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How Could Central Bank Digital Currencies Be Designed?

Author(s): Itai Agur, Anil Ari, Giovanni Dell’Ariccia

Date published: Feb 2020

SUERF Policy Note, Issue No 129
by Itai Agur, Anil Ari and Giovanni Dell’ Ariccia
International Monetary Fund


JEL-codes: E41, E58, G21.
Keywords: CBDC, fintech, digital currency, financial intermediation, network effects.

As various central banks weigh the introduction of central bank digital currency (CBDC), it is vital to study their implications in frameworks that capture key features of the payment system. This study considers households that can sort into cash, CBDC and bank deposits according to their preferences over anonymity and security. Importantly, network effects make the convenience of payment instruments dependent on the number of their users. CBDC can be designed with attributes similar to cash or deposits, and can be interest-bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank"s tradeoff. This is a finding of policy relevance, as central banks" CBDC studies currently focus primarily on non-interest bearing CBDC.

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SUERF Policy Note, Issue No 129SUERF Policy Note, Issue No 129

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