The purpose of this paper is to describe and explain the rise and development of central bank digital currencies (CBDCs) over the past 30 years. CBDCs are forms of digital or cryptographic currencies issued by a central bank and handled as a liability on par with cash.
The pursuit of central bank digital currencies arose out of a need to meet the destabilizing monetary forces of e-money in the 1990s. There were concerns of competing currencies that could impact monetary policy, seigniorage, and monopoly control of money by central banks. In short, central banks were concerned about their business models and sought ways to fortify their positions in a changing monetary world. However, the challenge of e-money faded with the end of the decade.
With the rise of cryptocurrencies in the late 2000s, after the launch of Bitcoin, central banks again became concerned about losing their monopolies on money production and control. Alternative cryptocurrencies grew in number and size, and by the early 2010s were increasing viewed as threats to central banks and their operations. Consequently, more and more banks launched initiatives to study and create CBDCs as a counter to the stablecoins and other cryptocurrencies exploding on to the scene. And, 2021 saw the launch of CBDCs by China and the Bahamas with more in development.
In short, the story of central bank digital currencies is the story of central banks responding to the threatened loss of monetary power by alternative currencies.