The 2022 Nobel Prize for economics has been awarded for studying the banking system and crises. In this regard, the award is timely given the ongoing digitalisation of money, banking, and financial services. A few days prior to the award, the Reserve Bank of India (RBI) released a concept note on the central bank digital currencies (CBDC). The note discusses the RBI’s views on issuing a CBDC, and how this can change the banking and payment system.
A CBDC is a digital version of the physical currency issued by a central bank. Worldwide, most central banks are at different levels of engaging in a CBDC. The Central Bank of The Bahamas and the Bank of Jamaica have issued CBDCs, the European Central Bank has started a consultation process, and the United States Federal Reserve has issued a discussion paper on the topic.
Let’s look at the impact of CBDCs on banks, and financial stability.
How will introduction of a CBDC impact the existing banking, and payments system? The RBI note points to two ways in which public could switch to the CBDC.