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The pros and cons of issuing a central bank digital currency

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Abstract

Over the past decade the financial services industry has been disrupted by a range of new technologies. This has included the launch of new, private, digital currencies such as Bitcoin. In this environment, central banks are considering how they can take advantage of these new technologies to help deliver their core functions. This article contributes to this discussion by evaluating the pros and cons of a public digital currency issued by a central bank across four functional areas: currency distribution, payments, monetary stability and financial stability. We distinguish between two kinds of digital currency – ‘conventional’ digital currencies, which rely on existing payments technology to operate, and crypto-currencies which rely on distributed ledged technology (similar to Bitcoin). We find the pros and cons of a central bank issuing a digital currency are mixed across each of the central bank functions, revealing the complexity in evaluating such a currency. In particular, we find the implications for monetary policy and financial stability could be significant, both positively and negatively.

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  • Amber Wadsworth, 2018. "The pros and cons of issuing a central bank digital currency," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 81, pages 1-21, June.
  • Handle: RePEc:nzb:nzbbul:june2018:7
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    File URL: https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2018/2018jun81-07.pdf
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    References listed on IDEAS

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    1. Matthew Wright, 2016. "The imagery and themes of the Series 7 ‘Brighter Money’ banknotes," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 79, pages 1-17, December.
    2. Ben Fung & Scott Hendry & Warren E. Weber, 2017. "Canadian Bank Notes and Dominion Notes: Lessons for Digital Currencies," Staff Working Papers 17-5, Bank of Canada.
    3. Ali, Robleh & Barrdear, John & Clews, Roger & Southgate, James, 2014. "The economics of digital currencies," Bank of England Quarterly Bulletin, Bank of England, vol. 54(3), pages 276-286.
    4. Barrdear, John & Kumhof, Michael, 2016. "The macroeconomics of central bank issued digital currencies," Bank of England working papers 605, Bank of England.
    5. Warren E. Weber, 2015. "Government and Private E-Money-Like Systems: Federal Reserve Notes and National Bank Notes," Staff Working Papers 15-18, Bank of Canada.
    6. Mohammad Davoodalhosseini & Francisco Rivadeneyra, 2018. "A Policy Framework for E-Money: A Report on Bank of Canada Research," Discussion Papers 18-5, Bank of Canada.
    7. Ben Fung & Hanna Halaburda, 2016. "Central Bank Digital Currencies: A Framework for Assessing Why and How," Discussion Papers 16-22, Bank of Canada.
    8. Sarah Drought & Roger Perry & Adam Richardson, 2018. "Aspects of implementing unconventional monetary policy in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 81, pages 1-22, May.
    9. Meyer Aaron & Francisco Rivadeneyra & Samantha Sohal, 2017. "Fintech: Is This Time Different? A Framework for Assessing Risks and Opportunities for Central Banks," Discussion Papers 17-10, Bank of Canada.
    10. Warren E. Weber, 2015. "Government and Private E-Money-Like Systems: Federal Reserve Notes and National Bank Notes," Staff Working Papers 15-18, Bank of Canada.
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    Cited by:

    1. Barry Eichengreen, 2019. "From Commodity to Fiat and Now to Crypto: What Does History Tell Us?," NBER Working Papers 25426, National Bureau of Economic Research, Inc.
    2. Ansgar Belke & Edoardo Beretta, 2019. "From Cash to Central Bank Digital Currencies and Cryptocurrencies: a balancing act between modernity and monetary stability," ROME Working Papers 201909, ROME Network.

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