Sovereign Grassroots Currencies: A CBDC Architecture for Credit and Monetary Policy (Full Version)

Abstract

A Central Bank Digital Currency (CBDC) is central-bank money in digital form, held by the public. Leading designs have two limitations: conversion from bank deposits into CBDC can accelerate deposit flight, requiring safeguards; the CBDC stays outside credit creation and monetary-policy operations. Here we present a CBDC architecture that overcomes these limitations, based on grassroots currencies. It has three components: (1) Money: sovereign grassroots coins, which are digital debts of one unit of fiat currency issued by the central bank, constituting a direct CBDC; (2) Credit and Liquidity: non-sovereign grassroots coins, which are digital debts of one unit of the same fiat currency, redeemable at par, that can be issued by any person, natural or legal - adding credit; and (3) Interest: grassroots bonds, sovereign and non-sovereign - adding maturity, and with it interest, standard banking instruments, and the central bank's instruments of monetary policy. The central bank can therefore lend, absorb liquidity, set its rates and buy and sell securities in the coins and bonds the public holds, choosing the counterparties and terms of its credit operations, and without converting bank deposits into newly issued central bank money on demand. We prove that one unit of the fiat currency is the only arbitrage-free price of a grassroots coin whose issuer meets presentations, and argue that the central bank's lending rate and the rate on its own bonds bound what its counterparties pay and accept on comparable terms; the central bank can choose to deal with any counterparty, not just banks.