Central Bank Digital Currency: Benefits and Drawbacks

Abstract

Prompted by technological advances and a decline in cash usage, many Central Banks are investigating whether it would be possible to issue a digital complement to cash, a so-called Central Bank Digital Currency (CBDC). Despite ongoing research and occasional pilots, Central Banks have shied away from introducing a CBDC for public use. Even though CBDCs would have the potential to counteract some of the problems that could arise for the payment system in the future when the use of cash is rapidly declining, they also present significant risks for financial stability. This article contributes to the discussion by setting out a CBDC framework and formulating broad design principles for CBDC in line with the central bank´s function as Lender of last Resort (LOLR). The attributes and functionality of a CBDC are highly determinative of the architectural design and technical solution chosen, particularly in the context of LOLR. Therefore, we argue in favour of a solid coin for e-emergency liquidity assistance, available 24 hours a day and seven days per week, anonymous, interest-bearing and unlimited, to prevent bank runs and restore financial stability in times of financial distress.