Events

Dr Jonathan Chiu
Senior Research Advisor
Bank of Canada

Should a central bank digital currency (CBDC) or tokenized deposits be issued to facilitate decentralized
finance (DeFi) within the crypto space? Would their introduction be a curse or a blessing
for stablecoins and illicit transactions? This paper presents a general equilibrium monetary model
where money creation is susceptible to moral hazard problems. The impacts of issuing a CBDC
or tokenized deposits hinge upon their utilization as a means of payment or as collateral assets in
DeFi. In instances where surveillance is low and the interest rate remains moderate, these tokenized
currencies tend to be used as a means of payment within DeFi, thereby crowding out stablecoins.
Conversely, when the associated interest rate and surveillance level are high, tokenized currencies
tend to serve as collateral within DeFi, leading to the crowding-in of stablecoins. In terms of social
welfare, CBDCs generally outperform tokenized deposits. In some cases, it becomes necessary to
prohibit the creation of tokenized deposits in order to implement the optimal CBDC design. Furthermore,
it is deemed optimal to apply the lowest level of surveillance to a CBDC to prevent its
utilization as collateral by stablecoin issuers, thus preserving the scarcity of collateral assets.