CENTRAL-BANK digital currencies are coming. China has started large-scale trials of the “e-yuan”. European officials want to launch a digital euro by 2025. America’s Federal Reserve is studying whether to follow suit. The Bahamas has already put its version, the “sand dollar”, into circulation. This sudden rush arouses both excitement and confusion. A central-bank digital currency, or CBDC, sounds like a newfangled monetary innovation, perhaps an official take on bitcoin. But it is not obvious what the point is. Many people already use digital currency, whether in mobile apps for payments or on bank websites for transfers. What are these new digital currencies and why are central banks creating them?
CBDCs are simply a digital version of cash—the physical money issued by central banks. In most countries, their design will probably resemble existing online payment platforms, with one key difference: money held on a CBDC app or website will be equivalent to a deposit at the central bank. The main motivation for central banks is to limit the risks inherent in the global shift to cashless payments. They are responsible for the safety of the monetary system, the most basic element of which is guaranteeing that people can use cash to buy things. But in a world dominated by Apple Pay or Alipay, everyday transactions would depend on private companies rather than on central banks. Cryptocurrencies like bitcoin and “stablecoins” (which peg their value to the dollar or other assets) like Facebook’s Diem (formerly Libra) are also a threat, potentially chipping away at state authority. With CBDCs, central banks will have a stronger presence in online payments. That would lessen the danger to financial stability from reliance on purely private payment systems. And some people might like having the option to keep at least some of their digital cash on a trusted official platform.
