Both in developed and developing economies, cash usage is declining as people increasingly use digital forms of money (such as credit/debit cards, payment apps). Combined with the rise of decentralized cryptocurrencies and stablecoins, this trend shifts the balance between central-bank issued public money and private money. In response, central banks across the world are exploring central bank digital currencies (CBDCs), a new digital form of public fiat money. The number of countries exploring CBDCs has increased from only 35 in 2020 to around 100 in February 2022. Emerging markets with large unbanked populations are the most eager.
CBDCs have certain advantages for public policy makers: they would give central banks a new tool to directly influence the money supply and monitor how money is used. Moreover, CBDCs could increase financial inclusion and support citizens in time of need by enabling governments to directly transfer funds, even if people have no (access to) commercial bank accounts. Because it is digital, the use case of money could be programmed into the issuing of welfare funds, e.g. a subsidy that could only be spent on specific goods and services. It could also increase the efficiency and stability of digital payment systems, with money-creating activity being redirected towards central banks instead of commercial banks, economic activity being brought out of the shadows into the tax net, reduced counterfeiting, and the fact that it will be much more difficult to use official money for illicit purposes (e.g. money laundering, drug trafficking, terrorist financing). As a result, CBDCs would significantly expand the central bank's toolkit for ensuring financial stability. Lastly, these developments motivate central banks to exercise discipline in order to maintain the value of their currency and prevent inflation.
However, CBDCs could also infringe upon our privacy, as transactions in which CBDCs are used are likely to be auditable and traceable, as no central bank would want to allow its money to be used for illicit transactions. Furthermore, CBDCs also pose risks for countries and companies, because if currencies are less convenient or volatile, they could be displaced by private stablecoins or CBDCs issued by large economies. This would result in a loss of monetary sovereignty. In terms of money as a medium of exchange, powerful private companies with strong digital ecosystems (e.g. Apple, Meta) could come to issue their own currency at the expense of smaller companies.