Search Results (43)

This paper measures the post-treatment effects of Central Bank Digital Currencies (CBDCs) on mobile money and outstanding loans from commercial banks as a percentage of the GDP in Nigeria and the Bahamas, respectively, from the perspective of financial inclusion. The literature on the topic has primarily focused on the technological specifications of CBDCs and their potential future implementation. This article addresses a gap in the empirical literature by examining the effects of CBDCs. To this end, a Synthetic Control Method (SCM) is applied to the Bahamas (SandDollar) and Nigeria (eNaira) to construct a counterfactual scenario and assess the impact of CBDCs on mobile money and commercial bank loans. Nigeria’s mobile money transactions as a percentage of the GDP increased significantly compared to the synthetic control group, suggesting a notable positive effect of the eNaira. Conversely, in the Bahamas, actual performance fell below the synthetic control, implying that SandDollar may have contributed to a decline in outstanding loans. These results suggest that CBDCs could pose a “deposit substitution risk” for commercial banks. However, they may also enhance the performance of other Fintech tools, as observed in the case of mobile money. As CBDC implementations worldwide remain in their early stages, their long-term effects require further analysis. Full article

This paper considers the impact of Central Bank Digital Currencies (CBDCs) on the world’s financial systems with a special emphasis on G20 economies. Using quarterly macro-financial data for the period of 2000 to 2024, collected from the IMF, BIS, World Bank, and Atlantic Council, a Global Vector Autoregression (GVAR) model is applied to 20 G20 countries. The results reveal significant heterogeneity across economies: CBDC shocks intensify emerging market financial instability (e.g., India, Brazil), while more digitally advanced countries (e.g., UK, Japan) experience stabilization. Retail CBDCs increase disintermediation risks in more fragile banking systems, while wholesale CBDCs improve cross-border liquidity. This article contributes to the literature by providing the first GVAR-based estimation of CBDC spillovers globally. Full article

Central Bank Digital Currencies (CBDCs) are increasingly positioned as digital equivalents to physical cash, yet their ability to replicate the full functionality of cash remains contested. This study investigates whether the proposed Digital Euro can credibly serve as a substitute for physical Euro cash. Using a qualitative comparative framework, the analysis evaluates both currencies using 36 pairwise comparisons. The findings reveal that while the Digital Euro offers advantages in portability, divisibility, and digital integration, it falls short in key areas such as anonymity, fungibility, recognizability, and universal acceptability. These limitations are primarily due to technological dependencies, regulatory constraints, and the absence of physical tangibility. The study concludes that the Digital Euro cannot fully mimic the role of physical cash, particularly in offline and privacy-sensitive contexts. As a result, the hypothesis that the Digital Euro is an electronic equivalent of physical Euro cash is rejected. These findings underscore the continued relevance of physical currency and highlight the need for cautious, evidence-based CBDC design and implementation. Full article

In pursuit of a higher-quality post-pandemic economic recovery, Chinese authorities have accelerated the development of the e-CNY. This study posits that the e-CNY distinguishes itself from other payment instruments through its controlled anonymity, programmability, and non-interest-bearing attributes. By analyzing patents filed by the Digital Currency Research Institute of the People’s Bank of China between 2016 and 2023, the paper elucidates potential implementation strategies for these distinctive features. The findings suggest that the e-CNY may facilitate a zero-interest accrual model within the prevailing legal framework. Restricted authority access and the anonymity ensured by encrypted data further allow users to maintain a high degree of confidentiality. Additionally, conditional automatic transfers—a prominent function in the e-CNY’s smart contracts—mirror traditional automatic transfers for directed fund utilization without impeding the circulation of fiat currency. The People’s Bank of China has sought to thoughtfully integrate these functionalities into its Central Bank Digital Currency framework, aiming to minimize potential conflicts with existing legal standards. Instead of relying solely on extensive legislative revisions, China’s experience illustrates how deliberate and incremental CBDC design choices can reconcile regulatory compliance with innovative technological advancements. Full article

The implementation of Central Bank Digital Currencies (CBDCs) faces significant challenges in achieving the same level of anonymity and convenience in offline transactions as cash. This limitation imposes considerable constraints on the development and widespread adoption of CBDCs. Unlike cash, digital currencies, similar to other electronic payment methods, necessitate internet or other network connectivity to verify payment eligibility. This study proposes a secure offline payment model for CBDCs that operates independently of internet or network connections by utilizing a Trusted Platform Module (TPM) to enhance the security of digital currency transactions. Additionally, the monotonic counter, the basic component of the TPM, is integrated into this model to prevent double spending in a completely offline environment. Our research presents a protocol model that combines these easily implementable technologies to facilitate the efficient processing of transactions in CBDCs entirely offline. However, it is crucial to acknowledge the security implications associated with the TPMs and near-field communications upon which this protocol relies. Full article

