Central bank digital currencies (CBDCs) and their potential impact on traditional banking and monetary policy: an initial analysis

Central banks around the world are actively considering and developing central bank digital currencies (CBDC) as a response to the declining use and acceptance of physical cash and the rise of private and decentralized digital currencies. CBDCs are a type of central bank digital currency that can be used for a wide range of purposes, including digital payment. Central banks have the potential to provide a cost-effective and inclusive digital payment solution also for the unbanked population and support economic growth. However, the impacts of CBDCs are still uncertain, both in terms of the magnitude and probability of effects. Central banks should have a multifaceted strategy that includes understanding, identifying, managing, and mitigating risks associated with CBDC design to manage unintended macroeconomic consequences. This involves assessing demand for CBDCs, evaluating deposit structures and vulnerabilities to disintermediation, examining the effectiveness of proposed measures like caps, and considering changes in money velocity and monetary policies regimes. Strengthening liquidity management is crucial to mitigate liquidity risks arising from CBDCs funded by bank deposits. Therefore, this paper focuses on the impact of CBDCs on monetary policy, including deposit disintermediation and increased volatility of commercial bank reserves.