Central bank digital currency research around the world: a review of literature

Abstract

Purpose The purpose of this paper is to gain some insight into central bank digital currency research by reviewing the recent advances in central bank digital currency (CBDC) research in a way that would help researchers, policy makers and practitioners to take a closer look at CBDC. Design/methodology/approach The paper uses a systematic literature review methodology. Findings The review shows a general consensus that a CBDC is a liability of the central bank and it has cash-like attributes. The review also presents the motivation and benefits of issuing a CBDC such as the need to increase financial inclusion, the need to improve the conduct of monetary policy and to foster efficient digital payments. The review also shows that many central banks are researching the potential to issue CBDCs due to its many benefits. However, a number of studies have called for caution against over-optimism about the potential benefits of CBDC due to the limiting nature of CBDC design and its inability to meet multiple competing goals. Suggested areas for future research are identified such as the need to find the optimal CBDC design that meets all competing objectives, the need for empirical evidence on the effect of CBDC on the cost of credit and financial stability, and the need to find a balance between limiting the CBDC holdings of users and allowing users to hold as much CBDC as they want, and there is a need to undertake country-specific and regional case studies of CBDC design. Originality/value This review paper offers new areas for further research in central bank digital currencies.

Circular Economy and Central Bank Digital Currency

“…Central bank digital currency (CBDC) is a digital representation of paper money or physical money (Bordo and Levin, 2017;Ozili, 2022b). The origin of CBDC dates back to the 1980s when central banks permitted commercial banks to use digital money, and this led to a rise in digital money (Adrian and Mancini-Griffoli, 2019).…”

“…This means that the CBDC can be used as a medium of exchange, a store of value, a unit of account, and for settlement of debt. CBDC can be used by individuals, firms and governments to make micro and large payments (Ozili, 2022b). A CBDC is also designed to offer settlement finality for all transactions (Calle and Eidan, 2020).…”

“…Williamson (2021) argues that CBDC tends to encourage banking panics, even though banking panics are less disruptive with central bank digital currency than with physical currency. Ozili (2022b) shows that there is a need to: (i) determine the optimal CBDC design that meets all competing objectives, (ii) determine the effect of CBDC on the cost of credit, (iii) the effect of CBDC on financial stability, and (iv) find a balance between limiting the CBDC holdings of users and allowing users to hold unlimited units of CBDC. Arner et al (2020) suggest that most central banks should focus on transforming their existing payment systems rather than on rolling out a central bank digital currency.…”

“…The direct link between CBDC and the circular economy depends on the CBDC design, and the effect on circular economy transactions. Generally, a CBDC is usually designed to meet specific goals such as payment efficiency, financial stability or financial inclusion (Agur et al, 2022;Allen et al, 2020, Ozili, 2022b. This means that the unique nature of a CBDC depends on the design of the CBDC and the goal the central bank wants to achieve by adopting a CBDC.…”

“…Central bank digital currency, apart from being a money equivalent, can be designed to be used as a payment solution for most types of transactions. A central bank digital currency has many potential benefits, including, the potential to offer low transaction cost than that charged by financial institutions, it can increase cross-border remittances and increase financial inclusion (Ozili, 2022b). Given the enormous opportunity that central bank digital currency presents for businesses and projects in the circular economy, there is need for a discussion on how circular businesses can benefit from a central bank digital currency.…”