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Global Themes Series - Central bank digital currency: handle with care (w/video)

  • Mistrust in fiat currencies, increased preference for electronic means of payment and demand for cheaper and faster cross-border payment solutions have contributed to the emergence of a large number of private digital currencies, the so-called cryptocurrencies. Because of their features, cryptocurrencies – including bitcoin – are ill-suited to fulfilling the function of money.
  • However, rapid progress on stablecoins – a category of cryptocurrencies featuring greater stability of value – seems to have played an important role in the decision of many central banks around the world to start exploring central bank digital currencies (CBDC). In most cases, the possible launch of a digital currency is still some years away.
  • Issuing a CBDC available to households and firms poses big challenges. For a central bank of a developed country, it is not obvious that CBDC represents the most suitable tool to increase the efficiency of the payment system.
  • This is especially the case in the euro area, where the unique institutional framework makes it more complicated for the ECB to manage the issue of bank disintermediation. A hard cap on the maximum CBDC holdings and the introduction of a European deposit insurance scheme (EDIS) would help reduce the risk of bank runs.

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