Central Bank Digital Currency
A central bank digital currency is digital money issued by the central bank, a direct liability like cash but in electronic form. Designs split into retail versions for the public and wholesale versions for banks, with choices over privacy, interest, and limits. Because it is a direct claim on the central bank, a retail CBDC can pull deposits out of commercial banks (disintermediation), so many designs add holding limits or pay little or no interest.
Why it matters
Today the public holds central bank money only as physical cash, while bank deposits are private money. A retail CBDC would give households a digital claim directly on the central bank, a kind of digital cash. Because it is the safest possible asset, in a panic households could shift from deposits to the CBDC fast, a digital run, which is exactly why designs cap balances and pay low or no interest.
Worked examples
How would holding a retail CBDC differ from holding a bank deposit?
A CBDC is a claim on the central bank itself, so it carries no commercial-bank default risk and, in many designs, settles without a commercial bank in between. A deposit is a claim on a private bank.
A financial scare hits and a popular retail CBDC already exists. What is the danger for banks?
Depositors can shift from bank deposits to a risk-free CBDC instantly, accelerating a run on banks. Holding caps and low or no interest on the CBDC are designed to blunt this disintermediation.
Common mistakes
- ✗A CBDC is a cryptocurrency. It is centralised central bank money, not a decentralised crypto asset validated by consensus.
- ✗A CBDC must end cash. The agreed foundational principles call for it to coexist with cash and do no harm to monetary and financial stability.
- ✗A CBDC has no effect on banks. It competes directly with deposits and can reshape how banks fund themselves, which is why disintermediation is a central design concern.
Revision bullets
- •Digital central bank money, a direct central bank liability
- •Retail for the public, wholesale for banks, coexists with cash
- •Can disintermediate banks, so caps and low or no interest
Quick check
A central bank digital currency is best described as
Why do many CBDC designs include holding limits or pay no interest?
Connected topics
Sources
- Mishkin (2018), Ch. 3Mishkin, F. S. The Economics of Money, Banking, and Financial Markets. 12th ed. Pearson, 2018. ISBN 978-1-292-26885-9.Background on money and the payment system.
- BIS (2020)Bank for International Settlements and a group of seven central banks. Central Bank Digital Currencies: Foundational Principles and Core Features. BIS, October 2020. bis.org/publ/othp33.htmThe foundational principles and the design features that address disintermediation and financial-stability risks.