Monetary policy is the process by which a central bank manages the supply and demand of money in the economy to achieve its objectives, such as price stability, economic growth, or full employment.
CBDCs can significantly impact monetary policy as central banks will have greater control over the supply of money in the economy as the currency will be held and transacted digitally. They can shape interest rates and money supply to manage inflation, which helps to keep the economy stable.
One potential application area of CBDCs is to reduce the cost of transaction between banks and other financial intermediaries. CBDCs adopted as an interbank settlement tool can streamline the financial intermediation process, giving banks faster access to liquidity which they can use to make loans to the public that may have a positive impact on the economy as a whole.
One may also anticipate CBDCs will make cross-border payments quicker, cheaper and more transparent. International remittance firms, in particular, can use them to operate more efficiently and help reduce the cost of remittance for migrant workers who send funds to their origin countries.
CBDCs are intended to supplement the existing monetary infrastructure, rather than replace it completely. CBDCs are also envisaged to ultimately promote financial stability.
CBDCs can help to prevent bank runs and other systemic crises that occur when customers flock to banks to withdraw their cash during a period of uncertainty. CBDCs can potentially offer an alternative way for people to hold their wealth digitally eliminating the need for bank deposits.
Another potential benefit of CBDCs is that they may help with the concept of a cashless society. CBDCs can be seen as an alternative to traditional currency forms , which can improve efficiency while reducing transaction costs and financial crime. The transparency inherent in CBDC issuance offers a greater level of control and visibility on illicit activity , which helps to reduce fraud and money laundering in financial transactions .
CBDCs are the future of digital payments, and their adoption can have far-reaching consequences on the world economy. They could offer considerable advantages, driving bank innovation and greater efficiency in financial management. Yet there is also the potential for negative impacts, such as a monetarily insular society with the risk of cyber attacks and system failure. As central banks continue to explore the potential of CBDCs, it is essential to find a middle ground between innovation and prudence that upholds stability and security.