Central bank digital currencies could cut costs for merchants and consumers

In a new paper, researchers Walter Engert and Ben Fung look into the benefits and pitfalls of a non-interest bearing CBDC made available to the general public, examining six reasons that central banks might consider issuing their own digital currencies.

Of the six, increased contestability in payments is deemed by the authors as the most convincing. CBDC could offer an alternative not only to bank notes, but to cheques, debit and credit cards and online transfers.

CBDC would be less costly for consumers than cash, says the paper, while for merchants it would be cheaper than cash and cards because the central bank would not charge any transaction fee.

CBDC could also help with financial stability because it would be "outside money" - as opposed to "inside money" - money claims backed by private credit. However, the paper notes that a shift from bank deposits to CBDC could also have an impact on bank funding and credit provision, which could hurt financial stability.

The researchers suggest that a CBDC could help with financial inclusion in developing countries but note that other options are available for this, pointing to Kenya's M-Pesa as an example.

The anonymity or pseudonymity of a CBDC means that it has no value in inhibiting criminal activity and claims that it could reduce the effective lower bond on interest rates do not convince. Meanwhile, there is no "meaningful concern" in most countries about preserving seigniorage or maintaining adequate central bank money for the general public.

The paper suggests central banks proceed with caution and concludes with a question:

"[T]o the extent that demand for bank notes decreases over time...an interesting question is whether a central bank liability that is accessible to the general public, like cash or CBDC, is desirable from a social-welfare perspective. Is it sufficient for a central bank to supply only reserves to qualified financial institutions? Put differently, is a 'cashless society' a sound outcome?"

Read the full paper: