The Future of Central Bank Digital Currencies (CBDCs) in Monetary Policy

Abstract

CBDCs have become one of the most influential developments in the history of monetary systems since they provide an alternative to cash in the form of a state-issued digital currency. With digital payments gaining an even firmer hold on the global market, the option of CBDCs introduces the prospects of updating the monetary policy, improving the speed of payments, and empowering financial inclusion. The current paper explores the future prospect of CBDCs in the context of monetary policy frameworks, their possible advantages and drawbacks as well as policy trade-offs. Using existing central bank projects, pilots, and theoretical frameworks, the research paper examines the ways in which CBDCs may impact the central pillars of policy implementation; that is, interest rate transmission and liquidity provision as well as inflation targeting. The comparison takes into account retail and wholesale CBDC models, determining which alternative of these has less significant implications in the financial intermediation process, stability of commercial banks, and cross-border payment system. Macroeconomic issues the paper is also attentive to include the threat of bank disintermediation, the threat of cybersecurity, and the observance of privacy. What is more, it assesses the benefits of programmable aspects of CBDCs, which may allow policy actions to be more fine-tuned and implemented earlier, as well as concerns regarding the mandates and governance when it comes to central banks. The study synthesizes available literature and uses case examples of early adopters of the CBDCs, including China, the Bahamas, and Sweden, which points out the successful introduction of CBDCs into monetary policy through careful design decisions, excellent regulatory frameworks, and international coordination of standards. The results indicated that although CBDCs can bring exciting potential opportunities in enhancing the effectiveness of policies and resilience, the long-term effects can only be determined by keeping innovation and financial stability in a balanced manner. Finally, CBDCs have the potential to restructure the relationship between central banks, commercial banks and citizens, and that is why the development of such currencies turns out to be the critical topic of future monetary systems worldwide.