Would a Retail Central Bank Digital Currency Achieve Its Intended Purpose?

Romain Baeriswyl

A chapter in The Emergence of a Tradition: Essays in Honor of Jesús Huerta de Soto, Volume I, 2023, pp 23-34 from Springer

Abstract: Abstract The issuance of a retail central bank digital currency (CBDC) has three purposes: (1) providing the public with a digital central bank money, (2) improving the resilience of digital payments, and (3) promoting diversity and sovereignty in payment systems. The issuance of a retail CBDC is not trivial as it entails a transfer of credit risk from commercial banks to the central bank. To control this transfer of risk, the central bank could either limit the demand for CBDC by charging an unattractive interest rate to it or limit its supply by imposing an individual quantity ceiling on its holdings. These mechanisms—as Gresham’s law teaches us—would undermine the use of CBDC as a medium of exchange, as people would hoard their CBDC free of credit risk and spend their risky bank deposits instead. Retail CBDC could thus miss its intended purpose.

Keywords: Central bank digital currency (CBDC); Central bank; Digital money; Fractional-reserve banking; Gresham’s law; Medium of exchange; Monetary policy (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-17414-8_3

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DOI: 10.1007/978-3-031-17414-8_3

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