What is central bank digital currency?
A central bank digital currency (CBDC) is, simply put, a digital version of cash.
You may not have thought much about it, but in Norway we have two types of money: Central bank money and deposit money. Central bank money is notes and coins, while deposit money is the money you have in your bank account. Most of the money in circulation today is issued by commercial banks.
Now Norges Bank and a number of other central banks across the world are exploring whether to also offer a digital version of cash. Digital cash can have some of the same properties that notes and coins have today, and it can have properties that are more complex.
Just like cash, a CBDC will be issued by Norges Bank. In practice, this means that you, as a holder of a CBDC, have a risk-free claim on the government. If a CBDC becomes a legal tender, like cash is today, holders will be able to use it in almost all payment situations.
It is too early to determine how you will encounter CBDC in everyday life, but it is reasonable to believe that it will be possible to use bank money and CBDC interchangeably in the most common electronic payment services. CBDC can thus be used for payments to friends, in stores and online.
It is also too early to determine the technology that will be used, but technically, it is possible to use a CBDC for programmable payments, also called smart payments. This means that you as a payer can decide that the payment is made if, and only if, one or more specific events occur. For example, you can choose to make a payment for a used car only when it is test-driven and delivered.
One of the advantages of a CBDC is that it can strengthen the payment system’s contingency arrangements. The Norwegian payment system is safe and efficient today, but a high degree of digitalisation and interconnectedness makes it vulnerable to cyber-attacks and technical disruptions.
Payments using CBDC can be made independently of banks’ payment solutions, making the entire payment system less vulnerable.
A CBDC could also make cross-border payments cheaper and more efficient by reducing the number of links in the transaction chain.
It is up to the politicians to decide whether a CBDC should be introduced. That decision is still some time away.