Central Bank Digital Currencies: Financial Stability Perspective

Digitalization of the global economy, catalysed by advancements in blockchain technology and the rise of cryptocurrencies, has led to a paradigm shift in the monetary landscape. Central Bank Digital Currencies (CBDCs) have emerged as a transformative force with the potential to revolutionize financial systems and enhance stability. CBDCs represent a pivotal development in the evolution of monetary systems, holding the potential to enhance financial stability across various dimensions. The transformational impact of CBDCs on the banking landscape, whether through direct customer distribution or intermediation via commercial banks, underscores the need for thoughtful design and consideration of their distribution method. Careful planning can mitigate risks associated with deposit outflows, ensuring financial stability. This paper examines the multifaceted impact of CBDCs on financial stability, focusing on key dimensions such as their role in reshaping the banking sector, mitigating bank runs, influencing monetary policy, and addressing trust and privacy concerns. We discuss the importance of striking a balance between privacy and transparency. Through a comprehensive exploration of these dimensions, we assess how CBDCs can contribute positively to financial stability and provide a roadmap for their effective implementation.