Central Bank Digital Currency (CBDC): potential problems and benefits

Central Bank Digital Currency (CBDC): potential problems and benefits - 1CBDC 770x433

Some central banks have highlighted many potential benefits of CBDC implementation. Let's see some:

  • Cost of cash: In some countries the cost of managing cash is very high, due to the vastness of the territory or the presence of particularly remote areas. CBDC could lower the costs of these operations by providing sustainable national payment methods.
  • Payment system stability: Government institutions are concerned about the growing spread of digital currencies controlled by a few powerful private companies. In this context, the CBDC could represent a way to preserve and strengthen central bank payment systems.
  • Disciplining the market: Regarding the previous point, some central banks see the CBDC as a potential competitor of the big payments companies, and consequently a concrete way to limit their profits. In addition, it could reduce or prevent the emergence of new digital currencies that are difficult to manage.
  • Support for Distributed Ledger Technology (DLT): Given the growing presence of companies based on DLT, it would be desirable to have a CBDC that facilitates payments for the services offered by these companies. Some central banks are considering the idea of ​​providing a CBDC only to countries that encourage the development of these businesses.
  • Monetary policy: Some scholars argue that a CBDC would increase the response of the local economy to the reference rate. Furthermore, in periods of prolonged crisis, it would be useful to charge negative interest rates, thus breaking the minimum limit of the zero rate.
  • Despite these hypothetical benefits, significant critical issues also emerge. Some of these could be mitigated by an appropriate CBDC architecture.
  • Compression of the banking system: Should the CBDC begin to occupy a large volume in the financial sector, the banks could be forced to increase the costs of services and the interest rates on loans and loans, even in normal times. This could be resolved by carefully studying the commissions on CBDC services, also to ensure that it does not become, trivially, an alternative to cash.
  • Bank Escape Risk: In times of crisis, bank clients could flee to the CBDC, possibly seen as a safer and more available place. However, in many cases, the credibility and guarantees offered by banks could deter customers from escaping. Furthermore, often the escape from banks coincides with the escape from the currency in crisis to foreign currencies. And this would happen regardless of the existence of a CBDC.
  • Banks' balance sheet and investments: Seeing that profits fall, it is plausible that banks decide to make investments outside the bank itself, renouncing its independence and opening up to political interference.
  • Central Bank Costs and Risks: Supporting the implementation of the CBDC would be very costly for central banks, which would have to strengthen their basic system to remain competitive. This means increasing the quantity and quality of services, offering constant technical analysis, improving the technology in use and much more, otherwise the public reputation will be compromised.

Basically, each country should evaluate the pros and cons of the CBDC case, based on the particular circumstances that concern it.