The Future of Central Bank Digital Currency in a Digital Payments Landscape

According to reports, Signe Krogstrup, President of the Danish National Bank, discussed some of the impacts of the decline in cash usage and the rise of digital payments on the central bank’s assessment of CBDC. In his speech, Signe Krogstrup pointed out that the decline in cash usage does not necessarily justify the issuance of retail CBDC. This shift is an important trend at the core of the central bank’s monetary and financial stability tasks. In fact, between 2017 and 2021, Denmark’s cash disbursement ratio decreased from 23% to 12%. In contrast, digital payments have risen to nearly 90%.

President of the National Bank of Denmark: Low cash utilization does not justify the issuance of retail CBDC

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As cash usage continues to decline and digital payments rise, the central banking community is grappling with the potential impacts of these trends on the issuance of central bank digital currency (CBDC). In a recent speech, Signe Krogstrup, President of the Danish National Bank, shed light on some of the factors driving the central bank’s assessment of CBDC in the context of a changing payments landscape. This article will explore the implications of these trends for the future of central bank digital currency.

Cash Usage on the Decline

According to Krogstrup, the decline in cash usage is an important trend that central banks are paying close attention to. In Denmark, this trend has been particularly pronounced, with the cash disbursement ratio falling from 23% in 2017 to just 12% in 2021. This drop in cash usage is primarily driven by the increasing popularity of digital payment methods.

The Rise of Digital Payments

As cash usage has declined, digital payments have become the dominant form of payment in many economies. In Denmark, digital payments now account for nearly 90% of all transactions. This trend is not unique to Denmark, as digital payments have been steadily growing in popularity around the world.

Implications for CBDC

The rise of digital payments has led many to question the need for central bank digital currency. However, Krogstrup emphasized that the decline in cash usage does not necessarily justify the issuance of a retail CBDC. Central banks must weigh the potential benefits of CBDC, such as increased financial inclusion and reduced transaction costs, against the risks and challenges associated with its implementation.

Benefits of CBDC

One of the main arguments in favor of CBDC is that it could increase financial inclusion by providing access to digital payments for those who may not have access to traditional banking services. CBDC could also reduce transaction costs by cutting out intermediaries in the payment process.

Risks and Challenges of CBDC

Despite the potential benefits of CBDC, there are also several risks and challenges associated with its implementation. These include the need to ensure secure and resilient payment systems, the risk of disintermediation and destabilization of the banking sector, and regulatory and legal considerations.

Conclusion

As digital payments continue to rise and cash usage declines, central banks must carefully consider the potential implications of these trends for the issuance of central bank digital currency. While CBDC presents a number of potential benefits, it also poses significant risks and challenges. Ultimately, the decision to issue CBDC will depend on a complex analysis of these factors and the specific needs of each economy.

FAQs

1. What is CBDC?

CBDC stands for central bank digital currency. It is a digital form of currency issued by a central bank and backed by the full faith and credit of the government.

2. How could CBDC increase financial inclusion?

CBDC could provide access to digital payments for those who may not have access to traditional banking services, such as the unbanked or underbanked.

3. What are the risks and challenges of CBDC?

Some of the risks and challenges associated with CBDC include ensuring secure payment systems, avoiding destabilization of the banking sector, and navigating regulatory and legal considerations.