Building on the Innovation Diffusion Theory, this study proposes and explores the influence of financial literacy on the behavioral intention to use central banks’ digital currency (CBDC) and the moderating role of trust of respondents in the financial institution on the above relationship. This study has employed a quantitative research design to examine the relationship between financial literacy, behavioral intention to use CBDC and trust. The final sample comprised 241 respondents who had used CBDC across India. The statistical relationship between the above variables was assessed using PROCESS macro in SPSS 23.0. Findings revealed that financial literacy emerges as a strong predictor of CBDC use. Individuals with higher financial literacy are more likely to understand the features, benefits and risks associated with adopting CBDC. The interaction effect reveals that as financial literacy increases, the relative importance of trust diminishes. On the other hand, those who lack sufficient knowledge of financial literacy depend more on trust to fill in their knowledge gaps. This is one of the first studies to scientifically support the relationship between trust and financial literacy and how both influence behavioral intention to use CBDC. This research contributes valuable knowledge to the discourse on the use of CBDC, which is crucial for achieving a nation’s broader digital transformational goal. Full article

This article offers a clear and approachable introduction to the evolving landscape of money and the frictions developing between traditional government control and decentralized finance (DeFi). Tailored for readers with a basic awareness of cryptocurrency but limited familiarity with its broader implications, the article demystifies DeFi by explaining its core concepts including blockchain, Centralized Bank Digital Currencies (CBDCs), and the historical role of government regulation of money through central banking. Against this backdrop, it examines the transformative potential of DeFi, emphasizing the growing tension between the centralized authority of governments and the decentralized ideals driving this new financial model. While governments seek to maintain stability and control, individuals increasingly gravitate toward the more affordable, efficient, and inclusive solutions promised by DeFi. Designed to empower readers with a better grasp of the forces shaping the future of finance, this article underscores the importance of understanding the delicate interplay between governmental oversight and decentralized innovation. As the digital economy expands, this dynamic struggle will influence not only economic policies but also personal financial choices and access to resources. Full article

The rise of cryptocurrencies over the past decade has promised to challenge the dominance of fiat money systems and reshape monetary policy. However, recent developments, including market volatility and the collapse of key exchanges like FTX, have eroded public trust, raising skepticism of a feasible transition to a crypto-based monetary system. This paper explores why cryptocurrencies have not met the expectations of their proponents, particularly those who saw them as a step towards Friedrich Hayek’s vision for competitive currency issuance. While cryptocurrencies reflect some aspects of Hayek’s model, their instability—especially in Bitcoin-like assets—undermines their role as a reliable alternative to fiat money. The paper also considers how central bank independence and regulatory gaps further hinder the development of a robust cryptocurrency framework. Despite the continued relevance of Hayek’s ideas in today’s monetary landscape, the entrenched structures of modern central banks and the rise of Central Bank Digital Currencies suggest that a decentralised currency order remains unlikely in the near future. Full article

The widespread reliance on paper-based currency poses significant drawbacks, such as counterfeiting, lack of transparency, and environmental impacts. While Central Bank Digital Currencies (CBDCs) address many of these issues, their dependence on continuous internet connectivity limits their usability in scenarios with poor or no network access. To overcome such limitations, this paper introduces ElasticPay, a novel Peer-to-Peer (P2P) Offline Digital Payment System that leverages advanced hardware security measures realised through Trusted Platform Modules (TPMs), Trusted Execution Environments (TEEs), and Secure Elements (SEs). ElasticPay ensures transaction privacy, unforgeability, and immediate settlement while preventing double spending. Our approach integrates robust recovery mechanisms and provides a scalable solution for diverse environments. Extensive experimentation validates the system’s reliability and practicality, highlighting its potential to advance secure and inclusive CBDC ecosystems. We demonstrate the proposed solution implementation on the iPhone mobilephone because it has an inbuilt Secure Enclave, which is an integrated implementation of the necessary TPM, TEE, and SE functionalities. Full article

