MASARYK
UNIVERSITY
FACULTY OF ECONOMICS AND ADMINISTRATION
The Impact of Central Bank Digital Currency
on Economic Policy
Bachelor's Thesis
IVAN FURSIN
Supervisor: Mgr. Ing. Ondfej Spetik, Ph.D.
Department of Public Economics
Degree Programme: Economics and Public Policy
Brno, Spring 2025
MUNI
E C O N
Bibliographie record
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Ivan Fursin
Faculty of Economics and Administration
Masaryk University
Department of Public Economics
The Impact of Central Bank Digital Currency on Economic Policy
Economics and Public Policy
Economic Policy
Mgr. Ing. Ondfej Spetik, Ph.D.
2024/2025
68
Central Bank Digital Currency, Macroeconomics, Economic Policy,
Systematic Literature Review, Financial Economics, International
Finance
Abstract
Recently, a new concept of central bank digital currency (CBDC) has emerged in the
financial system. It has attracted significant attention and promises huge potential for the
economy. The thesis is focused on identifying the impact of the introduction of CBDC on
economic policy by conducting a systematic literature review and synthesizing existing
knowledge into a comprehensive overview. The systematic literature review is done in
accordance with PRISMA 2020 framework. Findings suggest that CBDC may deliver
various benefits, serve as a valuable policy instrument, and promote innovation and
inclusion in the financial system. However, the adoption of CBDC may also entail certain
risks that could be largely addressed with appropriate measures. Overall, CBDC may
be worth adopting, however, it depends on the policy objective of the central bank and
the general economic context.
Declaration
Hereby I declare that this paper is my original authorial work, which I have worked
out on my own. All sources, references, and literature used or excerpted during elaboration
of this work are properly cited and listed in complete reference to the due source.
Brno, 14. April 2025
Author's signature
UIM I
ECO
MASARYKOVA U N I V E R Z I T A
FACULTY OF ECONOMICS AND A D M I N I S T R A T I O N
L I P O V Á 4 1 A , 6 0 2 00 BRNO
I Č : 0 0 2 1 6 2 2 4
D I Č : CZ 0 0 2 1 6 2 2 4
B A C H E L O R ' S
T H E S I S D E S C R I P T I O N
Academic year: 2024/2025
Student: Ivan Fursin
Programme: Economics and Public Policy
Title of the thesis/dissertation: The Impact of Central Bank Digital Currency on Economic
Policy
Title of the thesis in English: The Impact of Central Bank Digital Currency on Economic
Policy
Thesis objective, procedure and methods used: Thesis objective, procedure and methods used
The concept of Central Bank Digital Currency (CBDC) has become
one of the new highly discussed topics in
FinTech and public policy literature. The adoption of CBDC and
its potential has attracted significant attention
from international organizations and central banks. The thesis
is focused on identifying the potential of CBDC
technology in relation to economic policy. The aim of the thesis
is to conduct a systematic literature review on
the impact of the introduction of CBDC on economic policy,
synthesizing existing knowledge into a comprehensive over­
view.
The research is performed in accordance with the PRISMA
2020 systematic literature review framework.
The thesis structure includes background information about
the technology, outline of the research methodology,
analysis of literature, and interpretation of the results
Extent of graphics-related work: According to thesis supervisor's instructions
Extent of thesis without supplements: 35 - 45 pages
Literature: Barrdear, J., & Kumhof, M. (2022). The macroeconomics
of central bank digital currencies. Journal of
Economic Dynamics and Control, 142, Article 104148.
https://doi.Org/10.1016/j.jedc.2021.104148
Das, M., Mancini Griffoli, T., Nakamura, F, Often, J.,
Soderberg, G., Sole, J., & Tan, B. (2023). Implications
of central bank digital currencies for monetary policy
transmission. Fintech Notes, 2023 (010), Article A001.
https://doi.org/10.5089/9798400252792.063
European Central Bank. (2023). A stocktake on the
digital euro. https://www.ecb.europa.eu/euro/digital_
euro/timeline/profuse/shared/pdf/ecb.dedocs231018.en.pdf
Infante, S., Kim, K., Orlik, A., Silva, A. F., & Tetlow, R. J.,
(2022). The Macroeconomic Implications of CBDC: A Review
of the literature. Finance and Economics Discussion Series,
2022-076, 1-65. https://doi.org/10.17016/feds.2022.076
PAGE 1 OF 2
World Bank. (2021). Central bank digital currency: background
technical note, https://doi.org/10.1596/36766
Thesis supervisor: Mgr. Ing. Ondfej Spetik, Ph.D.
Thesis supervisor's department: Department of Economics
Division of Legal Education
Faculty of Economics and Administration
Thesis assignment date: 2024/02/29
The deadline for the submission of Bachelor's thesis and uploading it into IS can be found in the academic year
calendar.
In Brno, date: 2025/03/10
PAGE 2 OF 2
Acknowledgements
I would like to thank my supervisor, Dr. Ondfej Spetik, who provided me with invaluable
support and guidance throughout the writing process of this thesis. Their expertise and
encouragement were essential in helping me complete this bachelor thesis.
Contents
List of Tables 13
List of Figures 15
List of Terms and Abbreviations 17
Introduction 19
1 Background 21
1.1 Definition 21
1.2 Design and architecture 22
1.3 Countries exploring CBDC 23
1.3.1 Nigeria 23
1.3.2 European Union 23
2 Methodology 25
2.1 Literature selection 26
2.2 Search procedure 26
2.3 Synthesis procedure 27
3 Results 29
3.1 Statistics 30
4 Synthesis 35
4.1 Financial stability 35
4.1.1 Bank disintermediation 36
4.1.2 Bank intermediation 37
4.1.3 Bank runs 38
4.1.4 Other considerations 38
4.1.5 Addressing instability risks 39
4.2 Monetary policy 40
4.2.1 Credit allocation 41
4.2.2 Monetary policy transmission 41
4.2.3 Fiscal transfers 42
4.2.4 Effective lower bound 43
4.2.5 Transparency 44
4.2.6 Operational risk 44
4.3 Financial innovation 44
4.3.1 Payment system industry 45
4.3.2 Payment standard 45
4.3.3 Benefits and costs 46
4.4 Financial inclusion 46
4.4.1 Barriers 46
4.4.2 Addressing exclusion 47
4.4.3 Broader financial inclusion 47
4.4.4 Informal economy 48
4.5 International financial system 48
4.5.1 International CBDC architecture 49
4.5.2 International risks 49
4.5.3 Addressing risks 51
5 Discussion 53
5.1 Impact perspectives 53
5.2 Policy and research considerations 55
Conclusion 57
References 59
A Excluded Literature 65
List of Tables
2 Literature sources
List of Figures
1 PRISMA 2020 systematic review flow diagram 29
2 Literature publication years 31
3 Literature methodology types 31
4 Literature publishers 32
5 Literature word cloud 33
6 Mind map of impact perspectives 55
List of Terms and Abbreviations
BIS - Bank for International Settlements
BOC - Bank of Canada
BOE - Bank of England
BOJ - Bank of Japan
CBDC - central bank digital currency
C B N - Central Bank of Nigeria
DLT - distributed ledger technology
DSGE - dynamic stochastic general equilibrium
ECB - European Central Bank
E U - European Union
Fed - Federal Reserve System
IMF - International Monetary Fund
OECD - Organization for Economic Co-operation and Development
P2P - peer-to-peer
PRISMA - preferred reporting items for systematic reviews and meta-analyses
PSP - payment service provider
SNB - Swiss National Bank
Introduction
Recently, a new concept in the financial system has emerged: central bank digital currency
(CBDC). It promises many new possibilities for households, firms, and governmental
institutions. The adoption of CBDC has attracted significant attention from international
organizations and central banks. CBDC has large potential and I believe that an introduction
of it may provide extensive economic benefits, valuable policy instruments, and
further financial innovation.
The thesis research is focused on identifying the potential of CBDC technology
concerning economic policy. Given that this is a new technology, there is a limited
possibility of conducting empirical studies, however, there is already a considerable
amount of literature published by credible authors and institutions which can provide
valuable insight about it. The aim of the thesis is to conduct a systematic literature review
on the impact of the introduction of CBDC on economic policy, synthesizing existing
knowledge into a comprehensive overview. The reporting of the research is performed in
accordance with the PRISMA 2020 systematic literature review framework as described
by Page etal. (2021).
The thesis structure has five main chapters: (1) background, describing essential
context information for further analysis; (2) methodology, outlining procedures used in
the research; (3) results, reporting literature review procedure and statistical findings; (4)
synthesis, providing a detailed overview of the literature; and (5) discussion, presenting
a high-level summary of main findings and other research considerations.
19
1 Background
Money serves a crucial role in every economy. It facilitates a smooth and efficient movement
of economic transactions, enabling the flow of economic resources. There are three
fundamental functions of money: (1) medium of exchange; (2) unit of account; and
(3) store of value. These functions are commonly considered essential for the proper
functioning of money in an economy. In addition to that, many different kinds of money
exist. They are commonly structured into a hierarchy composed of regular central bank
currency on top, bank deposits in the middle, and other near-money financial assets at
the bottom (Suchánek, 2024). The appearance of central bank digital currency is likely
to dramatically change this long-standing hierarchy
The world economy is evolving and money should also adapt to satisfy its needs.
Modern economies have extensively digitized in the span of only a few decades and
the form of money has also significantly changed. The entire financial system is built
around the old monetary system based on cash. Many alternatives have appeared such
as banking cards that slowly replace cash. For example, in the E U a significant portion
of transactions at the point of sale are cashless, especially those with considerable
amounts of money (Esselink & Hernandez, 2017). Another important development that
may show the interest of the public in new monetary technology has been the rise of
cryptocurrencies in the 2010s.
All of this development made central banks and other organizations consider a better
alternative that would fundamentally change the monetary system. This has led to
the creation of the concept of central bank digital currency which is a digital currency
issued and controlled by the central bank. Their adoption would provide better and
more secure financial services, and let governmental institutions such as central banks
have more control over the monetary system, and thus the whole economy. However,
there are concerns that CBDC may also bring certain risks which should be considered. I
believe that CBDC will significantly impact the economic policy of countries that choose
to adopt it, and in this research, the potential impact is analyzed.
This section provides comprehensive background information about CBDC technology
that is necessary to understand further analysis.
1.1 Definition
As already mentioned CBDC is essentially a digital currency that is issued by the central
bank. For instance, Ozili (2023) defines CBDC as a digital form of money issued by the
central bank that is equivalent to physical cash.
