Central Bank Digital Currency: A Primer

digital dollar


There has been a lot of talk about central bank digital currency (CBDC) recently, as central bankers around the world are discussing the possibility of launching their own CBDCs. Some of the problems of CBDCs have been pointed out already (see, e.g., here and here), and I will not discuss them too much here. The purpose of the present article is to answer the simple question: What exactly is a CBDC? How is it different from physical cash, demand deposits, and cryptocurrencies?

What It’s Not

Let us begin with what CBDCs definitely are not: they are not a new kind of cryptocurrency akin to bitcoin. While central banks have discussed issuing CBDC in the form of a token and using distributed ledger technology (DLT), this does not mean that central banks intend to let people trade and hold it without oversight, let alone that they will not centrally control the overall supply of it. The purpose of DLT and tokenization is purely a question of which technology to use in the imposition and distribution of the digital currency; it does not mean that central banks have adopted any of the ideas behind the rise of bitcoin.

Some central banks may, however, believe that the existence and rising market value of bitcoin and other cryptocurrencies is evidence that there is a demand for digital currency and that they should therefore step up and supply it. They don’t seem to realize that the demand for bitcoin—as the demand for gold—is demand for something outside the control of central banks and governments.

It is also important to point out, contrary to what central bankers themselves think, that a CBDC is not a central bank liability any more than physical cash is. Now, in the purely formal sense of being an item on the right side of the central bank balance sheet, both cash and CBDC are liabilities. However, the definition of a liability is the obligation of delivery of goods (usually money) to the party to whom the liability is owed (see Investopedia). The holders of central bank liabilities, then, would appear to have a claim against the central banks—but what exactly do they have a claim to? The correct answer here is of course nothing, and hence, neither physical cash nor CBDCs can properly be said to be a liability. That central banks record cash as a liability is merely a relic of a bygone age when central bank notes really were money substitutes in the Misesian sense1 and the banks really were liable to surrender a sum of money (i.e., gold) when presented with a note for redemption.

(As an aside, central bank reserves are correctly listed as a liability, since the banks that hold reserves at the central bank truly have a claim against the central bank—namely, a claim to cash.)

What It Is

CBDC is or is intended to be, a digital equivalent to physical cash. Just as, say, four quarters are the equivalent of a dollar bill, so one dollar in digital currency will be the equivalent of one dollar in physical cash. It is simply a new technological expression of the same fiat money. Recall that fiat money, as Mises described it,2 is “money that comprises things with a special legal qualification,” i.e., these things are not technologically different from other things, except for the marks showing that they have a special legal qualification. The corollary of this is that technologically dissimilar things—metallic coins, paper notes, and digital assets—are all part of the supply of fiat money so long as they possess the marks confirming their legal status.

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