Why Central Banks Got Serious About Digital Money

Money is edging toward its biggest reinvention in centuries. Modern technology and even the coronavirus pandemic have pushed consumers to go cashless, and with alternative concepts like stablecoins and cryptocurrencies taking hold, central banks are acting quickly to ensure they don’t fall behind on innovation. The goal is a digital form of money that can compete with private-sector alternatives by being safer, more resilient and cheaper.

Not so different, at least on the surface, from keeping electronic money in a bank account and using cards, smartphones or apps to send that money into the world. The key difference is that money provided by a central bank — like cash — is generally considered a risk-free asset. For example, a dollar bill issued by the US Federal Reserve is always worth $1. A dollar in a commercial bank account, while in theory convertible into paper cash on demand, is subject to that bank’s solvency and liquidity risks, meaning consumers might not always be able to access it and can lose money if a bank goes bust. CBDCs, like bank notes and coins, would be the direct liability of the central bank, carrying its guarantee.