Another important concept in the context of CBDC is distributed ledger technology
(DLT). It initially came from peer-to-peer (P2P) technologies that were developed during
the rise of the internet. P2P represents peers or nodes which are computers that may
directly exchange data with any other node on a network without intermediaries or a
centralized entity. DLT refers to a network of P2P nodes that exchange a ledger which
could be thought of as a database consisting of any information that is synchronized
across all the nodes. In the context of CBDC, the ledger contains records of financial
21
i . BACKGROUND
transactions that are synchronized across the network and updated as new transactions
occur. (Natarajan et al., 2017)
DLT is commonly used for critical systems because it has the advantages of being
decentralized, transparent, programmable, verifiable, resilient, and generally more
efficient. For example, DLT is the underlying technology that powers blockchain in many
cryptocurrencies. (Natarajan et al., 2017)
CBDC is a broad concept that may apply to many kinds of digital currencies issued
by central banks which may vary in architecture, design, and purpose. Because of this,
it is important to identify the most common design and architectural differences. The
following sections aim to explore possible CBDC implementations from the literature
and countries that are researching it.
1.2 Design and architecture
It is important to highlight that the design primarily depends on the chosen policy
objectives for implementing CBDC and its purpose. Furthermore, the potential impact
of a particular CBDC may differ depending on the implementation and environment.
Design considerations in the research will be addressed in the methodology section. This
section presents the key potential differences in CBDC implementation. The information
is based on a report by Bossone and Ardic (2021) which provides a comprehensive
overview of CBDC design features and useful context for further analysis in subsequent
sections.
There are three potential purposes outlined in the report: (1) CBDC is aimed to
replicate the properties of physical cash and become equivalent to cash; (2) CBDC is
aimed to become more of a monetary policy tool; and (3) CBDC would have accountbased
design instead of token-based design. In the first design option, it would have
properties of physical cash and would not differ much in terms of features. In the second
design option, it is the same as the first but CBDC would be able to bear interest which
could potentially improve monetary policy. The third design option would be similar
to the first except the token-based system is replaced with an account-based system.
Essentially, token-based means that tokens would have a certain value and they would
assigned to an agent, while account-based is where accounts are assigned with a certain
balance. The main difference is that under token-based there may be anonymity, while
under account-based the anonymity of agents would be lost. In addition to that, the
central bank may also limit access to CBDC only to certain institutions or make it public
for everyone. (Bossone & Ardic, 2021)
Architecture choice is another possible difference in implementation. There are two
options: (1) one-tier model; and (2) two-tier model. In a one-tier model, the central
bank would operate the CBDC infrastructure and directly provide financial services to
access CBDC. In a two-tier model, the central bank would operate the essential CBDC
infrastructure, while the distribution will be provided by payment service providers
(PSP), such as commercial banks and other existing financial institutions. A hybrid
version of these models may also be used for a smoother transition. (Bossone & Ardic,
2021)
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i . BACKGROUND
1.3 Countries exploring CBDC
Many countries are currently exploring CBDC technology, and also those that have
already implemented it to a certain extent (Bouza et al., 2024). In this section, the
development of CBDC technology in the European Union and Nigeria will be presented.
1.3.1 Nigeria
The Central Bank of Nigeria (CBN) started researching CBDC in 2017 and by 2021 they
fully launched a public CBDC called eNaira (Ree, 2023). They used a phased approach
to slowly adopting eNaira (Central Bank of Nigeria, 2021).
Nigeria's CBDC uses a variant of DLT called Hyperledger Fabric as infrastructure for
transactions and has an architecture similar to a two-tiered model, meaning the existing
financial institutions act as PSPs. The CBN has stated that eNaira was designed to mimic
the physical Naira and so it also does not bear interest. In addition to that, the C B N has
chosen the account-based CBDC model. eNaira is available to both retail and wholesale
users through digital wallets. (Central Bank of Nigeria, 2021) m
After launch the adoption process was relatively slow compared to the scale of
Nigeria's financial system. Despite that, it is arguably a slow process and there is already
a considerable number of users and daily transactions. It is expected that eNaira will
gain more adoption, and it will potentially become a highly useful instrument in policy
making. (Ree, 2023)
1.3.2 European Union
The European Central Bank (ECB) started the initial investigation phase in October of
2021, which ended in October of 2023. In the first phase, the ECB was researching the
possibility of implementing digital euro. Currently, the progress is in the preparation phase
with a deeper exploration of CBDC and potential design, and also initial experimentation
with it. This phase is supposed to end in October 2025. (European Central Bank, 2024)
In the main report, the ECB does not always explicitly define its planned design
of the digital euro based on the characteristics that were defined in previous sections
of this research, so the characteristics are interpreted from the generally described
features. Digital euro has a two-tiered architecture with PSPs such as banks providing
financial services to users. It does not rely on a DLT-like system, instead, it is a traditional
centralized approach to infrastructure which will be maintained by the Eurosystem. In
addition to that, it appears that the digital euro will have an account-based model. It will
be available to both retail and wholesale users, however, the circulation might be limited
at the beginning for a smooth adoption process. In the report, there is no mention of
interest-bearing for digital euro, so it is assumed that it does not bear interest given that
it is supposed to resemble physical euro in its properties. (European Central Bank, 2023)
It should be said that the above-mentioned characteristics are only planned and there
may be considerable changes to the design in further research and legislative process
(European Central Bank, 2023). The next phase will begin in November of 2025 and end
in October 2026 during which the initial prototype of the digital euro may potentially be
developed and further experimented with (European Central Bank, 2024). The ECB is
23
i . BACKGROUND
very cautious with C B D C adoption likely because of the possible risks involved, which
will be presented in further sections. In the future depending on the results of the current
and next phases the digital euro may be implemented, and the public will benefit from
the advanced and convenient features of C B D C , while policymakers will obtain another
useful policy instrument.
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2 Methodology
The aim of the thesis is to identify the impact of the introduction of CBDC on economic
policy by conducting a systematic literature review. More specifically, any kind of potential
change in economic policy that was introduced as a result of the adoption of CBDC.
For example, the impact could be related to changes in the economic environment like
the banking system, or as introduction of a new monetary policy tool with high potential.
During the research, several most prominent impact perspectives of CBDC adoption will
be identified and papers will be grouped accordingly. Furthermore, a paper may contain
information related to multiple perspectives and thus it will grouped multiple times.
The primary source of information for the research is the literature. Due to CBDC
technology being new, there is a limited possibility of conducting empirical research on
it. Thus, the majority of studies reviewed will likely be not strictly empirical. Despite
that, there is a considerable amount of literature published by credible authors and
institutions that may bring valuable insight into CBDC technology. Specifically, this
kind of literature is aimed to be used for the systematic literature review. Literature is
identified as credible if the author is a member of a credible institution, or it is published
by a credible institution such as a central bank, international organization, or journal
publisher with a good track record. This is one of the key considerations in further
literature source selection.
As previously mentioned CBDC is a broad concept with many possible designs, and
depending on the design the impact may also vary. For instance, the scale of impact on
the economy and technical capabilities may largely differ (Terracciano & Somoza, 2020)1
.
Because of this, it is important to highlight that in the thesis the overall potential of
CBDC technology is being researched, rather than a specific design of it. Nevertheless, in
the literature review synthesis, the design features will be specified if they are outlined
by the author and they are necessary for context.
The reporting of the research is done in accordance with the PRISMA 2020 standard
as described by Page et al. (2021). The following is the process used for the systematic
literature review:
1. The literature search is conducted according to the defined search queries and
inclusion criteria.
2. The identified literature is evaluated and irrelevant or duplicate literature is re-
moved.
3. The citation information and text of the literature that matched the inclusion criteria
are collected.
4. The list of potential impact perspectives is compiled from the literature, and publications
are grouped accordingly.
5. The literature is analyzed and synthesized for each distinct perspective.
1. See the paper by Terracciano and Somoza (2020) for more details
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2. METHODOLOGY
To ensure consistency and reproducibility of the research, all procedures for the
literature selection, search, and synthesis are precisely documented in the following
sections.
2.1 Literature selection
The literature includes publications in the English language published in any country.
Given that the majority of CBDC technology research started largely in the 2010s, only
literature published between 2010 to 2024 is included. Literature sources such as academic
search engines (e.g. Google Scholar) and resources provided by international
organizations (e.g. IMF) are used to collect the literature. Table 2 below contains a list
of literature sources used to conduct the literature search for the systematic literature
review. Both the name of the source and the link to the website is provided. No special
search engine filters are applied because not all sources support that. Furthermore, the
default search configuration is used unless specified otherwise in this methodology.
Only publications such as articles and reports are being collected. If possible, the list of
results is configured to be sorted from the most relevant to the least relevant, otherwise,
it is assumed to be sorted this way.
Table 2: Literature sources
Type Name Link
Search Engine Google Scholar https://scholar.google.com
BIS https: //www.bis.org/search/index.htm
ECB https://www.ecb.europa.eu/press/
research-publications /working-papers /html/index,
en.html
Organization
Fed
IMF
OECD
World Bank
https:/ /www.federalreserve.gov/
cbdc-research-and-publications.htm
https: / /www.elibrary.imf.org/search
https://www.oecd-ilibrary.org/papers
https:/ /documents.worldbank.org/en/publication/
documents- reports / documentlist
2.2 Search procedure
The base search query for all sources is "central bank digital currency macroeconomic
policy impact". Different search sources provide different capabilities and may output
completely different quality results, therefore to improve the productivity of the search
and quality of the results the following three rules are applied if necessary:
1. If the number of results exceeds 50 then only the first 50 results are collected.
2. If the number of results is less than 30 then the last 3 words ("macroeconomic
policy impact") are removed one by one from the right until the result count
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2. METHODOLOGY
reaches at least 30, otherwise the smallest acceptable query is "central bank digital
currency".
3. If the results contain an overwhelming number of unrelated literature, if possible,
configure the search to exactly match the search query or limit the search to only
title, keywords, and abstract.
If the above rules are satisfied the listed publications are considered to be identified.
One exception from the sources is the list of CBDC-related publications provided by the
Fed which will be fully considered as identified.
After the initial list of literature is identified, the duplicates are removed and the
screening of abstracts is performed. As part of this process, the literature is evaluated
based on whether it is relevant to the research question. Irrelevant publications are
removed. Additionally, the initial list of impact perspectives is compiled. Lastly, citation
information and text of remaining publications are collected.
If the link to the publication is broken then it is attempted to be fixed by searching
for the same publication on alternative resources. If the link leads only to a section
of a relevant publication, then if inclusion criteria are satisfied, the entire publication
is collected. Collected publications represent candidate papers for the final literature
synthesis.
2.3 Synthesis procedure
The literature synthesis is performed during the full-text screening of collected papers.
Firstly, the literature is grouped based on the initial list of identified impact perspectives.
If necessary, the list of perspectives may be edited, but it would require reevaluating
other papers if they can be included. After the initial analysis of all papers, the final list
of impact perspectives should not be changed, however, individual papers may still be
added or removed from groups if necessary.
The main part of the synthesis is an iterative process that is conducted for each
identified impact perspective separately. It requires analyzing all grouped papers and
extracting relevant information to a specific topic or perspective. This extracted information
is further structured and synthesized within the corresponding perspective section.
In the end, some papers might not provide any significantly relevant information to the
identified perspectives, therefore such papers are excluded as redundant, however, they
are available in the appendix section A .
All in-text citations are done very explicitly on purpose to ensure that all statements
are easily traceable to the original source. Some statements may have many in-text
citations which indicates that many sources may confirm the corresponding statement.
