Understanding central bank digital currencies
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Understanding central bank digital currencies

In our latest podcast, Brian Blackstone catches up with economist Maxime Botteron to discuss the outlook for central bank digital currencies.

Central bank digital currencies, or CBDCs, are a relatively new development. What are they and why are they useful? Here are five areas where CBDCs could be helpful for central banks, financial markets and the public.

1. Improving efficiency in the financial system

Central bank digital currencies are the result of digitalizing the traditional forms of money issued by central banks. Digital currencies can help central banks modernize, by upgrading the technology 'plumbing' of the financial system that financial institutions and the central bank use in their interactions. In turn, this paves the way for efficiency gains in payments, transaction settlements or monetary policy operations.

2. Responding to the decline in bank notes

The world uses ever fewer bank notes, thanks to the rise of mobile payments. The COVID-19 pandemic has only accelerated this trend. CBDCs are a central bank response to the decline in the use of bank notes as a means of payments. By facilitating online or mobile payments to buy goods and services, CBDCs could give households and non-financial companies access to central bank money as an alternative to the notes.

3. Achieving monetary policy goals

Creating a CBDC that is accessible to households and non-financial corporates could help a central bank manage monetary policy. For example, if the central bank wants to boost private consumption, they could issue a specific kind of money that gets to households quickly. In an extreme case, such digital money could even have an expiry date. This would help a government achieve a stimulus program more effectively than current alternatives like sending individuals checks, although we are a long way from this kind of development.

4. Contributing to financial inclusion

CBDCs can contribute to financial inclusion. For example, the Central Bank of the Bahamas has already issued a CBDC. This allows for the extension of financial services to remote populations across hundreds of islands. Digital currencies could increase the options for countries where physical banking services are not available due to geography, and open up the financial system to more people.

5. Maintaining sovereignty over money issuance

Digital currency is often associated with cryptocurrencies like Bitcoin. However, CBDCs are different, primarily because they are a form of government money with a reliable store of value. Due to price volatility, many privately issued cryptocurrencies do not meet this criterion. This advantage would allow a central bank to maintain the sovereignty of money issuance through adopting CBDC.