Is There a Case for Central Bank Digital Currency?

15 Jan 2020

- Digitisation and the trend towards cashlessness has led some central banks to consider the introduction of a central bank digital currency (CBDC);

- Many central banks have determined that developments in technology (fast-payments innovations in particular) mean that many of the potential benefits of CBDC can be satisfied in other ways and that the case for CBDC has therefore not yet been made;

- However, broader public policy concerns around the growth of private forms of money remain, with the introduction of CBDC seen as part of a potential reform solution.


Digitalisation is changing the nature of many aspects of economic life. One manifestation of this is a decline in the use of cash as a daily payment method as digital payments rise. Digital innovation is driving efforts to build new forms of money itself. The history of money suggests that, while its basic functions may remain constant (in so far as it provides a unit of account, a means of payment, and a store of value), the form that money takes does evolve in response to user needs.

The trajectory of digitalisation and cashlessness is prompting some central banks to consider the introduction of central bank digital currency (CBDC), which some see as the potential next milestone in the evolution of money.

There are a range of different models of CBDC, but most would provide for it to be a digital form of fiat money issued by the central bank as legal tender. It would be compatible with a variety of technologies and widely available for all types of payments, including person-to-person, person-to-business, and business-to-business transactions of any amount. By contrast, central banks typically only issue two types of money: cash and reserve balances, with the latter only being used to settle wholesale interbank payments.

Technologically, it is likely that CBDC would use either a distributed ledger, or the issuing authority could issue electronic currency in the form of files or ‘tokens’ stored in digital wallets provided by financial institutions.

The International Monetary Fund (IMF) considers the main rationale for exploring CBDC in advanced economies to be ‘countering the growth of private forms of money’ as the trend towards digitisation reduces the use of central bank-backed cash currency in the economy. 

Reserve Bank of Australia (RBA) Governor, Philip Lowe has similarly pointed out that there are significant difficulties and dangers associated with privately issued fiat money, saying “The history of private issuance is one of periodic panic and instability. In times of uncertainty and stress, people don't want to hold privately issued fiat money. This is one reason why today physical banknotes are backed by central banks”. Several national central banks, including those in China, Uruguay, and Sweden are working on issuing central bank digital currencies.

Sweden in particular is going cashless so quickly that some banks no longer handle it, and many businesses no longer accept it. A 2018 Riksbank survey showed that only 13% of Swedes paid for their most recent purchase in cash, down from 39% in 2010. The Riksbank has also expressed the concern that this rapid shift creates a risk that Swedes will no longer have access to a form of payment that is guaranteed by the state and not entirely in the hands of the private sector: 

“If the marginalisation of cash continues a digital krona, an e‐krona, could ensure that the general public still has access to a state-guaranteed means of payment […] Alternatively, not to act in the face of current developments and completely leave the payment market to private agents, will ultimately leave the general public entirely dependent on private payment solutions, which may make it more difficult for the Riksbank to promote a safe and efficient payment system.”


In Australia, Philip Lowe has said that the central bank has no immediate plans to issue an electronic form of Australian dollar banknotes, but that it is continuing to look at the pros and cons.



Assessing CBDC’s potential to create value requires us to explore two sides to the potential benefits and downsides:

  1. Would CBDC meet consumers needs from money as well as or better than other forms of money?

  2. Would CBDC allow central banks and other financial regulators to more fully achieve their public policy goals, including ensuring financial integrity, financial stability, and monetary policy effectiveness?

Consumers use of money:

To answer the first question, it will assist to set out the existing forms of money and measure their abilities to function as a unit of account, a means of payment, and a store of value relative to CBDC.

Physical currency has the advantage of anonymity, immediate settlement, and no default or cyber risk. Importantly, being backed by the central bank, it is generally a reliable store of value, except to the extent that it lacks returns in the form of interest, which can impact its value in a highly inflationary environment. However, it does involve high transaction costs, the inconvenience of transacting in person, and vulnerability to theft.

Commercial bank deposits:
Only about 4 per cent of money that circulates in Australia is in the form of cash. The rest is in the form of commercial bank deposits which are mostly digital, and not backed by the central bank. Banks create deposits in the form of interest-bearing debt as a by-product of their lending. Financial Times economics editor, Martin Wolf explains that while some people object that commercial bank deposits are not money but only transferable private debts, “the public views the banks’ imitation money as electronic cash: a safe source of purchasing power.”

Commercial bank deposits provide more security from theft and loss, and integration with additional services. While peer-to-peer transactions in commercial bank deposits were inconvenient in the past, requiring cheques or wire transfers, recent innovations (including fast-payments) have overcome this and the cost and inconvenience of transacting is now minimal. Though commercial bank deposits are not backed by the central bank, in Australia the government does guarantee deposits in authorised deposit-taking institutions (ADIs) up to $250,000 per person per institution. This was originally implemented in response to the Global Financial Crisis. 


A cryptocurrency is a digital currency that is secured by cryptography. Many cryptocurrencies are decentralised networks based on blockchain technology. The main advantage of cryptocurrencies is anonymity, portability, divisibility, inflation resistance, and transparency. They are not a widely accepted form of payment and their exchange rate and value can be very volatile. The transaction cost involved in making a payment with cryptocurrencies can also be very high. Further, there is concern that cryptocurrencies like Bitcoin are not rooted in any material goods, though some research claims that the cost of producing a Bitcoin for example, which requires an increasingly large amount of energy, is directly related to its market price.