Furthermore, the number of citations might even be used as an indicator of consensus
or credibility of a given statement, which is one of the reasons for such explicitness.
After the synthesis is complete, it is additionally reviewed and a summary of the
most important information is compiled. It is further used in the creation of a mind
map summarizing the most important takeaways of the research and providing a good
overview of CBDC impact perspectives. This will be presented in the discussion section.
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2. METHODOLOGY
In the following section, the overall results of the collected literature will be presented.
Additionally, the identified impact perspectives will be outlined.
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3 Results
The research was implemented in accordance with the previously outlined methodology
The results are presented in Figure 1 in the PRISMA flowchart format.
Identification of studies via database and registers
Records identified from:
• Google Scholar (n = 51)
• BIS (n = 50)
• IMF (n = 50)
• Other (n = 41)
Records removed before
screening:
• Duplicates (n = 21)
• Invalid (n = 5)
Records identified from:
• Google Scholar (n = 51)
• BIS (n = 50)
• IMF (n = 50)
• Other (n = 41)
Records removed before
screening:
• Duplicates (n = 21)
• Invalid (n = 5)
Records screened (n = 166) Records excluded (n = 91)Records screened (n = 166) Records excluded (n = 91)
Reports sought for retrieval
(n = 75)
Not retrieved (n = 6)
Reports sought for retrieval
(n = 75)
Not retrieved (n = 6)
Reports assessed for eligibility
(n = 69)
Reports Excluded:
• Redundant (n = 17)
Reports assessed for eligibility
(n = 69)
Reports Excluded:
• Redundant (n = 17)
Studies included in review
(n = 52)
Figure 1: PRISMA 2020 systematic review flow diagram
The identification of papers was conducted on the 13th of September, 2024, thus the
systematic literature review represents a snapshot for this particular date. Most of the
identified literature came from Google Scholar, BIS, and IMF. One exception was made
for Google Scholar source on the maximum limit of publications. It has 51 identified
papers due to the inclusion of Niepelt (2021), a collection of publications where multiple
papers were further selected and reviewed.
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3. RESULTS
Some identified literature was duplicated across sources, while a few other publications
were recognized as invalid because they were not in the format of a report or an
article. Such publications were removed before screening.
The initial abstract screening was conducted and all irrelevant publications were
excluded. It should be noted that the number of irrelevant publications is substantial,
which might suggest imperfections in the search methodology or problems with the
sources themselves. Nevertheless, the irrelevant publications were successfully excluded
although with greater effort.
Further, all publications were retrieved and full-text screening was performed. During
the screening process, all impact perspectives were identified and papers were
successfully categorized. The remaining uncategorized papers were excluded as redundant.
If necessary, they can be found in the appendix section A . In total, 52 different
publications were included in the literature review and synthesis.
Overall, the literature provides various perspectives on CBDC. Mostly the research
comprises of theoretical analysis of potential CBDC impacts and policy recommendations.
A substantial part of this information is reaffirmed in multiple publications,
amplifying its importance. As previously mentioned, all in-text citations are done very
explicitly which may allow to assess the credibility or consensus of statements. This
enables the ability to evaluate the significance of presented information.
As a result of screening, five distinct impact perspectives were identified, namely: (1)
financial stability; (2) monetary policy; (3) financial innovation; (4) financial inclusion;
and (5) international financial system implications. Overall, the collected literature
provides a high-quality overview of these impacts. In particular, the most discussed
implications were related to financial stability, monetary policy, and the international
financial system. This can be seen in the variety of presented information and numerous
sources confirming the statements. The following chapter contains the synthesis
for all identified perspectives. However, before the complete synthesis is presented,
supplementary literature statistics are reviewed in the next subsection.
3.1 Statistics
As previously shown, the final literature synthesis contains 52 different publications.
Three of those are from larger collections of papers and are assumed to be standalone
publications. This section presents several insightful statistics of the literature, such as
publication years, publication methodology types, publisher statistics, and word cloud
of the publications.
Figure 2 below presents the distribution of publication years for the literature. Despite
the initial constraint allowing for publications from 2010 to 2024, the earliest collected
literature was published in 2016, suggesting that the field started to emerge only around
this time. Interestingly, most of the publications are from 2021 and 2022, with a decrease
in 2023.
Another Figure 3 shows the categorization of publications by type of methodology.
During the full-text screening process, the publications were categorized into those
that employ macroeconomic modeling techniques such as DSGE and those that take
a more theoretical analysis approach. According to the chart, it appears that most of
30
3. RESULTS
the publications use a theoretical approach to analyze CBDC, although there is still a
substantial part of the publications with more technical analysis.
u
2016 2017 2018 2019 2020 2021 2022 2023 2024
Year
Figure 2: Literature publication years
u
S-H
30 -
20 -
10
Modeling Theoretical
Methodology type
Figure 3: Literature methodology types
31
3. RESULTS
u
D • Working paper
D • Report
D • Journal article
Multi-org BIS ECB Others*Fed IMF NBER
Publisher
*Includes remaining papers whose publisher occurs two or fewer times
Figure 4: Literature publishers
During the screening process, the literature was also categorized by most common
publishers and publication types. Figure 4 above presents various publishers and the
corresponding number of included publications with publication types indicated by
the color. It appears that most of the included literature consists of working papers
published by various central banks and international organizations that are researching
CBDC. Additionally, some of the research is published in the form of a report or as a
journal article.
Generally, some of the publishers had more relevant information to the research
question. In particular, during the screening process, most of the extracted information
was from BIS papers, ECB papers, and other multi-organizational reports. This might
also be reflected in the above data.
32
3. RESULTS
Additionally, a word cloud visualization was created from the text of all included
publications. It is shown below in Figure 5. Word clouds may be useful to provide a
broad overview of the topics discussed in the literature. Overall, it does fairly reflect the
topics in the literature and those that will be discussed in the synthesis.
countries
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33
4 Synthesis
The potential of CBDC technology is largely thanks to its digital nature and the ability of
policymakers to redesign the entire system in the best possible manner from the ground
up. Thanks to this, CBDC is able to potentially provide extensive benefits to the overall
economy as an advanced payment system and a powerful policy instrument. O n the
other hand, there are certain concerns among policymakers and academics that should
be addressed.
The economy and financial system may benefit from CBDC adoption enormously
depending on the chosen design and economic environment. For example, it enables
greater financial inclusion, and it may potentially increase competition and facilitate
innovation in the financial system (Cirasino et al., 2021). However, it may also bring
certain risks, such as potential disintermediation of banks, increased possibility of bank
runs, monetary sovereignty concerns, and riskier funding of commercial banks. (BOC
et a l , 2020; Kiff et a l , 2020)
CBDC technology may also provide many technical benefits. For instance, it may
include: increased speed, lower cost, reduced complexity, improved efficiency, and
increased resilience, among others (BOC et al., 2020; Mills et al., 2016). A crucial feature
that CBDC would allow is the programmability of money. This feature is key for
advanced policy solutions, such as an ability to accept only certain types of financial
transactions (e.g. for food and medication, and not gambling or alcohol) for CBDC
money transferred from the government as social benefits. (Cirasino et al., 2021)
Even more potential benefits CBDC has as a policy instrument. It may improve the
effectiveness of monetary policy, provide an ability for unconventional fiscal policy
and programmable monetary policy, and restore the role of government-issued money
especially in low cash usage economies (BOC et al., 2020; Cirasino et al., 2021; Kiff et al.,
2020). However, there are certain concerns that it may also bring potentially undesirable
effects on the transmission of monetary policy and central bank balance sheet (Kiff et al.,
2020).
Despite the concerns, the scale of some of these negative effects is still being debated.
Furthermore, some authors may even argue that a competent monetary policy may
prevent a large portion of that risk. In further synthesis the key five impact perspectives
will be presented, including: (1) financial stability; (2) monetary policy; (3) financial
innovation; (4) financial inclusion; and (5) international financial system implications.
Afterward, in the discussion section, a mind map will be compiled and presented based
on the overall synthesis.
4.1 Financial stability
This subtopic is by far the most significant and highly discussed in the literature. It
primarily concerns with the potential changes to the banking system, including implications
related to the risk of bank runs, bank disintermediation or an opposite bank
intermediation, and further effects on aggregate credit supply, investment, and overall
output of the economy.
35
4. SYNTHESIS
4.1.1 Bank disintermediation
The most highly cited concern is banking system disintermediation. This term essentially
means that the capital of households and private firms in the economy does not go
through the banking system. Instead, it would go through the newly introduced CBDC
and the balance sheet of the central bank. This may have an adverse effect on the economy
and significantly change the role of the central bank.
This disintermediation is incentivized by the attractive features of the adopted CBDC.
The dominant feature is the risk-free and safe nature of CBDC (Chen et al., 2022; Ward
& Rochemont, 2019), at least for depositors who hold above deposit insurance (Chen
et al., 2022). This feature is especially important in times of crisis (Chen et al., 2022).
Moreover, the preferences towards CBDC are further increased with an introduction
of remuneration or interest-bearing feature (Chen et al., 2022; Demmou & Sagot, 2021;
Engert & Fung, 2017; Ward & Rochemont, 2019), which effectively acts as a floor interest
rate for the entire financial system (Demmou & Sagot, 2021). Additionally, other features
such as efficiency, lower access cost, and convenience make it even more attractive (Chang
et al., 2023). Bank disintermediation risk and volatility are further exacerbated in periods
of stress due to these features (Engert & Fung, 2017). It should be noted, however, that
such an effect is not unique to CBDC and could also be caused by other forms of digital
private money (BOC et al., 2021).
Due to introduction of CBDC, depositors may decide to switch to CBDC, which
in turn creates bank disintermediation (Abad et al., 2023; BOC et al., 2020; Adrian &
Mancini-Griffoli, 2021; Ahnert et al., 2022, 2023; Bindseil, 2019; Bitter, 2024; Bossone &
Ardic, 2021; Cecchetti & Schoenholtz, 2021; Chang et al., 2023; Demmou & Sagot, 2021;
Fernandez-Villaverde et al., 2021; Griffoli et al., 2018; Keister & Sanches, 2022; Muhoz
& Soons, 2023; Raskin & Yermack, 2016). This will result in a reduction of deposits as
a funding source for commercial banks. The magnitude of consequences depends on
the reliance of commercial banks on deposits (Burlon et al., 2022), the availability of
alternative funding sources (Infante et al., 2022), and whether commercial banks have
any excess reserves (Abad et al., 2023); although if there is perfect competition then
there would be no excess reserves (Auer, Frost, et al., 2021), so it also depends on the
level of competition in the industry.
