The economic consequences of central bank digital currencies

Central bank digital currencies (CBDC) have probably become the most prominent feature in the discussion on the future of payment systems and on money more generally. This section proposes an overview of the macroeconomic benefits and risks of introducing a retail CBDC for non-experts, based on a literature review, with a focus on the euro area and a ‘digital euro’. Such a euro-area retail CBDC would be a new form of money. It would tackle a possible decline in the use or acceptance of cash by ensuring the continued provision of public money and improve the functioning of the payment system. It would also support the European economy’s digitalisation and the European Union’s strategic independence in the context of dominant foreign-based payment providers and the possible emergence of new digital means of payment. However, designing a retail CBDC entails several trade-offs which may have implications for the financial sector. If not properly designed, a retail CBDC may produce disintermediation in the banking system, reduce banks’ funding and lead to increased risk-taking, with consequences for lending and financial stability. However, this should be assessed against the current context of excess reserves. Thus, to reap the benefits of a CBDC the trade-off between more efficient payment systems and risks to the banking system needs to be well managed by choosing an appropriate design for the CBDC. The section does not aim at proposing any specific design option for the digital euro, nor does it preempt content of a possible legislative proposal by of the Commission in any manner, as the concrete implications of the introduction of the digital euro will very much depend on the practical design choices made.