Central Banks and Digital Currencies

Abstract

The exploration of digital currencies by Central Banks is motivated by their potential to enhance the efficiency and accessibility of payment systems and to bolster financial stability (He et al., 2020). However, the adoption of digital currencies could also yield significant transformations in the financial system, such as a potential transition from bank deposits to digital currencies (Lagarde, 2018). This transition has the capacity to disrupt the traditional intermediary role of banks in the financial system and potentially reshape the structure of monetary policy transmission (Bordo and Levin, 2017). Moreover, the introduction of Central Bank digital currencies (CBDCs) raises crucial inquiries about the role of Central Banks in the economy, encompassing their ability to manage the money supply and intervene during financial crises (Raskin and Yermack, 2016). Additionally, the emergence of cryptocurrencies, operating on decentralized blockchain technology, has also perturbed traditional financial systems and posed challenges to the position of Central Banks (Swan, 2015). Cryptocurrencies offer the potential for increased financial autonomy, as they operate without the control of any central authority or government (BIS, 2021). However, the anonymity associated with cryptocurrencies has also raised concerns regarding their potential exploitation for illicit activities, including money laundering and terrorist financing (Fernandez-Villaverde, 2018). Therefore, the objective of this thesis is to investigate the influence of Central Banks and digital currencies on the financial system and the future of money. The research will entail an extensive examination of pertinent literature on Central Bank digital currencies and cryptocurrencies, evaluating their distinctive features, benefits, and potential drawbacks. Additionally, the thesis will analyze the potential effects of CBDCs on the financial system, considering the role of banks and the transmission of monetary policy. Lastly, the study will explore the future ramifications of digital currencies on the financial system and the roles assumed by Central Banks.