Central bank digital currency

Abstract

This chapter aims to employ the most up-to-date literature to shed light on the aims, working mechanisms and likely macroeconomic impact of Central Bank Digital Currency (CBDC). It describes payment systems to distributed ledger technology (DLT)-based ones. The chapter explains the working mechanisms of CBDC, providing some real-world examples. It discusses some of the potential benefits and macroeconomic risks associated with CBDC. A payment system is a collection of technologies, laws and contracts that allow payments to occur and determine when a payment effects a settlement. The volume of electronic payments processed by central banks’ clearinghouses has been rising. DLT-based payment systems have some potential benefits, and they also present some challenging aspects. Token-based retail CBDCs are meant to be the digital version of cash. Hence, the general public would be granted direct access to central banks’ liabilities. Turning to monetary policy, CBDCs’ effects on policy rates largely depend on CBDC design.