The reduction in deposits would induce commercial banks to rely more on alternative
less stable and arguably more risky funding sources (Chang et al., 2023; Chen et al.,
2022; Chiu et al., 2019; Demmou & Sagot, 2021; Raskin & Yermack, 2016). This includes
higher reliance on wholesale funding (Auer, Frost, et al., 2021; Bossone & Ardic, 2021;
Chang et al., 2023; Chiu et al., 2019; Demmou & Sagot, 2021; Ward & Rochemont, 2019),
equity funding (Auer, Frost, et al., 2021; Demmou & Sagot, 2021), and central bank
lending facility (Abad et al., 2023; Chang et al., 2023). Moreover, the central bank might
even be able to cover possible shortages during the transition (Ahnert et al., 2022). This
will be further discussed in subsequent sections.
Consequently, the introduction of CBDC would significantly impact the bank's
business model. It will likely increase the funding costs (Adrian & Mancini-Griffoli,
2021; Bossone & Ardic, 2021; Chiu et al., 2019; Demmou & Sagot, 2021; Griffoli et al., 2018;
Keister & Sanches, 2022; Raskin & Yermack, 2016), reduce commercial bank profitability
(Adrian & Mancini-Griffoli, 2021; Alfonso et al., 2022; Bitter, 2024; Bossone & Ardic,
36
4. SYNTHESIS
2021; Demmou & Sagot, 2021; Ward & Rochemont, 2019), and possibly induce banks
to take greater risk in investments to compensate for lower profits (Alfonso et al., 2022;
Bossone & Ardic, 2021; Chiu et al., 2019; Ward & Rochemont, 2019). Commercial banks
would be forced to modify their portfolio accordingly, which would result in a relative
increase in maturity transformation of bank assets (Munoz & Soons, 2023). In general,
the adoption of CBDC would increase the financial instability of the banking sector,
especially in times of crisis (Ward & Rochemont, 2019). This is one of the key risks
central banks need to consider when adopting CBDC.
Overall, the unfavorable environment for commercial banks may result in a decrease
in aggregate bank lending and investment in the economy (BOC et al., 2020; Adrian &
Mancini-Griffoli, 2021; Alfonso et al., 2022; Auer, Frost, et al., 2021; Bossone & Ardic,
2021; Chang et al., 2023; Chen et al., 2022; Keister & Sanches, 2022; Raskin & Yermack,
2016). Furthermore, loan interest rates may increase (Chen et al., 2022; Demmou &
Sagot, 2021), and the supply of credit would become more volatile (Alfonso et al., 2022).
Nevertheless, the extent of these effects may be limited. For example, a decrease in
lending and investment may lead to a proportionally smaller reduction in deposits
because the remaining depositors tend to be more optimistic and hold their money
for the long term. (Munoz & Soons, 2023). Moreover, if commercial banks have excess
reserves, the impact and subsequent decrease in bank lending activity will be less severe
(Abad et al., 2023). Therefore, a significant decrease in aggregate credit and investment
is unlikely if banks have a strong market position (Ahnert et al., 2022).
Additionally, some authors mention other effects that might occur due to the introduction
of CBDC. For example, there may be increased demand and prices for safe
assets (Alfonso et al., 2022), or in general for all assets in short-term funding markets
(Malloy et al., 2022). O n the other hand, Bitter (2024) argues that during a period of
financial crisis, CBDC improves financial stability by stabilizing capital asset prices, thus
potentially reducing the risk of illiquidity and insolvency for commercial banks.
4.1.2 Bank intermediation
Many authors also mention that there is a positive counterforce to bank disintermediation
that creates bank intermediation. With the introduction of CBDC and it being a
substitute for bank deposits, it effectively competes with the banking sector, inducing
banks to provide more attractive offers to retain customers (e.g. providing higher deposit
rates), which in turn increases the aggregate bank lending and investment (Ahnert et al.,
2022,2023; Andolfatto, 2020; Bossone & Ardic, 2021; Chang et al., 2023; Chiu et al., 2019).
This counterforce may depend on the acceptance of different means of payment and
the competition in the banking industry (Chiu et al., 2019). Bank intermediation would
likely be more prominent in economies where the banking sector is less competitive
(Andolfatto, 2020). The overall impact on aggregate bank lending and investment depends
on whether intermediation or disintermediation force dominates (Bossone &
Ardic, 2021).
Additionally, some authors suggest their explanation of the intermediation process
and possibly how to control it.
37
4. SYNTHESIS
In their paper, Chang et al. (2023) suggest that better deposit offers induce richer
households to increase their deposits, however poor households usually switch to CBDC.
Furthermore, they point out that the disintermediation effect from poor households
usually dominates, especially in developing and emerging market economies (Chang
etal.,2023).
In another research, Engert and Fung (2017) highlight that the intermediation force
may be able to exceed the disintermediation force in normal times during which banks
would effectively compete with the central bank, and where the economy would still be
relying on bank deposits, however during periods of crisis it may be problematic.
Ahnert et al. (2023) and Chiu et al. (2019) go even further by arguing that the
intermediation and disintermediation forces are determined by the remuneration rate
of CBDC. Chiu et al. (2019) argue that if the interest rate is too low then CBDC will
not affect the equilibrium, however, if it is too high then disintermediation will occur.
Ahnert et al. (2023) suggest that the optimal remuneration rate may be on a low positive
level to achieve the most favorable results.
The bank intermediation force is also closely related to financial innovation which
will be further discussed in a subsequent section.
4.1.3 Bank runs
Another unfavorable potential consequence of CBDC adoption is the risk of bank runs.
They would result in severe bank disintermediation, however, by definition, bank runs
could be significantly more abrupt and possibly cause bank failures and greater damage
to the economy.
In this case, the problem is that CBDC is considerably less risky or even risk-free than
commercial bank deposits (Auer, Frost, et al., 2021; Bossone & Ardic, 2021; Demmou &
Sagot, 2021; Ward & Rochemont, 2019). Therefore, the adoption of CBDC could increase
the risk of bank runs from deposits to CBDC, especially during periods of crisis (BOC
et al., 2020, 2021; Ahnert et al., 2022, 2023; Alfonso et al., 2022; Auer, Frost, et al., 2021;
Bindseil, 2019; Bossone & Ardic, 2021; Demmou & Sagot, 2021; Griffoli et al., 2018; Ward
& Rochemont, 2019). Additionally, CBDC transactions can be very efficient and virtually
free of charge which may promote bank runs at unprecedented speed and scale (Bossone
& Ardic, 2021). Furthermore, it could also exacerbate bank runs from weaker banks to
stronger banks and CBDC, especially in less developed banking systems (Chen et al.,
2022). Moreover, this risk is higher if CBDC has an interest-bearing feature (Ahnert
et al., 2023), and it is further intensified if commercial banks do not have excess reserves
(Auer, Frost, et a l , 2021).
4.1.4 Other considerations
The literature also contains other unique perspectives on the issue of financial stability
with CBDC.
A completely different approach to analyzing CBDC was taken by Dong and Xiao
(2021). Instead of considering CBDC as a substitute for bank deposits, they proposed
to consider it as a complement. Additionally, they allowed banks to accept C B D C as
deposits. Their results show that an increase in the CBDC interest rate promotes both
38
4. SYNTHESIS
deposits and aggregate investment. They argue that the introduction of CBDC does not
necessarily lead to financial disintermediation. (Dong & Xiao, 2021)
In another research, Cecchetti and Schoenholtz (2021) have pointed out an important
positive effect of the adoption of CBDC. They argue that unregulated cryptocurrencies
and other private digital money may pose a threat to financial stability, while CBDC
may provide equivalent features and displace such undesirable cryptocurrencies; as a
result, decreasing financial instability. (Cecchetti & Schoenholtz, 2021)
4.1.5 Addressing instability risks
The literature also contains a variety of different possible solutions to address these
financial stability risks. These measures are mostly related to either reducing the substitutability
of CBDC with bank deposits or restricting the speed or volume of substitution
(Infante et al., 2022). The dominant solutions may be sorted based on the following
categories: (1) interest rate methods, (2) fee methods, and (3) restriction methods.
Depending on the approach a solution may require an adjustable CBDC interest rate
feature and a separate digital identification scheme (BIS, 2021).
Interest methods include various interest rate policies, such as paying no interest
(Adrian & Mancini-Griffoli, 2021; Alfonso et al., 2022; BIS, 2021), paying less interest
than the main policy rate (Adrian & Mancini-Griffoli, 2021), paying negative interest
(BIS, 2021), or even setting tiered interest based on account features (Ahnert et al., 2023;
Alfonso et al., 2022; Bindseil, 2019; BIS, 2021; Infante et al., 2022). Tiered interest or tiered
remuneration is a more advanced approach that allows to disincentivize using CBDC as
a store of value by paying different amounts of interest depending on the amount of
balance a user has (Alfonso et al., 2022; Bindseil, 2019; BIS, 2021). For instance, if the
balance is below a certain threshold then zero interest is paid, but if the balance exceeds
that threshold then negative interest is paid.
Similarly, fee methods aim to disincentivize certain behaviors. In particular, it may
be possible to impose higher service fees on larger holdings (Adrian & Mancini-Griffoli,
2021; Alfonso et al., 2022), and on convertibility between CBDC and other assets (Griffon
etal.,2018).
Additionally, it may be possible to outright restrict or limit certain actions. For instance,
access to CBDC may only be provided to the permitted users that satisfy access
criteria (BOC et al., 2021; Infante et al., 2022). Alternatively, the central bank may impose
limits on transaction amount or frequency (BOC et al., 2021; Adrian & Mancini-Griffoli,
2021; Chen et al., 2022; Infante et al., 2022), or limit the overall possible balance amount
on a CBDC account (BOC et al., 2021; Adrian & Mancini-Griffoli, 2021; Ahnert et al., 2023;
Alfonso et al., 2022; BIS, 2021; Chen et al., 2022; Griffoli et al., 2018; Infante et al., 2022;
Muhoz & Soons, 2023), while excess money will flow to a backup bank account (Adrian
& Mancini-Griffoli, 2021; Alfonso et al., 2022). Likewise, the central bank may set limits
or prevent convertibility between CBDC and commercial bank reserves (Kumhof &
Noone, 2018), or CBDC and commercial bank deposits (Alfonso et al., 2022; Bossone &
Ardic, 2021; Kumhof & Noone, 2018); although the latter might increase the risk of bank
runs (Alfonso et al., 2022; Bossone & Ardic, 2021).
39
4. SYNTHESIS
The literature also suggests other alternative measures that could be taken. For
instance, it is recommended to use a two-tiered CBDC architecture model to ensure that
commercial banks maintain intermediation (Adrian & Mancini-Griffoli, 2021; BIS, 2021),
where commercial banks are involved in the distribution of CBDC. Additionally, it is
recommended to issue CBDC only against eligible government securities (Barrdear &
Kumhof, 2022; Kumhof & Noone, 2018), and implement a deposit insurance scheme to
reduce the risk of bank runs (Alfonso et al., 2022; Griffoli et al., 2018).
