bank of Russia unequivocally declares in its own reports that the digital ruble fully performs all the functions of money, is money and a legitimate means of payment. Thus, in its own Advisory Report, the Bank of Russia states that in the Russian economy there are only two forms in which money exists: cash, which is issued by the Central Bank of Russia and non-cash, presented in the form of funds in accounts with commercial banks and accounts with the Bank of Russia. ^[6] The latter are used for settlements between commercial banks and the Bank of Russia. At the same time, the third, additional form of the Russian national currency will be the digital ruble. Moreover, it is worth noting that in the rhetoric about digital money, the Central Bank of Russia has gradually moved from a complete denial of the phenomenon to a decision to create a pilot of the central bank's digital currency. Of course, this is due to the fact that, one way or another, the digitalization of all spheres of society, including the economy, forces the Bank of Russia to adapt to global changes and move "in step with the times." Thus, the central banks themselves, as well as their representatives at the Bank for International Settlements, designate the central bank's digital currency as one of the forms of national currencies. ^[14]

For a more complete understanding of the differences between the forms of money, let's look at them in more detail. So, if we compare the digital ruble with other forms of the Russian ruble, we can note the following. Cash rubles are banknotes, each of which has its own unique number. At the same time, the owner of the funds is fully responsible for the safety of the cash. Non–cash money is a special record on accounts in commercial banks. The commercial bank is responsible for maintaining and maintaining accounts. It is the two forms described above that are considered money in Russia, since these two forms of money are directly accessible to citizens. However, the digital ruble cannot be identified with non-cash money, despite their similarities. To some extent, the digital currency of the Bank of Russia is even closer to cash, since the digital ruble is represented in the form of a unique code located in a specialized electronic wallet. Accordingly, when making payments and transfers, the transfer of a digital ruble will technically be the transfer of a digital code from one wallet to another.^[7]

As noted above, there are many models for implementing CSDs. Within the framework of one of the classifications, a single-level and a two-level digital currency model are distinguished. The single-level model implies the presence of direct interaction between users and the central bank. Accordingly, within the framework of this model, the owners of central securities make demands directly to the central bank. The two-tier model differs in that in this model, the account holder makes demands not on the central bank, but on intermediary banks, which open accounts to customers. The Bank of Russia has decided to use a two-tier model in the development of the digital ruble. In the context of this classification, it can be noted that a two-tier digital currency has some similarities with non-cash money, since the owners of funds make demands specifically on commercial intermediary banks.

Thus, the digital ruble has absorbed the positive aspects of both cash and non-cash money. It will be used simultaneously with cash and non-cash money. Below is a table with the main features of the three forms of the Russian ruble.

Table 1. Comparison of the three forms of the Russian ruble ^[7]

S. Belenchuk notes that the Central securities Exchange can be defined as a new form of central bank money. At the same time, this form of money differs from the balances on traditional reserve and settlement accounts. For this reason, it is necessary to create a specific system that includes various participants in the central securities market: commercial banks, the central bank, operators and providers of payment systems. ^[3] A similar point of view is observed in the work of Hisamova Z. The author claims that central securities are the same fiat money that performs all functions, but they are digital assets.^[4]

At the same time, it is worth noting that the very nature of the digital currency is much closer to fiat money than to other types of digital money. The reason for this is the fact that the central securities are essentially an analogue of the same cash currency circulating in the country, which is correlated with it in a ratio of 1:1. At the same time, the Central securities have absolutely identical collateral and support from the state. ^[14]

Thus, the point of view of the authors, who claim that the central bank's digital currency is a new form of existing fiat money, is the most reasonable and well–reasoned.

In fact, if we give examples, the digital currency can serve as a means of circulation, since digital currency is supposed to be used to pay for goods and services. Of course, each model of digital central bank currency has its own infrastructure, but it should make it possible to use the Central Bank as a medium of circulation. Speaking about the function of a measure of value, it can be noted that the central bank will allow estimating the value of goods and services, since it is denominated in the national currency in a ratio of 1:1. It is worth noting that the central bank can also be used as a means of payment, since the central bank's digital currency can be used to make certain payments that are not related to with the turnover. The central bank's digital currency allows you to transfer the value of money into the future. Thus, the Central Bank performs the function of a means of accumulation. It is worth noting that there are central securities with the possibility of depositing funds to receive interest income and central securities without such an opportunity.

According to representatives of central banks and other researchers, the Central securities Exchange is only a new form of existing fiat money. Indeed, the Central Bank cannot be attributed to either cash or non-cash money. The Central Bank is not a non-cash form of money, since, as noted above, non-cash money has a different nature and includes customer cash balances in commercial bank accounts. The functioning of the Central Securities Exchange is fundamentally different and involves the interaction of users of the Central securities Exchange with the central bank directly or through commercial banks.

At the same time, it is not possible in the modern classification of money to single out a separate type called the "digital currency of the central bank", since the central securities Exchange is only a form of embodiment of existing money, and not a new division of money according to a natural and functional feature, such as credit money or term deposits. The central bank's digital currency will be issued, serviced, and fully supported by central banks, just like other existing legal forms of money.

Thus, taking into account the existing points of view in modern analysis on the essence of the central bank's digital currency, it is legitimate to attribute it to an independent form of money, since all the functions assumed by monetary theory are fulfilled. At the same time, the Central Securities Exchange cannot be qualified as a new type of money. Being a separate new form of money, it cannot be identified with its existing non-cash form. It is worth noting that for a more complete and detailed understanding of the essence of the central bank's digital currency and the search for a place for this innovation in the modern classification of forms and types of money, it is necessary to understand the potential limitations and risks that may arise during the implementation of the Central Bank in circulation.

