Financial Development, Non-Bank E-Money, and Central Bank Digital Currency

Abstract

We develop a new framework to examine the effects of retail central bank digital currencies (CBDCs) on financial inclusion and stability, particularly how the results depend on an economy's existing degree of financial development. We demonstrate that when offering CBDCs in underdeveloped economies, some households migrate from cash to CBDCs. However, the competition between CBDCs and non-bank-issued electronic money (e-money) poses a significant threat to disintermediate banks. When offering CBDCs in developed economies, few households migrate from cash to CBDCs. Nevertheless, CBDCs can effectively constrain non-bank e-money and hence strengthen financial stability. Overall, our findings suggest that retail CBDCs can be useful for promoting financial inclusion only in underdeveloped economies without e-money and strengthening financial stability in terms of curbing non-bank e-money only in developed ones. An economy needs to consider the motivations and existing degree of financial development when offering CBDCs.

Keywords: central bank digital currency, electronic money, stablecoins, financial inclusion, financial stability, financial development

JEL Classification: D14, E21, E41, E42, E51, E52, G21, G23