Some authors suggest other solutions from a more macroeconomic perspective. In
particular, it may be possible to control the impact of C B D C on the financial system
by adjusting the available supply of C B D C (Assenmacher et al., 2021; Burlon et al.,
2022). In turn, the supply of CBDC can be controlled by changing the attractiveness of
CBDC (Agur et al., 2022; Assenmacher et al., 2021; Ward & Rochemont, 2019), such as
by adjusting the CBDC interest rate (Agur et al., 2022; Assenmacher et al., 2021; Ward
& Rochemont, 2019), or changing the services available on C B D C accounts (Ward &
Rochemont, 2019). If properly managed, these measures may reduce financial stability
risks (Assenmacher et al., 2021; Burlon et al., 2022), although it might reduce potential
output and overall welfare (Assenmacher et al., 2021).
In case of bank runs, the central bank would be able to and should provide sufficient
liquidity to commercial banks (Ahnert et al., 2022; Alfonso et al., 2022; Griffoli et al.,
2018; Malloy et al., 2022). Furthermore, Alfonso et al. (2022) argue that such bank runs
into CBDC would be less damaging. This is because the central bank would be able
to effectively redirect incoming CBDC deposits back to commercial banks to ensure
sufficient liquidity (Alfonso et al., 2022; Griffoli et al., 2018).
The above-mentioned measures would especially be helpful during the initial adoption
of CBDC (BOC et al., 2021). However, it should be noted that they cannot completely
eliminate financial stability risks (Griffoli et al., 2018), and some bank disintermediation
will still occur (Chen et al., 2022). In addition to that, some of these measures would
also reduce adoption and overall benefits from CBDC, thus creating a tradeoff between
reducing financial stability risks and receiving benefits from CBDC (Infante et al., 2022).
Therefore, the central bank must balance between the risks of rapid take up and the
policy objective of a meaningful level of adoption (BOC et al., 2021).
4.2 Monetary policy
CBDC has the potential to significantly change monetary policy. In particular, a central
bank may use algorithms to control the rate of money creation by adjusting the interest
rate of CBDC on customer deposits, which could even be negative. Furthermore, tools
such as open market operations may be replaced with direct fiscal transfers to customer
balances, which could be targeted at specific subgroups of depositors. Additionally,
CBDC may provide greater insight into financial transactions and the economy in general
for the central bank to make more informed decisions. (Raskin & Yermack, 2016)
With a sufficient level of adoption and availability of necessary features, this may
completely change the monetary policy framework that central banks employ in their
policies. Further details will be provided in further subsections.
40
4. SYNTHESIS
4.2.1 Credit allocation
As was previously discussed, bank disintermediation poses a real threat to the banking
sector, however, it can also be viewed from the other side. If there were a substantial
amount of disintermediation then the central bank would control a significant part of
credit allocation in the economy (BIS CPMI & BIS Markets Committee, 2018; Cecchetti &
Schoenholtz, 2021; Chen et al., 2022; Fernandez-Villaverde et al., 2021). Then the central
bank would have to decide how it would redirect the funds back to the economy. There
could be two scenarios.
Under the first scenario, the central bank itself may effectively become a large commercial
lender and directly supply the economy with credit (Cecchetti & Schoenholtz,
2021). Such a model was thoroughly analyzed by Fernandez-Villaverde et al. (2024).
In their paper, the authors suggest that the central bank would collect all deposits and
invest in the economy, similarly to quantitative easing. The central bank would also have
to pay interest to depositors and provide sufficient liquidity for on-demand deposits.
Therefore, it would engage in maturity transformation similar to commercial banks.
Given the above, bank runs would be possible, however, central bank runs cannot occur
in a classic sense because the central bank is the issuer of CBDC. Instead, central bank
runs might be in the form of higher nominal CBDC spending and inflation, which may in
turn undermine the credibility of the central bank. Additionally, this model FernandezVillaverde
et al. (2024) illustrates a clear tradeoff between short-term consumption and
long-term investment that a central bank would face when making investment decisions.
(Fernandez-Villaverde et al., 2024)
Such a centralized system may entail additional risks. In particular, there could be
greater political interference which would directly influence the credit market and the
entire economy (BIS CPMI & BIS Markets Committee, 2018; Cecchetti & Schoenholtz,
2021). Moreover, there are concerns that the central bank would be less efficient in
allocating resources than the private sector, resulting in possible economic loss (BIS
CPMI & BIS Markets Committee, 2018; Cecchetti & Schoenholtz, 2021).
Alternatively, the central bank may rely on investment banks to conduct credit
allocation on their behalf (Cecchetti & Schoenholtz, 2021; Fernandez-Villaverde et al.,
2021). According to Fernandez-Villaverde et al. (2021), such a CBDC financial system
is equivalent in outcomes to a regular financial system, although with an assumption
that competition is not impaired and there are no bank runs. Furthermore, FernandezVillaverde
et al. (2021) argue that the contract between investment banks and the central
bank decreases the risk of bank runs during panics, which might suggest that such a
system is more stable.
On a related note, if bank disintermediation would be significant, then the cost of
deposit insurance will decrease to the extent of disintermediation (Cecchetti & Schoenholtz,
2021), given that less commercial bank deposits would need to be insured (Raskin
& Yermack,2016).
4.2.2 Monetary policy transmission
CBDC will likely not impair or significantly affect monetary policy transmission in any
adverse way (Assenmacher et al., 2023; Griffoli et al., 2018). Monetary policy will likely
41
4. SYNTHESIS
operate similarly to the current system (Meaning et al., 2018), although perhaps with
some improvements. Moreover, interest-bearing CBDC will likely strengthen monetary
policy transmission (BOC et al., 2020; Auer, Frost, et al., 2021; BIS, 2021; BIS CPMI & BIS
Markets Committee, 2018; Bordo & Levin, 2017; Bossone & Ardic, 2021; Chen et al., 2022;
Das et al., 2023; Demmou & Sagot, 2021; Griffoli et al., 2018; Infante et al., 2022; Meaning
et al., 2018; Ward & Rochemont, 2019). In particular, because CBDC interest-bearing
feature allows to directly pass on the policy rate to the public (BIS, 2021; Bordo & Levin,
2017; Chen et al., 2022; Demmou & Sagot, 2021; Infante et al., 2022; Meaning et al., 2018).
Additionally, other factors contribute to improved policy transmission. For instance,
depending on the attractiveness there might be a decrease in usage of alternative means of
payment such as cash and cryptocurrency (Das et al., 2023). Furthermore, as previously
discussed, central bank competition would encourage commercial banks to adjust their
interest rates based on CBDC interest changes (Bossone & Ardic, 2021; Das et al., 2023).
Likewise, commercial banks would have to rely more on wholesale funding (Das et
al., 2023; Griffoli et al., 2018), increasing the dependence on the policy rate. Moreover,
the transmission would also be improved thanks to greater financial inclusion in the
economy (Das et al., 2023; Griffoli et al., 2018), and increased transparency of monetary
policy framework (Bordo & Levin, 2017).
Therefore, there are good reasons to believe that it will improve monetary policy
transmission. Despite that, this would require a considerable level of adoption to be
effective (BOC et al., 2020; Auer, Frost, et al., 2021). Furthermore, it would be necessary to
set competitive interest rates compared to the banking sector (BOC et al., 2020). Therefore,
the requirements for improved monetary transmission would also subsequently further
exacerbate financial stability risks discussed previously (BOC et al., 2020).
In addition to that, most central banks are considering restrictive measures to prevent
rapid adoption of CBDC (Das et al., 2023). For instance, limits on CBDC usage may be
used to ensure that monetary policy transmission is not impaired in any way (BIS, 2021).
Hence, CBDC will likely not have a significant impact on monetary policy transmission
due to restrictions (Das et al., 2023).
4.2.3 Fiscal transfers
There is a concept known as helicopter drops or helicopter money which is a type of fiscal
transfer of funds directly to firms and households from the government (BOC et al.,
2020; Bossone & Ardic, 2021; Cecchetti & Schoenholtz, 2021; Engert & Fung, 2017; Ward
& Rochemont, 2019). It is an unconventional monetary policy that aims to stimulate
aggregate demand through direct transfers of money to the public (BOC et al., 2020; BIS,
2021; Bossone & Ardic, 2021). It is similar to quantitative easing, however, the transfers
are permanent, with no repayment, and the transfers are direct, without intermediaries
(Bossone & Ardic, 2021; Ward & Rochemont, 2019). Additionally, such fiscal transfers
may be used for social policies and distribution of government benefits (Cecchetti &
Schoenholtz, 2021), such as those that happened during the COVID-19 pandemic (BOC
etal.,2020).
CBDC may enable more efficient and reliable fiscal transfers, however, it would
require a national digital identification scheme (BOC et al., 2020; Alfonso et al., 2022).
42
4. SYNTHESIS
Moreover, CBDC may provide technology to implement very targeted monetary policy
interventions. For instance, such transfers may be universal for all accounts, or targeted
on a selective basis (Bossone & Ardic, 2021). These transfers may also have time limits
or be conditioned on being spent only on certain goods (BOC et al., 2020; Allen et al.,
2020).
However, there is criticism that CBDC by itself does not enable fiscal transfers, given
that it is already possible without CBDC (BOC et al., 2020; Engert & Fung, 2017),
although potentially with higher administrative costs (Engert & Fung, 2017). Instead,
the technology that would enable such transfers is specifically a digital ID scheme (BOC
et al., 2020). Therefore, CBDC may not be strictly necessary to implement such policy
(BOC et al., 2020). Nevertheless, CBDC may provide a more reliable and cheaper way
of making such transfers.
Additionally, it is important to mention that such a policy may create certain risks.
Given that CBDC may provide the possibility of making fiscal-like policy, the distinction
between monetary and fiscal policy becomes less clear (BOC et al., 2020; Alfonso et al.,
2022). This may potentially increase the risk of political interference and undermine the
independence of the central bank (BOC et al., 2020).
4.2.4 Effective lower bound
Interest-bearing CBDC may also allow setting negative nominal interest rates on holdings
of depositors (BOC et a l , 2020; Allen et a l , 2020; BIS CPMI & BIS Markets Committee,
2018; Bossone & Ardic, 2021; Cecchetti & Schoenholtz, 2021; Demmou & Sagot, 2021;
Engert & Fung, 2017; Ward & Rochemont, 2019). A negative interest rate policy is
an unconventional monetary policy that aims to encourage spending of savings and
stimulate consumption (Allen et al., 2020; BIS CPMI & BIS Markets Committee, 2018;
Bossone & Ardic, 2021; Demmou & Sagot, 2021; Ward & Rochemont, 2019). In particular,
this policy is useful to prevent an economy from entering the liquidity trap (Demmou &
Sagot, 2021).
However, the policy is limited by the availability of cash which creates the effective
lower bound (BOC et al., 2020; BIS, 2021; Bossone & Ardic, 2021; Cecchetti & Schoenholtz,
2021; Demmou & Sagot, 2021; Engert & Fung, 2017; Griffoli et al., 2018; Ward &
Rochemont, 2019). Specifically, because consumers may switch to cash to avoid negative
interest rates (BOC et al., 2020; Bossone & Ardic, 2021; Demmou & Sagot, 2021; Engert
& Fung, 2017; Ward & Rochemont, 2019). However, using cash may involve certain costs
which create the effective lower bound (Bossone & Ardic, 2021; Ward & Rochemont,
2019).
