How would a Central Bank Digital Currency be different from a private bank deposit?

Question

Both are digital, both can be transferred digital, and both are denominated in the same currency. A CBDC is "a direct liability of the central bank, rather than of private banks or coin issuers", but in an age where currency is not backed by anything I don't understand what it actually means.

Furthermore, it seems that private banks will still be the interface for CBDCs, which means you don't hold them with the central bank either. So what is the real difference from our current system? How would the introduction of a CBDC change anything?

Answer 1

These could actually create significant changes compared to current system (e.g. see this the Economist article or more academic overview of this in Sinelnikova-Muryleva 2020, Panetta 2018 or Achord et al (2017)).

1. It is actually not clear if private banks would still remain, at least banks that specialize in retail banking for regular people. CB would be able to allow people to hold their currency in digital 'wallets' at lower cost than private bank (which has to pay for additional employees etc), so it is not clear whether such banking would be still necessary. Of course, CB would not manage customer relations, but they could just create some app and have private contractor run it or be operated by government. Although these things are difficult to predict maybe banks will start providing some advisory services to common people? Who knows?

2. CBDC is commonly considered to be not just an alternative to current to current deposit accounts, but way of phasing out cash out of society completely. This would allow central bank to pursue policies that are now impossible. For example, central banks could set negative interest rates of lets say 10% (which would mean every month you would loose 10% of your saving) in order to stimulate consumption. Currently that is not possible as people can simply withdraw money from their account. In addition, it would allow central banks to pursue other non-conventional monetary policies more easily (such as helicopter money) if they are allowed to do so by additional legislation.

3. Important way how CBDC's are different are privacy concerns. Although banking secrecy laws were already severely eroded over last 50 years or so there are still some after CBDC everything would be on a ledger that central bank has. Of course, data could be anonymized but in principle it would allow government to see every transaction you make, today that is not entirely possible due to existence of cash or as easy because banks are private institutions separated from government. Although, the current trend is toward less privacy so at some point arguably there would not be any difference if the trend continues.

4. It also gives more control to the authorities. This could be beneficial in democratic countries with good institutions as illegally earned money can be just 'deleted' from your digital wallet or other restrictions put on it, although it also creates possibility of abuse in dictatorships such as Russia or China, where the same could be done to dissidents who do not support government policies, so potentially this could have wider socio-economic and political consequences.