A World with Central Bank Digital Currencies

IMF Research Perspectives is the new online newsletter covering updates on IMF research.


IMF Research Perspectives is the new online newsletter covering updates on IMF research.

Illustration: Fabio Bolzan/David Hunt


Every day, it seems, brings a new privately issued digital (and crypto) currency. These may not be alone for much longer. Central banks are considering issuing their own digital currency, or CBDC. CBDC seems a natural next step in the evolution of official coinage (from metal-based money, to metal-backed banknotes, to physical fiat money). A recent study by a group of IMF economists considers how life would change, if at all, in a world with CBDC.

While banks have been using digital forms of payment for interbank transactions and settlement for quite some time, CBDC would entail a digital form of fat money that could serve as legal tender for transactions by the public at large. Like its physical equivalent-cash-CBDC would satisfy the traditional functions of money: a unit of account, a means of payment, and a store of value.

But would there be any demand for CBDC, and why might central banks wish to dust off their payment systems to introduce something new? Users may not necessarily swarm to CBDC, at least not in all countries. Payments in commercial bank deposits are becoming increasingly efficient and user-friendly, as banks partner with tech companies such as Apple, and central banks roll out improved back-end systems to clear retail transactions. Even in lower-income countries, private sector initiatives such as the mobile-phone-based money transfer system, M-Pesa, are facilitating transactions. Nevertheless, in countries with underdeveloped payment systems, there may well be demand for CBDC. And CBDC allowing for anonymous small-value transactions may one day replace cash, which will seem increasingly anachronistic as our lives become more digital.

Why might central banks consider introducing a digital currency? One reason is to encourage financial inclusion. CBDC could reduce costs to access money and related services by those not part of the banking system and by inhabitants of remote areas. Another reason is to reduce costs associated with cash.1 Some also believe that a palatable alternative to private forms of money is essential for healthy competition-to keep prices low and quality high.

And if cash were to eventually disappear, an interest-bearing CBDC could help sustain policies of interest rates below zero.2 Severe recessions could be easier to fight without relying on unconventional monetary policies (such as quantitative easing and forward guidance).

What could be the risks associated with CBDC that might make central banks reluctant to introduce it?

The design of CBDC in terms of anonymity (traceability of transactions), security, transaction limits, and interest earned will largely determine its risks. A CBDC design that mimics the features of bank deposits could divert funds from banks and increase their cost of funding and, consequently, the cost of financing for borrowers. Also, the adoption of a CBDC could facilitate runs from the banking system during periods of financial stress.

However, the potential costs and risks can be contained through design choices and policies. For example, a central bank could limit the risk of deposit fight by setting limits on individual CBDC holdings. In addition, during episodes of runs, a central bank could lend the funds it collects from deposits back to banks, and more easily service withdrawal requests from bank clients.

CBDCs may become a reality soon. IMF research suggests that its popularity and impact will largely depend on its design features and, while risks exist, policies can be introduced to mitigate the costs and increase the benefits.


See Assenmacher and Krogstrup (2018) “Monetary Policy with Negative Interest Rates: Decoupling Cash from Electronic Money,” IMF WP 18/191 https://www.imf.org/~/media/Files/Publications/WP/2018/wp18191.ashx and Agarwal and Kimball (2015) “Breaking Through the Zero Lower Bound,” IMF WP 15/224 https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Breaking-Through-the-Zero-Lower-Bound-43358