Nevertheless, it is possible to reduce the effective lower bound by increasing the
cost of using cash or limiting the usage of cash (Bossone & Ardic, 2021; Engert & Fung,
2017; Ward & Rochemont, 2019). The literature suggests a variety of solutions, among
them: abolishing the legal tender status of cash (Bossone & Ardic, 2021), applying
discounts on the value of cash (Bossone & Ardic, 2021), imposing additional taxes or
fees on convertibility (Engert & Fung, 2017), and removing high denomination notes
from circulation (Bossone & Ardic, 2021; Ward & Rochemont, 2019).
43
4. SYNTHESIS
One of the extreme solutions is to completely replace cash with CBDC, although
it is largely unfeasible (Engert & Fung, 2017). Only if C B D C completely replaces all
cash the negative interest rate policy would be most effective (Demmou & Sagot, 2021).
However, if cash is not available then in extreme cases this might even encourage currency
substitution (BOC et al., 2020). As a result, limiting the effectiveness of monetary policy
transmission and increasing financial stability risks (BOC et al., 2020).
Additionally, there is criticism that CBDC by itself is not necessary to reduce the
effective lower bound. Policies related to increasing the cost or reducing the availability
of cash may be sufficient. (Engert & Fung, 2017)
Interestingly, if CBDC was not interest bearing then this would increase the effective
lower bound, making negative interest rate policy even less effective. This is because
using CBDC is cheaper than using cash. Therefore, with the existence of a non-interestbearing
CBDC, the effective lower bound would increase. (Bossone & Ardic, 2021)
4.2.5 Transparency
Thanks to the digital nature of CBDC it may allow the collection of vast amounts of
economic activity data from the underlying ledger at national or even international levels
(Allen et al., 2020). This may provide unprecedented microeconomic and macroeconomic
insights for regulators and policymakers, thus enabling better-informed policy decisions
(Allen et a l , 2020; Auer, Frost, et a l , 2021; Raskin & Yermack, 2016).
Additionally, this transparency will provide comprehensive tools for the authorities
to prevent tax evasion, money laundering, and financing of terrorism (Allen et al.,
2020; Cecchetti & Schoenholtz, 2021; Raskin & Yermack, 2016). On the other hand, an
anonymous CBDC may raise concerns about the use of CBDC for such illegal activity
(BIS CPMI & BIS Markets Committee, 2018; Engert & Fung, 2017; Ward & Rochemont,
2019).
4.2.6 Operational risk
Being a digital currency, CBDC may be vulnerable to operational disruptions and cyber
attacks (Alfonso et al., 2022; Chen et al., 2022). Such disruptions and cyber-attacks may
not only hinder the adoption of CBDC but also potentially damage the overall reputation
of the central bank (Adrian & Mancini-Griffoli, 2021; Alfonso et al., 2022; Hansen &
Delak, 2022).
To mitigate these risks the central bank must ensure that resilience and security
are one of the key principles in developing and operating a C B D C system (Adrian &
Mancini-Griffoli, 2021; Alfonso et al., 2022; Chen et al., 2022; Hansen & Delak, 2022).
This must also apply to all the components of the ecosystem and all potential third
parties involved in the operations (Alfonso et al., 2022).
4.3 Financial innovation
CBDC may potentially become the catalyst for change in the financial system. The adoption
of CBDC technology may bring many other financial innovations and technologies.
44
4. SYNTHESIS
As previously mentioned, there appears to be a trend of declining usage of cash, which
is substituted with new innovative digital financial services. This might have been one
of the main motivations of central banks to start the development of CBDC, a digital
version of cash directly issued by the central bank (BOC et al., 2020).
4.3.1 Payment system industry
In general, the payment system industry is not perfect, and it tends to be either: (1)
too concentrated (i.e. monopolistic) due to network effects (BOC et al., 2020; Adrian
& Mancini-Griffoli, 2021; Ahnert et a l , 2022; Alfonso et al., 2022; BIS, 2021; Cecchetti &
Schoenholtz, 2021; Chen et al., 2022), which may result in increased prices and reduced
innovation (BOC et al., 2020; Alfonso et al., 2022; Chen et al., 2022); or (2) too fragmented,
which may result in difficulties in interoperability of payment systems, increased costs,
and reduced innovation (BOC et al., 2020; Alfonso et al., 2022).
With the creation of a safe, open, and competitive CBDC platform the central bank
would encourage competition and innovation in the financial system (Adrian & ManciniGriffoli,
2021; Ahnert et al., 2022; Alfonso et al., 2022; BIS, 2021; Chen et al., 2022; Chiu et
al., 2019; Engert & Fung, 2017; Infante et al., 2022). PSPs may further provide additional
services on top of the CBDC platform, such as banking, e-commerce, messaging, and
social media (BIS, 2021). For example, if CBDC provides necessary functionality it
may promote innovation through the development of "smart contracts", which would
allow automating any actions related to financial transactions (Alfonso et al., 2022).
Furthermore, many authors point out that adoption of CBDC would improve efficiency
(Adrian & Mancini-Griffoli, 2021; Auer, Frost, et al., 2021; Engert & Fung, 2017; Infante
et al., 2022), increase convenience (Alfonso et al., 2022), and reduce costs in the payment
system (Alfonso et al., 2022; Cecchetti & Schoenholtz, 2021; Chen et al., 2022).
Contrary to the rest of the literature, Cecchetti and Schoenholtz (2021) have argued
that adoption of CBDC may result in a reduction of competition. The authors have not
explicitly defined the reason, however, it appears to be implied that CBDC is a substitute
for products offered by PSPs, rather than a complement. The researchers highlight that
under such conditions, the adoption of CBDC would result in a lack of innovation and
increased costs in the payment system. (Cecchetti & Schoenholtz, 2021)
As previously mentioned, the competition induced by the adoption of CBDC may
positively impact bank intermediation, however, other unfavorable effects may be caused
by CBDC. Auer, Frost, et al. (2021) have suggested that CBDC may weaken smaller banks
due to lack of access to large funding markets, and as a result make the banking sector
less competitive. Moreover, Chen et al. (2022) have argued that CBDC may exacerbate
bank runs from weaker banks to stronger banks, further making the banking system
concentrated.
4.3.2 Payment standard
CBDC provides an opportunity for the central bank to start with a clean slate and build
an ideal open payments platform (Auer, Frost, et al., 2021). Through it, the central bank
would be able to influence and set a standard for the overall payments industry (BIS,
2021). CBDC may become an open and competitive payments platform with defined
45
4. SYNTHESIS
standards that would allow PSPs to integrate their systems and further innovate (BOC
et a l , 2020; Alfonso et al., 2022; BIS, 2021).
4.3.3 Benefits and costs
In addition to the previously mentioned benefits, CBDC also delivers many other improvements
in the payment system.
In case private digital payment systems fail, C B D C may serve as an alternative
backup payment system, increasing the resilience of the financial system (BOC et al.,
2020; Adrian & Mancini-Griffoli, 2021; Alfonso et al., 2022). These failures may potentially
occur due to power outages, natural disasters, management failures, etc. (Alfonso et al.,
2022).
CBDC increases the overall payment flexibility by providing easy methods for distributing
funds at a large scale and to remote locations (Alfonso et al., 2022). For example,
in case of emergencies, it may serve as a backup option to cash, as it is much easier to
distribute (BOC et a l , 2020; Alfonso et a l , 2022).
CBDC would allow for a more direct settlement of transactions without any intermediaries,
simplifying the architecture of the payment system (Alfonso et al., 2022; BIS,
2021) .
However, Alfonso et al. (2022) suggest that the initial implementation costs paid
by the central bank may be significant. Additionally, it may also require staff training,
purchasing licenses, ensuring good cyber security practices, and providing the public
with education programs. Nevertheless, the total benefits of the adoption would likely
outweigh the total costs. (Alfonso et al., 2022)
4.4 Financial inclusion
Financial inclusion is another key aspect of CBDC's impact. It represents the availability
and cost to use financial services and instruments by individuals and firms (Chen et al.,
2022) . Financial inclusion issue is especially important in developing economies, where
access to digital payments and other financial services may be constrained (BIS, 2022;
Chen etal., 2022).
Central banks are motivated to increase financial inclusion because it delivers many
benefits, such as reduced poverty, increased economic growth, reduced income inequality,
enhanced financial stability, and improved effectiveness of monetary policy
transmission, among others (Lannquist & Tan, 2023). To receive these benefits, central
banks may need to address certain barriers to financial inclusion, which would be
presented further.
4.4.1 Barriers
There are various kinds of barriers that may limit financial inclusion. It could be related to
high costs of financial services (BIS, 2022; Chen et al., 2022), geographical inaccessibility
(BIS, 2022), financial illiteracy (Alfonso et al., 2022; BIS, 2022; Chen et al., 2022; Lannquist
& Tan, 2023), fear of cyber fraud (Alfonso et al., 2022), distrust of formal financial
46
4- SYNTHESIS
institutions (BIS, 2022), or lack of formal identification and documents (Alfonso et al.,
2022; BIS, 2022). In particular, it may be caused by digital exclusion, such as lack of
digital infrastructure (Alfonso et al., 2022; Chen et al., 2022; Lannquist & Tan, 2023), or
similarly, digital illiteracy (Alfonso et al., 2022; Lannquist & Tan, 2023).
Most of these issues might be addressed with supplementary policies or CBDC itself.
For instance, addressing digital exclusion and illiteracy may require implementing digital
literacy programs, infrastructure development, promoting access to mobile phones, and
creating a digital identification system, among others (Lannquist & Tan, 2023).
Failure to design CBDC and carry out supplementary policies to address the barriers
to financial inclusion may likely not improve the situation, or even cause financial
exclusion. If barriers to financial inclusion were not addressed, and CBDC eventually
replaced cash, it would leave people without CBDC or cash, creating financial exclusion.
(Lannquist & Tan, 2023)
4.4.2 Addressing exclusion
Many authors point out that CBDC may facilitate financial inclusion (Adrian & ManciniGriffoli,
2021; Alfonso et a l , 2022; Andolfatto, 2020; BIS, 2022; Cecchetti & Schoenholtz,
2021; Chen et al., 2022; Griffoli et al., 2018; Infante et al., 2022; Lannquist & Tan, 2023;
B. J. Tan, 2024). Specifically, by overcoming previously mentioned barriers to financial
inclusion (Alfonso et al., 2022; BIS, 2022; Chen et al., 2022; Lannquist & Tan, 2023).
Furthermore, some authors argue that in order for the policies to be effective, CBDC
should also replicate desirable features of cash, and generally be more valuable as a
payment method. For instance, it should be more efficient, secure, trusted, affordable,
widely accessible, and should provide some anonymity at least for small transactions.
