Important challenges along the way
There would be some obstacles to think about on the path to a central bank digital currency. For example, people could decide to keep a large amount of their money in the central bank digital currency rather than in a regular bank account. The digital equivalent of putting money under the mattress, except easier.
If people keep their money under their mattresses, so to speak, there could be:
- less money available for lending, or
- higher lending rates,
- or even both.
Why? Because banks rely partly on deposits to make loans.
So, it could become harder to get credit, like a mortgage or business loan. If businesses invest less as a result, productivity and innovation could suffer. That’s because innovation often happens when companies borrow to create new products and services.
In other words, holding cash is safe, but it’s not very productive.
There are ways to lower the risk. One example is to not earn interest on central bank digital currency, the way cash in your wallet doesn’t earn interest. This would make holding it in large amounts less appealing in normal times. But in difficult times, it could still act as a safe asset—just like cash.