Central Bank Digital Currencies: The Motivation

A growing number of central banks are considering the issuance of central bank digital currencies (CBDCs). Upon their introduction and depending on their exact design, CBDCs may have considerable consequences for deposit insurers as well. In the first of a set of papers, this Fintech Brief sets out four of the main motivations for issuing CBDCs. Acknowledging considerable divergences across jurisdictions, we find: • CBDCs for the general public (“retail CBDCs”) would constitute a central bank liability and a form of digital cash. To the public, they would be an alternative to central bank issued cash and private money, such as bank deposits. • A large and growing share of central banks are experimenting with retail CBDCs. Some 20% of central banks indicate that they are likely to issue a retail CBDC by 2026, 40% indicate this is “possible”. • Short-term monetary policy considerations are unlikely to play a significant role in central banks’ motivation for CBDCs. • Whereas central banks in emerging markets and developing economies note that CBDCs may contribute to promoting financial inclusion, in advanced economies, CBDCs are not the most straightforward instrument in doing so. • The evolution of payments plays a pivotal role in developing CBDCs. Given the declining role of cash in some jurisdictions, CBDCs as a new form of central bank money may contribute to safeguarding trust in the public currency. However, the available CBDC amounts necessary for that purpose may cause conflicts with likely and financial-stability-related limits on the volume of CBDCs that individuals may hold. • As CBDCs would offer an alternative payment solution, they would contribute to resilience in future payment markets that may be privately dominated. However, given their digital nature, CBDCs may well be subject to similar cybersecurity and other digital risks that apply to private payment systems. • CBDCs may contribute to competition and efficiency in an otherwise oligopolistic market for payment services, dominated by BigTechs. While potentially challenging to implement, a regulatory or competition-law-based response may be possible and would be less intrusive than introducing a CBDC. • Central banks face the risk of large-scale use by the public of private or public (i.e. CBDC) digital currencies, not denominated in the domestic currency. These currencies may play a decisive role in the economy, and if foreign-based, largely out of reach of domestic legislation. CBDCs and/or private payment solutions in the domestic currency may assist in mitigating this risk, given sufficient demand for these.