Important challenges along the way
There would be obstacles to consider on the way to a central bank digital currency. For example, people might decide to keep a large portion of their money in the central bank’s 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 the loan, or
- higher credit rates,
- or even both.
Why? Because banks rely in part on deposits to make loans.
As a result, it may become more difficult to obtain credit, such as a mortgage or a business loan. If companies invest less as a result, productivity and innovation could suffer. This is because innovation often occurs 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 reduce the risk. An example is not earning interest on central bank digital currency, in the same way that money in your wallet does not earn interest. This would make holding it in large quantities less attractive under normal circumstances. But in tough times, it could still act as a safe asset just like cash.