Central bank digital currencies: policy and design

Key points

• Central bank digital currencies (CBDC) are designed to allow direct access to a central bank’s deposits also to households
• Currently, a vast majority of central banks are engaging in CBDC research
• CBDC is neither a cryptocurrency nor a totally new technology, but rather a natural evolution of money in order to cope with rapid technological progress
• Design features must be carefully assessed, as to not to interfere with existing monetary goals
• However, CBDC’s costs and benefits are not limited to the monetary sphere, as they extend into the social and environmental realm
• Monetary policy and financial stability are key points on the CBDC research agenda
• Several solutions to financial stability risks have been proposed, particularly solutions based on the concept or quantity rationing or interest rate tiering of CBDC
• Broader macroeconomic and strategic geopolitical effects (e.g. ‘first-mover advantage’) of CBDC must be accounted for
• The future co-evolution of traditional and digital currencies is still an open question

This paper discusses the potential benefits and the challenges of central bank digital currencies (CBDC), i.e. collateralised digital currencies issued by a monetary authority. Starting with a brief review of money, we then analyse both the similarities and differences between digital and traditional currencies. We also consider the advantages of a CBDC over a private sector digital currency. While providing a summary of existing relevant research, we highlight the importance of digital currencies for future research in other areas of economics.