Policy Paper 01/2019

Central Bank Digital Currencies: A Survey of the Key Issues

Central bank digital currency (CBDC) is currently a hot topic, discussed in a significant number of central banks as well as in academic circles. As can be expected, there is no clear-cut definition of CBDC. Rather, there are different variants of CBDC being in discussion with mainly one feature in common: It is digital money issued by the central bank. For the purpose of this paper, we focus on CBDC on an account basis that is available for the general public. Thus, in this paper, CBDC is synonym for digital money deposited at the central bank, with every adult being entitled to hold such an account, without any limit to swap deposits against CBDC.

Some 70% of central banks surveyed by the Bank of International Settlement (BIS) are currently engaged in doing research about CBDC, a majority of them from emerging markets. Reasons behind this strong interest are manifold. CBDC might work here as an accelerator towards a cashless society, as the use of cash in economic transactions in many countries is already decreasing in relative terms. Other reasons relate to combatting tax evasion and money laundering, creating more efficient payment systems and addressing the zero lower bound in the monetary transmission mechanism. Among emerging economies, the main motivation to think about the issuance of general-purpose CBDC is payment-efficiency, followed by financial inclusion and payment safety. Monetary policy implementation ranks on the lower end of importance.

The introduction of CBDC (in whatever concrete form) has implications for the stability and the profitability of the banking sector. Proponents of CBDC argue that by creating such “safe money”, a more stable financial system can be achieved by decoupling the payment system from the banking sector, which also reduces the necessity to regulate the banking system in its current form. Banks would become like normal “service” companies in this view. As such a shift would also affect their funding structure (banks in most countries fund themselves mainly through public deposits) and their lending capacity, their profitability would probably suffer.

For central banks, the introduction of CBDC would also affect monetary policy. This relates to likely increased volatility in traditional broad monetary aggregates, the role of the standard policy rate channel, possible elimination of lower bounds on rates (probably not very relevant for emerging markets like Ukraine) and credibility aspects. The latter might be negatively affected by more frequent liquidity interventions, and increased political interference in the activities of the central bank. Possible losses of seigniorage (related to money demand due to illegal activities) might also increase political dependency.

To conclude, over the last few years, a fascinating new topic has emerged in monetary economics. While the majority of this work is theoretical so far, it would be a mistake not to follow the discussion closely, as it might have far-reaching practical implications for the conduct of monetary policy.

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