Central bank digital currencies -design principles and balancesheet implicationsWorking papers set out research in progress by our staff, with the aim of encouraging comments and debate.Central bank digital currencies ‐ design principles and balance sheet implications | Bank of England Page 1Published on 18 May 2018Staff Working Paper No. 725By Michael Kumhof and Clare NooneThis paper sets out three models of central bank digital currency CBDC that differ in the sectors that have access to CBDC. Itstudies sectoral balance sheet dynamics at the point of an initial CBDC introduction, and of an attempted large-scale run out of bankdeposits into CBDC. We find that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced,credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC isaddressed. The core principles are i CBDC pays an adjustable interest rate. ii CBDC and reserves are distinct, and not convertibleinto each other. iii No guaranteed, on-demand convertibility of bank deposits into CBDC at commercial banks and therefore byimplication at the central bank. iv The central bank issues CBDC only against eligible securities principally government securities.The final two principles imply that households and firms can freely trade bank deposits against CBDC in a private market, and thatthe private market can freely obtain additional CBDC from the central bank, at the posted CBDC interest rate and against eligiblesecurities.Central bank digital currencies - design principles and balance sheet implications Central bank digital currencies ‐ design principles and balance sheet implications | Bank of England Page 2