Central bank digital currencies: Central banks go blockchain

Introduction

Motivated by the appearance of cryptocurrencies like Bitcoin and Ether, the first central banks started to analyze a potential introduction of an own digital currency as early as 2014. The announcement of the worldwide cryptocurrency project “Libra” in 2019 has further accelerated this process, and an increasing number of central banks are now exploring launching their own central bank digital currency (CBDC). The focus of worldwide central banks on digital currencies is further driven by the declining demand for cash in most regions worldwide. In Sweden, for example, cash is now used on rare occasions only. Consequently, Swedish central bank money is mainly displaced by bank money yielding higher systemic risks and dependencies on private financial institutions. In the event of a financial crisis, turmoil in the financial sector could amplify due to the lower role of central bank money and could lead to a broader global reach. Central bank digital currencies represent a digital form of central bank money and are considered as alternatives to cash, as the classical physical form of central bank money.

CBDCs have the potential to address important (macroeconomic) issues and can yield significant improvements. First, transactions can be made more secure and more resilient to attack vectors. Second, payment efficiency could be improved by increasing transaction speed and decreasing transaction costs. Third, financial inclusion could be increased since unbanked people living in remote areas could participate in the financial system.

This article provides basic insights into CBDC by defining CBDC, explaining the design principles of CBDC, discussing current CBDC projects and evaluating if a CBDC should be issued on a blockchain system.

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Jonas Gross is a project manager and research assistant at the Frankfurt School Blockchain Center (FSBC). His field of interest is primarily cryptocurrencies. Besides, in the context of his Ph.D. thesis, he is analyzing the impact of blockchain technology on monetary policy of worldwide central banks. He mainly studies innovations such as central bank digital currencies (CBDC) and other cryptocurrency projects such as “Libra.” You can contact him via mail (jonas.gross@fs-blockchain.de), LinkedIn (https://www.linkedin.com/in/jonasgross94/), Xing (https://www.xing.com/profile/Jonas_Gross4), or follow him on (Twitter Jonas__Gross).

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