Don’t Break the Bank: Economic Considerations and Design Implications for a Central Bank Digital Currency

Advances in technology allow us to buy and sell goods and services at the touch of a button, transfer money from one part of the world to another in seconds, and pay for purchases with our phones instead of with cash or bank cards. Digitalisation has radically changed the manner in which households and businesses interact with the financial system and complete everyday transactions.

In recent years, new forms of digital assets such as cryptocurrencies, stablecoins, and other forms of decentralised finance have exploded in popularity. In theory, these forms of finance are “decentralised” meaning that no single entity, such as a central bank, has control over their supply.

In response to these developments, and to provide an alternative to privately-issued forms of digital currency, more than 100 central banks throughout the world are currently exploring the creation of a central bank digital currency (CBDC).  

This paper by IIEA Senior Economics and Finance Researcher, Daire Lawler, examines what the issuance of a CBDC could mean for economies and societies in the euro area and internationally. Taking account of specific economic implications, it assesses how to ensure an effective design of a retail CBDC that protects financial stability.