Central bank digital currency: Payment choices and commercial bank profitability

• Published in: International review of financial analysis 2023-11, Vol.90, p.102874, Article 102874
• Main Authors: Son, Jaemin, Ryu, Doojin, Webb, Robert I.
• Format: Article
• Language: English
• Subjects: Central bank digital currency; Financial stability; Interest rate; Payment instrument
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2023.102874

This study examines how the issuance of a central bank digital currency (CBDC) affects consumers' payment instrument choices, asset allocation decisions, and the profitability of financial intermediaries. Specifically, we advance a theoretical model in which introducing an interest-bearing CBDC expands market participants' payment and investment options but also poses a potential threat to financial intermediaries if it raises their borrowing costs significantly. The existence of a network externality further complicates the analysis by affecting consumers' choice of payment mechanism. Our results suggest that the issuance of a CBDC is a double-edged sword for an economy. Although it provides additional payment and investment options for market participants, it increases competition and weakens financial intermediaries' margins. •We analyze the functions of a central bank digital currency (CBDC) as a means of both payment and value storage.•The interbank offered and CBDC rates affect commercial banks' lending and deposit sectors, respectively.•Changes in the CBDC rate can affect consumers' allocations among cash, the CBDC, and bank deposits.•The crowding-out effect accelerates when the CBDC rate exceeds a certain level.