Central Bank Digital Currency, though the concept is not new, has taken on significant gravity in the debate about government issued money. Typical of any novel development, numerous publications discuss CBDC from different perspectives and functions. The Bank of International Settlements, the IMF, the Federal Reserve, the Riksbank, the Central Bank of China, and academics have produced an enormous research output. [Sample research papers are found at the end of this article.
I use the publication entitled "Money and Payments: The US Dollar in the Age of Digital Transformation
", Board of Governors of the Federal Reserve System (January 2022) ["Report"] to open a discussion of CBDC. The Report m states the conventional criteria that money is a means of payment, store of value, and unit of account. Based on these criteria the Report states there are "three forms" of money.
First, there is Central Bank money that "serves as the foundation of the financial system and the overall economy". Central Bank money comprises "physical currency issued by the Central Bank and digital balances held by commercial banks at the Federal Reserve". I quote from the Report: "In the United States, central bank money is a liability of the Federal Reserve and comes in two forms: (1) physical currency circulating among the general public (with some held by banks) and (2) digital account balances held by banks and a limited number of other eligible institutions at theFederal Reserve". Physical currency has legal tender status in the United States.
The Report notes that, as of November 2021, "there was around $6.39 trillion of central bank money. Of this, $4.18 trillion was in the form of balances at the Federal Reserve and $2.21 trillion was in the form of circulating cash". Central Bank money "is the most trusted and safest form of money because the Federal Reserve" primarily because it is a liability of the Central Bank. The term "liability" is defined as "something a person or company owes, usually a sum of money". The question arises: what is the Central Bank liable for? The answer is "nothing", except another quantity of dollars. The declaration that CB money is the safest "money" does not rely upon the CB, since it bears no liability, but upon demand for dollars.
The second question: what became of the original $6.39 trillion of US dollars issued by the Central Bank, if we posit that commercial banks do not get something for nothing. The answer is: the public deposited physical notes in commercial banks, either as depositors or as owners of commercial banks, that then allowed commercial banks to open digital account balances at the Central Bank. This preliminary analysis may be wrong, but if it is, the Report requires clarification, as the audience of the Report is the educated, though non-specialist, reader.
Commercial bank money [CBM] is "the digital form of money that is most commonly used by the public". CBM hence is demand deposits and deposits created by commercial banks when approving a loan and opening up a "new deposit". They are not CB liabilities, but liabilities of commercial banks.
Appendix B of the Report states that, as of November 2021, commercial banks held approximately $4.76 trillion in demand deposits and $13.47 in other deposits. It is time to do some math. There is only $6.39 trillion of CB money, of which $2.21 trillion was held by the pubic in currency; the remainder the commercial bank deposits at the CB.
Assuming that the public holds $2.21 trillion in cash, what is the source of the $4.76 in demand deposits, that is, a right to demand physical currency [subject now to daily, monthly and quantity limits]? The public may receive payments in dollars from abroad, for example, employment in another country. Domestic employers cannot create currency; non-bank financial institutions cannot create currency. So, the question remains what is the source, since other than commercial bank lending, the CB has a monopoly on money.
The third form of money is Nonbank Money, that is, certain nonbank financial institutions may issue "liabilities" that can be considered money. The Report provides an example of a money market fund. However, it must be stressed that, unlike commercial banks, nonbank financial institutions must source money from CB money or commercial bank money. There is no other money as defined in the Report. Consequently, while MMF shares may be used as money under the economist definition, the issuer, in theory, cannot generate more "money" that has not been already generated by the CB and commercial banks, as the instruments it issues must be liquid, as good as money.
In sum, before even considering the policy concerns of CBDC, clarification is needed within the three forms of money as defined by the Federal Reserve.The Report's Issues of Concern
The Report states that there are three key concerns in considering the adoption of CBDC. They are:  Financial-Sector Market Structure,  Stability of the Financial System,  Effect on Monetary Policy,  Privacy Concerns and Crime, and  Operational Resilience and Cybersecurity."Financial-Sector Market Structure" is the term given to the potentially adverse effect on bank lending.
"Financial-Sector Market Structure" is the term given to the potentially adverse effect on bank lending, if CBDC is adopted. The concern is that, if consumers are allowed to hold accounts directly with the CB, then the likelihood follows that consumers will hold less demand deposits with commercial banks. Since commercial banks use a certain portion of demand deposits to support lending, the concern is that the availability of credit will shrink and adversely impact commercial banks and borrowers. CBDC: The Federal Reserve Definition
publication Let us first define Central Bank Money. Th latter comprises physical notes in circulation and digital accounts at the Central Bank held by commercial banks. In most research, the focus is upon retail CBDC, that is, the Central Bank would retire all or most of the physical notes in circulation and replace them with digital representations of money with consumers holding accounts directly at the Central Bank.
At first blush, this sounds revolutionary. We will not carry notes in our wallets, but instead migrate toward electronic payment using mobile devices and smart cards. But CBDC is nothing like the radical emergence of cryptocurrency designed to issue private money and dis-intermediate the payment system by getting rid of third-parties like commercial banks, payment system operators like VISA and Mastercard. Plus, CBDC has a potential darker side. Physical notes are the ultimate form of anonymous payment that exists. By all accounts, CBDC is not anonymous, though the issue of privacy comprises a key issue in CBDC design.
This raises the question why do we need CBDC, since it will diminish privacy and not make major changes to the existing financial ecosystem. Central banks possibly have missed an opportunity to solve deep rooted problems in the financial system like fees, roles of various institutions, antiquated, slow, and disordered clearing, settlement and payment systems, not to mention cross-border payments. The literature always explains why it is not possible to make fundamental changes. There is a total lack of vision, too much undue praise for "financial stability" and "achievements of central banks" even though history is littered with financial crises and financial mismanagement.