The latest advancements in distributed ledger technology (DLT) and payment architectures such as the UK’s New Payments Architecture present opportunities for leveraging the hidden informational value and intelligence within payments. In this paper, we present Smart Money, an infrastructure capability for a central bank digital currency (CBDC) which enables real-time value-added tax split payments, oversight, controlled access, and smart policy implementation. This capability is implemented as a prototype called Making Tax Smart (MTS), which utilises the open-source R3 Corda DLT framework. The results presented herein confirm that it is feasible to build an MTS capability which is scalable and co-exists with the current payment systems. Smart Money CBDC has the potential to mobilise payments data, transforming the role of money from a blunt instrument to a government policy sensor and actuator without disrupting the existing money system. DLT, smart contracts, and programmable money have a crucial role to play with benefits for government departments, the economy, and society as a whole. Full article

Credit rationing, especially prevalent for smaller firms, impedes economic growth. A central bank-aligned not-for-profit managed business-to-business “stablecoin” (“synthetic central bank digital currency”) providing trade credit liquidity can provide additional monetary mass to mitigate small firm credit rationing. This raises growth by reducing monetary transmission imperfections consequent upon asymmetric information, commercial bank underwriting restrictions, market power dynamics, and regulatory distortion. A simple framework is developed to contextualise small firm credit rationing and associated monetary transmission imperfections with broader credit flows into both the real and monetary sectors. Evidence is presented regarding monetary transmission efficacy to firms, paving the way to proposing a business-to-business central bank-mediated “trade credit stablecoin” to improve business credit supply. In addition to providing additional (estimated at more than 10%) industrial and commercial (including smaller) firm financing, the envisaged trade credit stablecoin provides an additional monetary transmission channel for central banks to manage credit supply to the real economy to support economic activity and raise growth. Available to all firms, the trade credit stablecoin offers additional low-cost liquidity to firms, thereby offering policymakers an additional contra-cyclical monetary transmission instrument to support growth and, where necessary, reduce real economic disruption consequent upon financial system crises and liquidity events. Full article

This study investigates the impact of central bank digital currencies (CBDCs) on monetary policy flexibility, the effective lower bound (ELB), and negative interest rate policies (NIRPs), specifically in the case of the digital euro (DE). Through a combination of theoretical modeling and empirical analysis, including two extensive surveys among EU participants, we explore whether CBDCs can change the ELB and affect consumer preferences in favor of the digital euro over physical cash. Our findings indicate that the introduction of the DE could potentially move the ELB from its current value of around −1.30% by approximately 0.25%. If agents had the possibility to move their deposits into both cash and DE, they would convert approximately 52% of the converted amount into cash and the rest into CBDCs. However, over a 10 year period, the situation would shift in favor of the DE, with a share of 63%. Both findings show that NIRPs will be more limited in the case of the introduction of CBDCs (DE). These facts must be considered both when deciding whether to introduce a CBDC (DE) and after its eventual introduction in the case of NIRP application. Full article

The failure of major banks in 2023, such as Silicon Valley Bank (SVB), Signature Bank, First Republic Bank, and Credit Suisse, points to the continuing need for financial institutions to price liquidity risk properly and for financial systems to find alternative sources of liquidity in times of dire need. Central bank digital currencies (CBDCs), fiat-backed stablecoins (fsCOINs), and synthetic central bank digital currencies (sCBDCs) could offer improvements, but each comes with its own set of problems and conditions. Prior research reaches conflicting conclusions about the effect that each of these three financial assets has on systemic bank liquidity and fails to adequately address their net benefits relative to each other. This paper addresses these issues, including those connected to financial disintermediation, bank runs, outsourcing central bank activities, financial interoperability, cash equivalents, maturity transformation, required reserves, and changes in nations’ monetary bases. After addressing the strengths and weaknesses of fsCOINs and CBDCs, we conclude that sCBDCs provide the most significant net liquidity benefits when risks and returns are considered. Full article

This study investigates the influence of a country’s financial access and stability and the adoption of retail central bank digital currencies (CBDCs) across 71 countries. Using an ordinal logit model, we examine how individual financial access, the ownership of credit cards, financing accessibility by firms, offshore loans, financial sanctions, and the ownership structure of financial institutions influence the probability of CBDC adoption in nations. These findings reveal that nations facing financial sanctions and those with substantial offshore bank loans are more inclined to adopt CBDCs. Furthermore, a significant relationship is observed in countries where many people have restricted financial access, indicating heightened interest in CBDC adoption. Interestingly, no statistically significant relationship was found between the adoption of CBDCs and the percentage of foreign-owned banks in each country. The results show that countries with low financial stability and financial access adopt CBDCs faster. This study expands our knowledge of how a nation’s financial situation influences its adoption of CBDCs. The results provide important and relevant insights into the current discussion of the direction of global finance. Full article