Central Bank Digital Currency: When Price and Bank Stability Collide examines classic banking issues in the context of central banks designing digital currencies. Threatened by the rise of cryptocurrencies, many central banks around the world are openly discussing the introduction of a central bank digital currency (CBDC). CBDCs would substitute traditional demand deposits and could revolutionize the monetary and financial systems today, possibly leading to the disintermediation of the retail banking sector. Given this scenario, the authors investigate the question: should central banks enter the role of financial intermediation and maturity transformation?
They argue that the financial intermediation of central banks comes at the cost of making these banks prone to runs. If central banks introduce a CBDC, they will additionally be concerned about price stability. The authors find that central banks have a conflict of interest with regard to attaining these three objectives simultaneously. They name this the CBDC trilemma: between attaining the efficient allocation of resources, avoiding bank runs, and maintaining price stability, central banks can achieve at most two. This impossibility implies that CBDCs should not be designed as a replacement for demand deposits. The paper provides a fresh perspective on the debate of CBDC design.