Editorial – Special Issue on “Central Bank Digital Currency”

Many central banks around the world have started to explore whether they should issue a central bank digital currency (CBDCs) to make central bank money fit for the future. The latest BIS survey on CBDC (Di Iorio, Kosse, and Mattei 2024), for instance, documents that 81 out of the 86 central banks surveyed are exploring CBDC. While an increasing share is conducting experiments with wholesale CBDC that would be accessible to banks or financial institutions only, work on retail CBDC that could be used by the general public is progressing as well. A CBDC combines elements of currently existing means of payment, i.e., currency and bank deposits. Like currency, it is issued by the central bank. Like deposits, it can be used for digital payments and potentially carries interest. These developments have spurred much research on different aspects of CBDC, in particular on the potential uptake, but also on the implications for monetary policy implementation, bank intermediation, and monetary policy transmission. The current special issue on “Central Bank Digital Currency” comprises five papers that contribute to the rapidly expanding literature on CBDC and add further insights into these topics.

Very few countries have yet adopted CBDC, meaning that empirical research faces severe limitations in terms of data availability. The first paper in this volume is a rare exception as it utilizes transactions data from a retail CBDC pilot project in Thailand that was run from February to September 2023. Based on this data set, which also includes demographic information about users, Synsatayakul et al. (2024) examine how financial service providers (FSPs), individual users, and merchants adopt CBDC for retail payments. They find that individuals tend to use CBDC for various transactions (peer-to-peer, business-to-consumer, and business-to-business) as a payment method rather than as a store of value. The highest average payment values are observed for users aged 55–64 years. In addition, CBDC usage was increased when reward incentives were offered for its use. The study also analyses the behavior of the three FSPs that distributed the CBDC and managed users’ digital wallets. Findings indicated that, to manage their CBDC liquidity, FSPs adjusted their CBDC redemptions rather than CBDC issuances in response to incoming retail payments. A network topology analysis showed that, owing to the small number of FSPs included in the pilot, the two-tier architecture where FSPs acted as intermediaries to distribute CBDC to the individual users resulted in a sparse network for the circulation of CBDC with only few connections. CBDC circulated slowly within the network, suggesting that the two-tier distribution model would benefit from an increase in the number of FSPs in the system as well as wider range of business models and use cases for FSPs.

León, Moreno, and Soramäki (2024) also focus on the payment function of CBDC. They use an agent-based model to build a digital twin of the Spanish retail payment system and simulate the adoption and use of a retail CBDC. Based on data from payment surveys, heterogeneous consumers and merchants are modeled who interact, learn, and adapt their behavior as they meet and use different payment instruments. This approach allows the authors to investigate different design options for the introduction of a digital euro. For instance, top-up limits, anonymity thresholds, and a reverse waterfall functionality and their effect on CBDC adoption and usage can be investigated. It turns out that introducing a retail CBDC without attractive design options and stimulus results in low and slow adoption. The reverse waterfall functionality, a positive remuneration spread, and the distribution of government subsidies via retail CBDC are effective in fostering adoption, whereas balance or top-up limits reduce it. The distribution of government subsidies through retail CBDC is the only option that incentivizes to reduce the use of cash. By combining different design options, policy makers might steer the system toward the desired adoption.

Since a retail CBDC would be a close competitor to bank deposits, much research has investigated the impact of CBDC issuance on the banking system. Auer et al. (2024) examine factors that may affect potential demand for CBDC and the channels through which CBDC demand would impact banks’ balance sheets and, ultimately, the economy. After discussing how CBDC design choices such as remuneration and the degree of privacy may affect the demand for a CBDC, they turn to banks’ adjustment strategies in response to a potential outflow of deposits caused by the substitution of private money with public digital money. Banks need to minimize their funding cost but have to observe also regulatory requirements when replacing deposit outflows with other sources of funding. The authors illustrate the impact of a CBDC on the funding structure and profitability on Italian banks, assuming on different scenarios regarding the size of deposit outflows, banks’ liquidity preferences, and the functioning of the interbank market. They conclude that the overall impact on banks’ funding would be manageable if CBDC take-up was less than 15 % of retail deposits. Larger CBDC take-ups could have a stronger impact on banks’ funding structure, in particular if liquidity in the banking system was low. Larger deposit outflows would also affect banks’ profitability in a more heterogeneous way.

Central bank digital currencies (CBDC) will compete with bank deposits and, therefore, could reduce banks’ ability to fund themselves by attracting retail deposits. In a dynamic bank-run model with a financial accelerator, Bitter (2024) studies how the introduction of an interest-bearing CBDC would affect the risk of bank runs in times of crisis. Bank runs are triggered by beliefs, which allows for distinguishing between bank failures caused by illiquidity or insolvency. Households can invest in CBDC, bank deposits, and capital. Banks provide deposits to households and loans to firms but face a leverage constraint. The central bank can implement its monetary policy in two different ways: either by lending to banks (credit policy) or by purchasing capital (asset purchases). Bitter finds that CBDC reduces banks’ net worth in normal times but mitigates the risk of a bank run in a crisis, in particular if CBDC issuance is counterbalanced by central bank asset purchases. In contrast, if CBDC issuance is complemented by loans to banks, it lowers bank failures due to illiquidity, but only marginally affects bank failures caused by insolvency.

Finally, CBDC also has the potential to affect how monetary policy is conducted and interest rates are transmitted to the real economy. Chen, Hänsel, and Nguyen (2024) investigate the impact of a CBDC on deposit spreads and welfare for different forms of market power in the banking sector, namely bank concentration and imperfect deposits substitutability. CBDC is assumed to be interest bearing and is used as a monetary policy tool. The authors find that the source of market power has important implications for the transmission of CBDC interest rate changes, which generally involve direct and indirect effects. A rise in the CBDC spread directly increases the households’ cost of liquidity. Simultaneously, the rising spread on CBDC enables banks to widen their deposit spreads, leading to an indirect effect. This indirect effect depends strongly on the source of deposit market power. With high concentration in the banking sector, banks can adjust their deposit spreads more, which amplifies the aggregate effects of the CBDC interest rate change. By contrast, if differentiation of deposits is the origin of imperfect competition in the banking sector, the indirect effect is less sizeable. Optimal policy requires offering a deposit subsidy to banks, which increases with market concentration to mitigate distortions from bank market power.