As central banks worldwide explore how and if to launch digital versions of their currencies, a European Central Bank study says it’s better to be the first.
A country without a CBDC would lose some control over its monetary policy by being forced to react more strongly to spillovers from shocks in nations that do have such an instrument, according to the study.
The study could have significant implications in the race to develop central bank digital currencies (CBDCs).
The People’s Bank of China (PBoC) has already made significant headway in pilot tests with consumers.
But ECB president Christine Lagarde said last week that while her institution is “not racing to be first,” her “hunch” is that it could create a digital currency within years.
The PBoC campaign comes as central banks worldwide race to issue CBDCs to modernise payments systems, as well as to fend off potential competition from privately issued cryptocurrencies.
Last month, a group of seven major central banks including the US Federal Reserve set out how a digital currency might look, in a bid to catch up with China’s “trailblazing” and leapfrog private projects like Facebook’s Libra stablecoin.
Bitcoin and such cryptocurrencies, which mask personal data from central actors, transact in an obscure domain with no legitimate regulatory oversight.
CBDCs however, are electronic versions of the legal tender, available either directly to consumers or via banks. They’re based on a technology called blockchain, used for verifying and recording transactions.
There are two main CBDC tracks: Wholesale and retail. 
In wholesale projects, access to the digital currency would be limited to banks and other financial institutions and the goal would be to make payment flows within the existing financial system faster and cheaper. 
In the retail sector, CBDCs would be issued through what might effectively be accounts at a central bank for the general public, or accounts at commercial banks working with the central bank. 
CBDCs could allow for faster and cheaper money transfers across borders, and improve access to legal tender in countries where cash supplies are dwindling.
There are downsides, too.
Depending on the model of CBDC, central banks risk either cutting out commercial banks, a vital funding source for the real economy, or assuming the direct risks and complications of banking the masses.
Central banks now have identified key criteria for issuing their own digital currencies.
Digital money will have to co-exist with cash and other forms of tender, do no harm to monetary and financial stability, and be very cheap or free to use. 
There should also be “an appropriate role for the private sector,” according to a report by the Bank for International Settlements, the ECB, the Fed.
The Group of Twenty (G20) said in a report last month that it is working with the International Monetary Fund, the World Bank, and the BIS to formalise the use of CBDCs in banking systems. 
By the end of 2022, the G20 members, the IMF, the World Bank and the BIS will have completed regulatory frameworks for CBDC, the report said.