Central bank digital currency (CBDC) : an explorative study on its impact and implications for monetary policy and the banking sector

2019

This thesis focuses on the concept of Central Bank Digital Currencies (CBDC) and the

possible implications this could entail for monetary policy, commercial banks, and payment

systems. With the declining use of cash and increased market capitalization of

cryptocurrencies, central banks face an important decision. They need to consider the possible

risks this change poses, and potential actions they could take to mitigate a potential weakening

of their monetary authority. A CBDC could be a viable option to moderate this risk, but the

potential impacts it can have are unknown. This study aims to understand the possible

implementation of a CBDC and the effects this could have on monetary policy, commercial

banks, and payment systems. Then, the ideal implementation for Norway is considered based

on the knowledge gained throughout the thesis.

Through a systematic literature review, this thesis attempts to synthesize the information

obtained into an overview of the current state of CBDC research. Therefore, an optimal

strategy proved to be a thorough literature search in order to increase the likelihood that all

relevant resources were considered. The selection of sources also went through a systematic

process to ensure the validity and reliability of the selected literature.

The literature highlights two types of CBDC, retail and wholesale. This definition is divided

further into token-based and account-based CBDCs. Research on monetary policy suggests a

CBDC would be useful at mitigating the zero lower bound (ZLB), but the actual effect of

moving the ZLB is unclear. Through a CBDC, an alternative to quantitative easing (QE) is

possible, called helicopter money. It enables the direct injection of funds into the public,

stimulating the economy. Commercial banks would likely need to increase the interest rate

offered on deposit accounts if the CBDC is interest-bearing. Funding this increase can be done

in various ways. Although a CBDC increases the ease of transferring funds into a risk-free

asset, the findings do not indicate a risk of bank runs, as long as necessary measures are in

place. Finally, the payment system can benefit from a CBDC, especially one based on

blockchain technology, from lower settlement times and costs, with the added benefit of the

security it offers.