Will CBDCs Disrupt the Financial Sector?

Posted on Jun 24, 2021 by Jonas Gross, Research Assistant, University of Bayreuth; Chairman, Digital Euro Association, and Jonathan Schiller, Research Assistant, University of Bayreuth

Central bankers worldwide fear that a CBDC introduction could lead to destabilizing effects in the financial sector. In this article, we discuss why this so-called disintermediation is indeed a threat and provide a simulation to quantify these effects and the transmission channels. In particular, we developed a mathematical model, a so-called dynamic stochastic general equilibrium (DSGE) model, to analyze a non-interest-bearing and an interest-bearing CBDC in times of crises and compare it with a world without CBDC. We find that a CBDC might indeed disintermediate a financial sector, but that central banks seem to have sufficient tools to prevent destabilizing effects.

Why Major Central Banks Remain Cautious About CBDCs

The declining use of cash and the emergence of technological innovations such as blockchain technology and cryptocurrencies have motivated central banks worldwide to consider issuing their own digital currencies, so-called central bank digital currencies (CBDCs). Two jurisdictions have already issued a CBDC: The Bahamas launched the Sand Dollar back in October 2020 and the Eastern Caribbean Currency Union started their CBDC “DCash” at the end of March 2021.

Unlike these pioneering island nations, advanced economies are more hesitant to issue a CBDC. China is the only advanced economy that has announced that a CBDC will actually be introduced. The European Central Bank (ECB), however, is still analyzing and discussing whether a digital euro will be issued—the same holds for other central banks in advanced economies, such as the Federal Reserve.

But why are larger, more advanced economies so cautious? One of the main reasons is uncertainty about ... 

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