Central Bank Digital Currency: Payment Choices and Commercial Bank Profitability

Abstract

This study examines how the issuance of a central bank digital currency (CBDC) affects both the payment instrument choice and asset allocation decisions of consumers, as well as the profitability of financial intermediaries. Specifically, we suggest a theoretical model where introducing a CBDC expands both payment and investment options for market participants but can also pose a potential threat to financial intermediaries if it raises borrowing costs significantly for financial intermediaries. Our analyses suggest that the issuance of a CBDC is a double-edged sword for an economy with greater payment and investment options for market participants on one edge and increased competition and the weakening of financial intermediary margins on the other edge.

Keywords: Central Bank Digital Currency; Financial Stability; Interest Rate; Payment Instrument

JEL Classification: E42; E58; G21