Central bank digital currencies: alternatives, benefits and risks

Advances in financial innovation, a declining use of cash in some countries and the introduction of private digital tokens have spurred central banks to consider issuing digital currencies of their own. Central bank digital currencies (CBDCs) would introduce a new central bank liability that is different from cash and reserves or settlement balances held by commercial banks. This would change the characteristics of central bank money, notably in terms of access and remuneration. Since central banks steer the financial system by calibrating the accessibility and terms of central bank money, this could have major implications for the structure and stability of the financial system. This paper analyses possible benefits and risks of CBDCs for the functioning of the financial system. The focus is on two stylised variants: a general purpose CBDC primarily directed at households and small and medium-sized enterprises (SMEs), and a CBDC that functions as a settlement instrument and safe asset in wholesale financial markets. While the general purpose CBDC variant would be broadly available to the general public, whereas the wholesale variant would only be accessible to (foreign) banks, non-banking financial institutions (NFIs) and large non-financial corporations (NFCs).