CBDCs will likely never be a large part of the overall money supply, however, which mainly consists of financial-system deposits (rather than those at a central bank). In our view, they will coexist with both cash and existing forms of electronic money, rather than replacing them. We believe the demand for paper money will ensure that it will not be eliminated in most countries for decades or even longer.
In this short paper, we discuss how disruptive CBDCs are likely to be and dispel some commonly held CBDC myths.
CBDCs’ Potential for Disruption
In theory, CBDCs could be significantly disruptive, as they could compete with bank deposits, facilitate capital flight, or have substantially different characteristics. For example, they could automatically pay negative interest rates or even have an expiration date.
In practice, however, we do not believe CBDCs will be as disruptive as commonly advertised. We think policymakers are aware that if central banks compete with the nonsovereign financial sector, it will result in disintermediation.2 Thus, in our view, policymakers will ensure CBDCs are, in most relevant ways, a complement instead of a substitute for private-sector money and financial services.
Notably, we believe fintech3 will thrive in a CBDC world, and CBDCs will become important inputs that can be leveraged for all sorts of financial products for individuals, firms, and governments alike. They could enable much more precise and targeted macro policy, for example, by providing stimulus and subsidies directly to specific groups of people, such as by age group, geography, or occupation status.
Debunking Common CBDC Misconceptions
As market interest in CBDCs grows, we believe they have caused some consistent misconceptions. Here, we look to dispel five of the most frequently discussed CBDC myths.
Misconception #1: CBDCs Are New
In the past, it was common for central banks to accept retail deposits. For example, the Bank of Spain did so until 1962. In addition, central bank digital currency (in retail form) existed as early as the 1990s, when Finland introduced the Avant Card. However, central-bank retail deposits were abolished so that central banks would not compete with the rest of the financial system. And the Avant Card failed because its network of users was too small. So, what is new is not CBDCs, but the fact that they can now quickly establish themselves within modern digital networks, where buyers and sellers can access them effortlessly and ubiquitously.