The Emergence of Central Bank Digital Currencies (CBDC) “An Exploration of Motivations and Implications”

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This thesis aims to investigate the development, motivation, and implementation of Central Bank Digital Currency (CBDC) through a comprehensive literature review. It will analyze existing research and publications to assess the potential advantages and disadvantages of CBDC, while exploring associated risks such as financial stability, monetary policy, and security concerns including cyberattacks and data protection.

The main research question of this thesis focuses on central bank motivations, and several sub-questions will support the analysis, addressing security risks, privacy challenges, the impact on financial stability and monetary policy, as well as the current state of CBDC development globally.

Key findings from the literature review indicate that the development of CBDCs is driven by factors such as the declining use of cash, the emergence of decentralized cryptocurrencies, the pursuit of financial inclusion, and the desire to improve payment systems and monetary policy execution.

However, a balanced and well-regulated approach is crucial for successful CBDC implementation. Further research, collaboration, and policy formulation are necessary to fully leverage the benefits of CBDCs while mitigating associated challenges and risks.CBDCs offer several advantages that can reshape financial systems and enhance economic activities. CBDCs hold a significant advantage in promoting financial inclusion by bridging the gap between traditional banking systems and underserved populations. Through their widely accessible digital currency, CBDCs provide individuals who lack access to traditional banking or have limited banking options with the opportunity to access financial services, thereby fostering greater financial participation and empowerment. Moreover, CBDCs can revolutionize payment systems with immediate settlements, efficient peer-to-peer and cross-border transactions, improving speed, convenience, and cost-effectiveness.

Nevertheless, CBDCs present risks that require careful management. Financial stability concerns arise from the potential for digital bank runs during economic uncertainty. Security and privacy risks include cyber threats and data breaches. Robust security measures and privacy regulations are crucial to protect against unauthorized access and preserve user privacy while complying with anti-money laundering requirements. The design and implementation of CBDCs should consider potential impacts on monetary policy, interest rates, and other factors. Research and analysis are necessary to address any unintended consequences on financial systems and economic stability. The global status of CBDCs varies, with some countries making significant progress while others are in the early stages of exploration. Continued research, collaboration, and monitoring are essential to inform the design, implementation, and regulation of CBDCs.