Private e-money:

Private e-money, such as Facebook’s proposed Libra, could offer widespread acceptance, low transaction costs and integration with a range of interfaces and services.


From a consumer’s point of view, compared to these forms of money CBDC would seem largely indistinguishable from commercial bank deposits, and would likely circulate alongside them; thus it is unlikely to generate much interest among consumers as it offers very little in the way of noticeable advantages to them in their everyday economic activities.  Further, in a developed economy like Australia where default risk has not recently been a major concern, the distinction of being backed by the central bank is unlikely to give CBDC a clear edge.


In addition, Philp Lowe has said the development of the New Payments Platform (NPP) has the potential to be transformational and will allow many transactions that today are conducted with banknotes to be conducted electronically:



“It provides this, while at the same time allowing funds to be held in deposit accounts at financial institutions subject to strong prudential regulation and that pay interest. This combination of attributes is not easy to replicate, including by closed-loop systems outside the banking system”.


Central Bank Objectives

Financial integrity:

There is a balance to be struck between satisfying consumers preferences for privacy and mitigating risks to financial integrity. Cash protects privacy because it is anonymous, but this feature of cash lends itself to facilitating criminal financial transactions and tax evasion. The ability for CBDC to help strike this balance depends on its design, as different models would allow it to be either fully traceable, completely anonymous, or a hybrid of these options. 


Financial stability:
With CBDC sharing, as far as consumers are concerned, many of the same characteristics as commercial bank deposits, it is possible that CBDC could negatively impact financial stability by competing with commercial bank deposits. This could occur if a higher level of interest in CBDC, possibly in a moment of economic uncertainly, resulted in a rush of consumers moving to convert their commercial bank deposits to CBDC.

The IMF found that while such a response to the introduction of a readily available, safe, and liquid alternative to commercial bank deposits could resemble ‘a generalised run on banks’, the effect of this would likely be muted:

“Even if the introduction of CBDC increased the risk of systemic bank runs, deposit insurance could alleviate the effects. Liquidity provision needs are smaller in countries with deposit insurance before a banking crisis. Countries adopting CBDC should, therefore, have a deposit insurance scheme to lower the probability of runs. The effectiveness of such schemes in mitigating runs, though, will depend on the credibility of the fiscal backstop and the extent of coverage.” 


Monetary policy effectiveness:
As long as central banks retain control of interest rates on reserves and don’t lose this to CBDC, the introduction of CBDC is unlikely to significantly affect the main channels of monetary policy transmission.

However, if CBDC were to see demand for reserves disappear, a model whereby CBDC had an interest bearing functionality built into it (which has been considered feasible in the case of the e-krona) would resolve this issue and see the central bank continue to be able to conduct monetary policy through the setting of interest rates.

An IMF study concluded that while CBDC could help central banks bolster the security of payment systems, improve consumer protection, and assist with both financial inclusion and reducing the cost to society associated with the use of cash, once again regulation and fast-payment platforms offered compelling alternatives.


The RBA has similarly taken the position that the case for adding an Australian CBDC to the payments mix has not yet been established, again largely because most of the potential advantages offered by CBDS can be satisfied in other ways.



Nevertheless, the concerns remain that the repercussions of privately issued digital money could be immense.

A report by the European Parliament's Committee on Economic and Monetary Affairs has considered whether private sector entities should be allowed to control the supply of money at all or whether provision of a universal means of exchange is an activity most efficiently provided by a sovereign, much like the legal system or national security.

But the report also raises the question of whether the business models of modern financial institutions are crucially dependent on the deposit creation privilege, which implies extremely elastic credit expansion and destruction.

Whether this deposit creation privilege and the elasticity in the growth of private forms of money is an enabler for economic growth or rather an economic destabiliser is something that Martin Wolf has attempted to answer.


Pointing to a 2012 study by the IMF, he argues that the state should be given a monopoly on all money creation, just as it creates cash today “Our financial system is so unstable because the state first allowed it to create almost all the money in the economy and was then forced to insure it when performing that function. This is a giant hole at the heart of our market economies. It could be closed by separating the provision of money, rightly a function of the state, from the provision of finance, a function of the private sector”



The introduction of a CBDC may not immediately be an especially appealing development as far as its utility to consumers is concerned. However, to the extent that broader concerns exist around the growth of private forms of money and the nature of money itself, it remains an option available to reformers.

The report by the European Parliament's Committee on Economic and Monetary Affairs concluded that:

“A digital currency could also be issued by the central bank and potentially substitute for bank deposits as the main form of money holding of households and businesses. This would challenge the present fractional reserve system at its core. Increased instability of monetary aggregates and credit supply would be a possible outcome, if market participants shifted liquidity pro-cyclically between digital money and bank deposits. Commercial banks would increasingly have to rely on other funding sources than deposits, so that this disruptive change to the fractional reserve system could finally pave the way for a more stable financial system.”

The opinions and views expressed in this publication are those of the authors exclusively and do not purport to reflect the opinions, views or official policy position of AusPayNet or its members. This publication is also subject to the AusPayNet Terms of Use and Privacy Policy available on the AusPayNet website.



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The opinions and views expressed in this publication are those of the authors exclusively and do not purport to reflect the opinions, views or official policy position of AusPayNet or its members. This publication is also subject to the AusPayNet Terms of Use and Privacy Policy available on the AusPayNet website.


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