(Lannquist & Tan, 2023; B. J. Tan, 2024)
Others suggest that CBDC may indirectly, through competition induce private firms
and banks to provide better offers and potentially increase financial inclusion (Alfonso
et al., 2022; Andolfatto, 2020; Chen et al., 2022). Consequently, it would also increase the
amount of new deposits from previously unbanked, contributing to bank intermediation
(Andolfatto, 2020). Likewise, under the two-tiered model where CBDC is complementary
to bank deposits, it has the potential to incentivize the unbanked to open bank
accounts, therefore increasing financial inclusion and promoting bank intermediation
(B.J. Tan, 2024).
4.4.3 Broader financial inclusion
After the initial adoption of CBDC by the unbanked, it could serve as an entry point for
further financial inclusion, helping bring other services to the unbanked, such as access
to credit, cross-border payments, insurance, savings, and others (Adrian & ManciniGriffoli,
2021; Lannquist & Tan, 2023). This way CBDC would also provide greater
integration of financial services (Lannquist & Tan, 2023).
Although, CBDC is not a perfect solution to financial inclusion. With supporting
policies it may be able to overcome some barriers, but not all of them (Chen et al., 2022;
Lannquist & Tan, 2023). Nevertheless, CBDC has certain unique features beneficial for
financial inclusion that private alternatives may not provide (Lannquist & Tan, 2023).
47
4- SYNTHESIS
4.4.4 Informal economy
On a related note, Alfonso et al. (2022) provide further insight into the topic of the
informal economy, which shares similarities with financial inclusion. Informal or shadow
economy is usually composed of small firms and workers who generate their income
outside of formal reporting frameworks. The existence of informal sectors is particularly
common in developing economies, which also tend to greatly rely on cash. (Alfonso
etal, 2022)
Informality may have considerable adverse effects on the economic growth and
development of countries. It may deprive governments of the much-needed tax revenue.
Additionally, it may constrain the ability of firms to find credit in the informal economy
Moreover, it may even reduce the incentive of firms to financial long term-projects due
to high risks and no legal protection. As a result, it limits the ability of these firms to
achieve economies of scale and innovation. (Alfonso et al., 2022)
CBDC can be seen as a solution to informality if there is enough adoption. For
instance, widespread adoption of CBDC by consumers could help push informal firms
and workers into the formal sector. Reduced informality would broaden the tax base,
improve social and regulatory protection, and enhance the business environment for
firms to invest and grow. (Alfonso et al., 2022)
4.5 International financial system
The current international financial system provides various methods for cross-border
financial transactions, however, it is criticized for having many inherent issues. For
instance, it may include high transaction costs (Adrian & Mancini-Griffoli, 2021; Alfonso
et al., 2022; Auer, Frost, et al., 2021), slow transaction processing (Adrian & ManciniGriffoli,
2021; Alfonso et al., 2022; Auer, Frost, et al., 2021; Chen et al., 2022), high
complexity of transaction process and infrastructure (BOC et al., 2020; Adrian & ManciniGriffoli,
2021; Alfonso et al., 2022; Auer, Frost, et al., 2021; BIS et al., 2021), inconsistent
standards, limited operating hours, legacy systems, increased maintenance costs, weak
competition (BIS et al., 2021), among others.
Despite that implementing a cross-border CBDC system is likely even more challenging
than just a domestic CBDC system (Alfonso et al., 2022), the implementation
of it would allow central banks to start with a clean slate and address all the inherent
issues of the current international financial system (Auer, Frost, et al., 2021; BIS, 2021;
BIS et a l , 2021).
In particular, according to Auer, Haene, and Holden (2021) adoption of any international
multi-CBDC (mCBDC) system can mostly address the previously mentioned
issues with the current system. Furthermore, the literature suggests that it may provide
a lot of benefits, such as: (1) simplifying international financial architecture (Alfonso
et al., 2022; BIS et al., 2021); (2) increasing efficiency (Alfonso et al., 2022; BIS, 2021;
BIS et al., 2021); (3) promoting competition (Adrian & Mancini-Griffoli, 2021; Auer,
Frost, et al., 2021); (4) reducing transaction time (Chen et al., 2022); (5) reducing transaction
costs (Alfonso et al., 2022; BIS, 2021; Cecchetti & Schoenholtz, 2021; Chen et al.,
2022), which is especially important for developing economies because of remittances
48
4- SYNTHESIS
(Alfonso et al., 2022; Chen et al., 2022); (6) enhancing technological integration (BIS
et al., 2021); (7) improving technical capabilities (BIS et al., 2021); (8) increasing safety
(BIS et al., 2021); and (9) potentially providing more effective implementation of capital
flow management (BIS et al., 2021).
In further subsections more details will be provided on the possible mCBDC architectures,
the impact of international CBDC, and possible solutions to adverse effects.
4.5.1 International CBDC architecture
Limited to no cooperation among central banks in the development of international
CBDC would likely result in low interoperability and facilitate unrestricted access to
some CBDCs in any jurisdictions without regard for local authorities (BIS et al., 2021).
Alternatively, if there is a certain degree of cooperation among central banks, they may
implement several possible architectural models for interoperability between CBDC
systems across jurisdictions (Auer, Haene, & Holden, 2021; BIS et al., 2021).
There are three main mCBDC models outlined by Auer, Haene, and Holden (2021):
(1) compatible CBDC system, which ensures interoperability of CBDC systems through
adherence to common international standards, similar to traditional cross-border payment
system; (2) interlinked CBDC system, which further provides interoperability of
CBDC systems through shared technical interfaces for standardized communication
between CBDC systems; and (3) single system for mCBDC, which by far is the most
ambitions model that provides complete interoperability of C B D C systems with one
common technical system and a set of standards. (Auer, Haene, & Holden, 2021; BIS
et al.,2021)
The implementation of any of these mCBDC models and system interoperability
would require strong cooperation and coordination among central banks. In particular,
it would require an alignment of regulatory and supervisory frameworks for crossborder
payments, ensuring anti-money laundering / combating the finance of terrorism
consistency, and establishing consistent technical standards for all systems. (Auer, Frost,
et al.,2021; BIS et al.,2021)
4.5.2 International risks
The adoption of C B D C with international capabilities may bring various risks and
opportunities. The magnitude of the impact would depend on international adoption,
which in turn depends on the design of CBDC and the degree of collaboration between
issuing and recipient countries (BIS et al., 2021). The following discussion assumes that
central banks across jurisdictions allow unrestricted cross-border usage of their CBDCs
(Alfonso et a l , 2022).
Capital flow volatility
With the adoption of CBDC, remittances would become cheaper and more accessible
(Alfonso et al., 2022; BIS et al., 2021). As a result, this would increase capital flow volatility
(Alfonso et al., 2022; BIS et al., 2021; Minesso et al., 2022), facilitate capital movements
across jurisdictions in response to adverse shocks (Alfonso et al., 2022; Minesso et al.,
49
4- SYNTHESIS
2022), increase the volatility of exchange rates (BOC et al., 2020; BIS et al., 2021; Chen
et al., 2022; Minesso et al., 2022), and generally make economies more integrated (BIS
et al., 2021; Minesso et al., 2022). Furthermore, international CBDC may render existing
mechanisms of capital flow management ineffective and would require adopting new
measures to contain spillovers (BIS et al., 2021).
Currency substitution
International CBDC would lower usage costs for foreign currencies, further increasing
the attractiveness and demand for such currencies (BIS, 2021; BIS et al., 2021), especially
for well-established and trusted currencies (BIS et al., 2021). This, in turn, may result
in an increase of currency substitution via the adoption of a foreign CBDC (BOC et al.,
2020; Alfonso et al., 2022; BIS, 2021; BIS et al., 2021; Cecchetti & Schoenholtz, 2021; Chen
et al., 2022; Popescu, 2022). In particular, it would affect countries with high costs of
payments, less credible governmental institutions, and financial instability (Alfonso
et al., 2022; BIS et al., 2021; Cecchetti & Schoenholtz, 2021; Chen et al., 2022; Popescu,
2022). For such countries, the risk of capital flow volatility would also be heightened
(Alfonso et a l , 2022).
The existence of a foreign currency in an economy reduces the proportion of money
in circulation that is under the control of the domestic central bank (BIS et al., 2021).
Therefore, for the receiving country, currency substitution may undermine monetary
policy independence, potentially weakening monetary policy transmission and control
of financial stability (BOC et al., 2020; Alfonso et al., 2022; BIS et al., 2021; Minesso
et al., 2022). O n the other hand, for the issuing country, shifts in foreign demand for
CBDC with large movement in capital flows may also potentially interfere with domestic
monetary policy (BIS et al., 2021).
Additionally, cheaper and faster international transactions might increase the risk of
runs on the domestic banking sector and currency (Alfonso et al., 2022; BIS et al., 2021).
Furthermore, currency substitution may undermine the ability of the domestic central
bank to be the lender of last resort due to the possibility that commercial banks would
mostly rely on liabilities in non-domestic currency. Therefore, the central bank would
only be able to provide liquidity from reserves of non-domestic currency, or with the
help of foreign central banks. (BIS et al., 2021)
Given poor cooperation among tax authorities across jurisdictions, the existence of
a foreign C B D C may also result in an increased possibility of tax avoidance and loss
of oversight by domestic authorities (BOC et al., 2020; Alfonso et al., 2022; Chen et al.,
2022).
BOC et al. (2020) and Alfonso et al. (2022) suggest that similar issues to what was
discussed above may also arise with the issuance of private digital currencies.
Reserve currency configuration
Some also argue that the adoption of international CBDC might impact the international
reserve currency configuration, i.e., currencies commonly used for international transactions.
CBDC may even be designed in a way to be most attractive for international trade
and finance. (BIS et al., 2021; Isaacson et al., 2022)
50
4. SYNTHESIS
However, a foreign currency is unlikely to gain widespread adoption just because it is
digital (BIS, 2021). Currency internationalization is usually not driven by technological
factors, but rather by the credibility and stability of financial institutions, financial
openness, rule of law, and geopolitical forces in the issuing country (BIS, 2021; BIS et al.,
2021; Isaacson et al., 2022). This counterargument also applies to concerns of widespread
currency substitution; it is unlikely to occur just because the currency is digital (BIS,
2021).
Therefore, CBDCs may facilitate changes to the configuration of reserve currencies,
but not dramatically (BIS et al., 2021; Isaacson et al., 2022). However, it might have a
stronger effect in regions with close economic and political connections (BIS et al., 2021).
This possibility may potentially require redesigning international monetary backstops
(BIS e t a l , 2021).
Banking sector
In another paper, Popescu (2022) has pointed out that the introduction of a foreign CBDC
that allows unrestricted international transactions by foreigners would potentially result
in adverse effects on the domestic banking sector including bank disintermediation.
The effect is further exacerbated if foreign CBDC is interest-bearing and is issued by a
credible central bank. (Popescu, 2022)
This finding might suggest that under no restrictions on the usage of foreign CBDCs,
the effects on the domestic economy from the introduction of a foreign CBDC may be
similar to the effects from the introduction of a domestic CBDC, which were described
in previous sections.
4.5.3 Addressing risks
Many authors have suggested a wide range of solutions to prevent or reduce the adverse
effects of international CBDC. These solutions are largely achieved through controlling
or limiting cross-border usage of CBDC (BIS et al., 2021).
