Central bank digital currencies: motives, economic implications and the research frontier

Summary

Focus

A growing academic literature examines the economic implications of central bank digital currencies (CBDCs). The main focus is on their "reserves for all" aspect and the balance sheet issues for central banks, as well as the implications for monetary policy and financial stability. By contrast, in policy circles, the emphasis is on designing CBDCs to achieve public policy goals within the current two-tier payment system. This implies a division of labour between the public and private sector, thus keeping the footprint of the central bank limited.

Contribution

We bridge the academic and policy perspectives on CBDCs. The paper gives a guided tour of the growing literature on the operational architectures for CBDCs, focusing on the technologies and the implications for privacy. We further examine the macroeconomic implications for the financial system, financial stability and monetary policy. We highlight issues for future research.

Findings

By issuing CBDCs, central banks will aim to improve the current two-tier payment system. The policy goals include payments inclusion and efficiency, as well as safeguarding competition, data privacy and payment system integrity. In this way, CBDCs respond to the digitalisation of the economy and the key role of data in the monetary system.

Regarding the macroeconomic implications of CBDCs, the literature focuses on three main themes: the effects of CBDC issuance on bank lending, their implications for financial stability, and their use as a new monetary policy tool.

Important questions remain open on CBDCs and cross-border payments, areas in which policy development is moving beyond the research stage. Here, research insights could inform the design and international coordination of CBDC projects. The challenges include understanding the international implications of CBDC issuance for issuing and receiving countries, and how CBDCs might improve cross-border payments and help to integrate (digital) economies.

Abstract

In just a few years, central banks have rapidly ramped up their research and development effort on central bank digital currencies (CBDCs). A growing body of economic research informs these activities, often focusing on the "reserves for all" aspect of CBDCs for retail use. However, CBDCs should be considered in the full context of the digital economy and the centrality of data, which raises concerns around competition, payment system integrity and privacy. This paper gives a guided tour of the growing literature on CBDCs on the microeconomic considerations related to operational architectures, technologies and privacy, and the macroeconomic implications for the financial system, financial stability and monetary policy. A set of questions, particularly on the cross-border dimensions of CBDCs, remains unresolved, and calls for further work to expand the research frontier.

Keywords: money, digital currencies, central banks, central bank digital currencies, CBDC, stablecoins, cryptocurrencies, distributed ledgers, big tech, data privacy.

JEL classification: C72, C73, D4, E42, E58, G21, O32, L86.