Limitations and risks of implementing projects on the introduction of digital currencies of central banks

With the full-fledged introduction of the digital ruble, it is likely that funds will flow from cash and non-cash forms of the ruble to digital ones. Accordingly, this may have an impact on banking performance. ^[5] If we talk about retail central securities, then replacing the cash ruble with a digital one will not have an impact on commercial banks, but the effect will be noticeable for the central bank. The share of cash rubles in the structure of the Bank of Russia's balance sheet will decrease and the share of digital rubles will increase. However, this change may lead to changes in the speed of money circulation. The use of cash implies some time lags between the receipt of physical money into the banking system and its deposit. Accordingly, the transition to the use of digital currency allows to increase the speed of money circulation, which, in turn, can lead to a certain increase in inflation. Regulators in countries with inflation targeting will be forced to apply certain measures to achieve the desired inflation rate. ^[12]

In addition to the transfer of cash rubles to digital ones, it is possible to transfer bank deposits and money in bank accounts. This change, unlike the previous one, has an impact on commercial banks. The replacement of deposits may cause volatility in the reserves of commercial banks in the central bank. This disintermidation weakens the interest rate channels in the transmission mechanism of monetary policy. Accordingly, it becomes more difficult for the central bank to predict the volume of reserves. The changes described above are reflected in the balance sheets of the central and commercial bank. The balance of a commercial bank as a whole is declining amid the flow of customer funds from deposits to the digital ruble. So, on the liability side, there is a decrease in the volume of deposits from the balance of operations. At the same time, on the asset side, the volume of reserves on accounts with the Central Bank and the balance of operations is decreasing. Changes in the central bank's balance sheet are observed only on the liability side. A decrease in the level of reserves of commercial banks entails an increase in the volume of central securities by the same amount. There are changes in the structure of assets in household balance sheets (transfer from deposits to central securities).

The cash flows from deposits to central securities described above can be unpredictable. Given that customers can withdraw deposits at any time, and banks' credit operations are contractual in nature and cannot be withdrawn before the maturity date, banks may run out of liquidity. This can lead to the insolvency of banks. Of course, this problem mainly concerns small banks, but large banks, also fearing potential outflows, will pursue a more cautious policy, reducing the provision of liquidity to small banks and significantly increasing reserves to cover daily payments and potential outflows of money to central securities. Thus, the structural changes described above in the balance sheets of commercial banks may lead to the fact that, all other things being equal, the introduction of a central digital currency will lead to a reduction in available bank lending to the economy. Accordingly, potential customers will experience an increase in the cost of credit and a further decrease in demand for loans in the economy. ^[12]

If we talk about wholesale central securities, then there are no risks similar to those described above, since with the introduction of this type of central securities, only the structure of assets of financial institutions changes (there is a flow from reserves to central securities), as well as the structure of central bank liabilities (a similar flow).

Thus, the introduction of central securities can have not only a positive effect in the form of reducing transaction costs, speeding up payments and increasing public involvement in the financial sector, but also create prerequisites for the emergence of risks. Central banks should monitor the state of the economy when implementing central securities. In some cases, regulators will be forced to actively intervene through existing channels of providing and absorbing liquidity to maintain stability in the banking sector. Perhaps, at the first stages of the introduction of the Central Securities Market, regulators will introduce certain limits and restrictions on the volume of transactions in digital currency. This will make it possible to introduce the central bank's currency into circulation in a dosed manner and monitor the state of the economy. It is also worth noting that the risks described above will not occur simultaneously. Historically, innovations for the most part take a long time to take root and actively begin to be used only after a long period of time. Thus, the introduction of the central bank's digital currency will be gradual and time-consuming. This will allow central banks to respond calmly to possible structural changes in the banking sector of the economy and make appropriate decisions.^[5]

Based on the above, there is reason to assert that the central bank's digital currencies have their own characteristics, positive and potential negative effects on the economy compared to the available forms and types of money.

Conclusions

The active development and implementation of digital currencies by central banks in different countries creates a field for research in various aspects of this phenomenon. Given the fact that the central bank will be actively used by citizens and businesses, it is necessary to understand the place of the central bank's digital currency in the type of money.

The analysis demonstrates that at the moment there is a wide variety of payment instruments that occupy one place or another in the modern classification of money. However, the question of classifying some instruments as "money" is still debatable.

Considering the opinions in the scientific community, as well as the points of view of representatives of various central banks actively involved in the implementation of the Central Securities Exchange, it is worth noting that the central bank's digital currency can, unlike some other types of digital payment instruments, be classified as money. All the functions of money given in modern money theory are performed by digital currencies of central banks. This is evidenced by the analytical studies of the Central Securities Commission conducted by financial institutions and other researchers.

In fact, the Central Bank is assumed to be a separate form of money without separating it into a separate type of money. This is due to the fact that, in fact, the Central Bank is only a new representation of existing money, and not a new kind. This is how the Bank of Russia and other central banks interpret the possible place of the Central Securities Exchange in the specific composition of money. Of course, the new form of money implies the creation of a certain infrastructure by central banks. This is necessary for the Central Securities Exchange to function smoothly and perform all its functions, as it does with other forms and types of existing money. It is also necessary to ensure that the introduction of digital currency is the least painful for the economy and does not create various risks and allows existing financial institutions to continue their activities without the need for a radical revision of their own policies. Nevertheless, the forecast of many central banks and, in particular, the Bank of Russia confirms that regulators have the necessary tools to monitor the state of the economy and adjust monetary policy at the moment to mitigate potential risks and maintain stable economic functioning.