Implementation of solutions would likely require CBDC accounts linked to a digital
ID so that a user would have to provide a valid digital ID to have access to their CBDC
account. This would provide the central bank with the technical capabilities to restrict
access based on residence or nationality. Although there might be certain difficulties in
using digital ID information outside of the originating country, this may be resolved
through international cooperation. (BIS, 2021)
The most common approach is to prohibit or limit the usage (i.e. transactions or
holdings) of CBDC for foreigners (Adrian & Mancini-Griffoli, 2021; Alfonso et al., 2022;
BIS, 2021; BIS et al., 2021; Chen et al., 2022; Minesso et al., 2022). Alternatively, the issuing
countries may allow local authorities in recipient countries to impose such restrictions
in their jurisdiction (Adrian & Mancini-Griffoli, 2021; BIS et al., 2021).
Additionally, many other potential methods for the issuing countries may address
the risks, including: (1) setting strict CBDC usage conditions for users and merchants
(BIS et al., 2021); (2) implementing pricing mechanisms, such as fees on large or frequent
transactions (BIS et al., 2021); (3) limiting circulation through programmability features
51
4. SYNTHESIS
of CBDC (BIS et al., 2021); and (4) integrating capital flow management capabilities
directly into cross-border CBDC specification (Adrian & Mancini-Griffoli, 2021).
Largely, these solutions require strong collaboration and coordination among central
banks to be effective (Adrian & Mancini-Griffoli, 2021; Alfonso et al., 2022; BIS et al., 2021;
Chen et al., 2022; Popescu, 2022), however, there are some methods that central banks
may implement independently. In particular, a central bank may limit the conversion
of domestic currency into foreign CBDCs (Alfonso et al., 2022), or they may go even
further by implementing strict legal tender regulations limiting or banning possession
of foreign CBDCs (Alfonso et al., 2022; BIS, 2021).
Additionally, some authors suggest that recipient countries may address currency
substitution by issuing their own convenient, efficient, and competitive domestic CBDC
(BOC et al., 2020; Alfonso et al., 2022; Cecchetti & Schoenholtz, 2021). However, this
would only be effective if the primary cause of currency substitution is lack of convenience
and efficiency (Alfonso et al., 2022). This measure will likely not be effective in
economies with financial instability and low trust in governmental institutions, because
the issued CBDC will not gain the necessary trust (Alfonso et al., 2022). However, with
a domestic CBDC, it might be possible to reduce spillover risks by implementing flexible
or reduced interest rates on CBDC (Minesso et al., 2022).
Generally, the effectiveness of these measures may depend on the design of CBDCs
and the ability of authorities to enforce restrictions (Alfonso et al., 2022).
52
5 Discussion
Understanding the potential implications that CBDC technology may have on the economy
is essential for a successful adoption of CBDC while maximizing possible benefits
and reducing risks. This research provides a broad overview of the literature on CBDC,
summarizing and synthesizing the most relevant information from the sample. This
section finalizes the study by providing an outline of key takeaways for all impact
perspectives and discussing policy considerations and further research.
5.1 Impact perspectives
As previously shown in the synthesis there are five prominent impact perspectives.
Among them, the most detailed were financial stability, monetary policy, and international
implications. They all present their own interesting findings specific to their topic.
The most important findings will be further summarized.
The financial stability perspective outlines the main concerns of central banks regarding
CBDC. Specifically, concerns about bank disintermediation, bank runs, and further
adverse consequences. However, the extent of bank disintermediation is still argued
given the existence of an opposite bank intermediation mechanism through competition.
Furthermore, many solutions were presented to minimize these risks, including
remuneration, architectural designs, and other restrictions. Therefore, these risks can be
manageable if handled properly.
The monetary policy perspective provides insight into possible changes to the monetary
policy approaches with the existence of CBDC. In particular, with sufficient adoption,
a central bank may take a new dominant credit allocation role within the economy. Furthermore,
new policy instruments may become available, or existing would become
more effective. For instance, monetary policy transmission would likely be strengthened
if C B D C remuneration is used as a policy instrument. Likewise, CBDC may provide
functionality to conduct negative interest rate policy and implement innovative programmable
fiscal transfers to stimulate aggregate demand. Additionally, the vast amount
of economic data from transactions may provide useful insight for policy decisions, and
increased transparency would allow to combat illegal activity more effectively. However,
operational risks should also be taken into consideration and the system should be
designed with resilience in mind.
The financial innovation perspective presents various beneficial changes to the financial
industry. In particular, the introduction of CBDC would spur competition and
stimulate innovation in the financial payments industry. CBDC may serve as a welldefined
innovative payment system standard that all PSPs may adopt and further develop.
Overall, CBDC would simplify the payment architecture, and increase resilience
and flexibility of the system. Development and implementation costs for CBDC may be
substantial, however some argue that total benefits might outweigh these costs.
The financial inclusion perspective describes factors limiting inclusion and how they
could be addressed with CBDC. The most commonly mentioned barriers to inclusion are
inaccessibility due to high cost or geographical location, financial and digital illiteracy,
53
5. DISCUSSION
and distrust of formal institutions. To overcome exclusion, the literature suggests replicating
the most desirable features of cash in CBDC to substitute cash and implementing
supplementary policies to address specific barriers to inclusion. Furthermore, these
measures might also help address informality in the economy. Financial inclusion and
reduced informality would significantly benefit economic growth and overall prosperity,
especially for developing economies. Moreover, CBDC may serve as an entry point for
further financial inclusion and access to a broader variety of financial services.
The international implications perspective examines the potential effects of CBDC
on the international monetary system. A multi-CBDC arrangement may solve many
issues with the current international payment system, such as high transaction costs
and slow processing. Furthermore, mCBDC may simplify the architecture, enhance
efficiency, and promote competition. However, cooperation and coordination are key to
achieving these benefits and minimizing potential risks. Insufficient cooperation and
control of international CBDCs may create undesirable adverse effects. For instance, it
may significantly increase capital flow and exchange rate volatility. In addition to that,
it may promote currency substitution, especially in countries with financial instability,
potentially undermining monetary policy independence, facilitating currency runs, and
increasing tax avoidance. Moreover, an uncontrolled foreign CBDC may cause similar
financial stability issues to a domestic CBDC, or perhaps more severe. Additionally, there
are concerns that an international C B D C may even change the international reserve
currency configuration, although it is unlikely. Nevertheless, the literature suggests
numerous solutions that may help address these risks, including various restrictions,
fees, limits, regulations, and issuance of a domestic CBDC. Therefore, it may be possible
to benefit from the adoption of international CBDCs while minimizing potential risks,
although it would require strong international cooperation.
Based on the above summary of impact perspectives a mind map was compiled to
illustrate the structure of the results. The mind map is presented below in Figure 6. It
provides a high-level overview of topics and findings discussed in the research.
54
5. DISCUSSION
Enhanced
Economic
Growth
Addressing
Informality
Capital
Flow
Volatility
lulti-
CBDC
System
Currency
Substitution
International
Implications
Reserve
Currency
Configuration
Solutions to
International
Risks
Financial
Stability
Bank Inter-
mediation
Broader
Inclusion
Current
System
Issues
Financial
Inclusion
Addressing
Exclusion
Existing
Barriers
Resilience
and
Flexibility
C B D C Impact
Perspectives
Financial
Innovation
Simplified
Architecture
Payment
System
Standard
Operational
Risks
Competition
and
Innovation
Dominant
Credit
Allocation
Role
Monetary
Policy
Bank Runs Solutions to
Instability
Risks
Data
Analytics
and
Transparency
Policy Rate
Transmission
Mechanism
Programmable
Fiscal
Transfers
Negative
Interest
Rate Policy
Figure 6: Mind map of impact perspectives
5.2 Policy and research considerations
The results of the systematic literature review represent a snapshot of the literature on
the topic of C B D C economic impact. It can be used by policymakers, researchers, and
academics as an outline of the most discussed topics in the literature to get a good
overview of the field. The findings contain mentions of benefits, risks, and solutions
across all related topics, thus they could serve as a basis for a general cost-benefit analysis
for the adoption of C B D C . Overall, it appears that C B D C may provide substantial benefits.
55
5. DISCUSSION
Depending on the policy objectives and economic context it could be worth adopting
CBDC despite the potential risks, which could also be manageable.
As previously mentioned, the major limitation of the research is the nature of the
field itself. There is a limited possibility of conducting empirical research on the topic
of C B D C given that it is still an emerging field. Therefore, all statements are purely
hypothetical and might not be reflected in reality when CBDC is adopted.
Likewise, some findings may assume extreme scenarios which are very unlikely
given how cautious all central banks are in the adoption of CBDC. For instance, some
findings assume that there would be a substantial adoption of CBDC by the general
public. Without a considerable adoption, none of these effects would be enabled. In
addition to that, some of the considerations require special features built into CBDC,
such as remuneration. Therefore, it is necessary to consider the context when applying
the results of this research to a particular case study.
There is also a risk of reporting bias. Some of the topics might not have been identified
or sufficiently discussed, possibly missing certain findings. Nevertheless, the research
contained a large number of reviewed papers and the general aim was to present the
most highly discussed topics in the literature. Thus, the results still present the most
commonly mentioned topics in the sample literature.
Additionally, literature and opinions may change over time, therefore this systematic
literature review represents results only until September 2024. It is important to remember
this, given that C B D C is an emerging field of study where some of the findings
might become outdated.
Addressing the above limitation would largely require having a real and successful
implementation of CBDC. Only under such empirical conditions, it would be possible
to make statements with absolute certainty. Despite the above limitations, the findings
from this research are reaffirmed by the most credible sources on the topic of CBDC,
making them unlikely to be inaccurate or get outdated. Therefore, they are still reliable,
although it is necessary to consider these limitations.
With all that being said, further research might involve a more detailed analysis of
particular impact perspectives or subtopics. In addition to that, case studies might be
conducted analyzing how CBDC would impact the economy under specific conditions.
As previously mentioned, the most desired research should ideally be empirical, however,
it may not be possible. Overall, there are many aspects of this field to be researched.
56
Conclusion
CBDC is an emerging field that promises huge potential for the economy. It may deliver
various benefits for households and firms, serve as a valuable policy instrument for
governments, and promote innovation in the financial system. In particular, C B D C is
significantly more efficient and technologically flexible, it may provide central banks
with innovative monetary instruments, promote financial inclusion and innovation, and
resolve many of the current problems in the international payment system.
However, it is also important for central banks to account for any risks that the
adoption of CBDC might entail. For instance, bank disintermediation, bank runs, and
currency substitution, among others. These concerns may be largely addressed through
various limits, design features, and other measures.
This study may provide a good overview of the field for policymakers and academics,
and, possibly, a basis for a general cost-benefit analysis for the adoption of CBDC. Overall,
I believe that CBDC is worth adopting, however, it is important to consider the policy
objective of the central bank and the general economic context. Further research may
focus more on identifying the impact of CBDC under specific conditions, and, when it
will become available, conducting empirical studies.
57
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