Introducing a CBDC will involve such a substantial change in the monetary system that it will require a political decision. It could also involve the question of whether the Central Bank Act would have to be amended. What is the current situation? Norges Bank’s research is now in a third phase, to be completed in the new year. We are working on specifying the features a CBDC should have and considering a range of technical solutions. We are also drawing on other central banks’ experience and plans. Possible strategies for testing and experimenting with technological solutions are also being assessed. The core of a prospective CBDC system will be controlled by Norges Bank. Banks and other third parties could provide end-user services. This is a natural division of roles. Norges Bank would facilitate innovation through the design of the system’s technical core and regulatory framework. The consequences a CBDC could have for the financial system depend entirely on its design. The design could influence which claims the public decide to replace with CBDC and on what scale. If CBDC replaces cash, banks’ balance sheets will not be affected – the public will simply replace one claim on the central bank with another. If the public replaces bank deposits with CBDC, the consequences for the financial system could be more severe. Banks’ access to deposit funding could be reduced and banks’ funding costs could rise. During a financial crisis or other situations of high uncertainty, the public can suddenly withdraw bank deposits.
In contrast, bank deposits are claims on private banks. CBDC raises some fundamental questions as to the role of central bank money. This is much more than a question of technology. Chart 4 Central bank digital currency Norges Bank is not alone in assessing the need for central bank digital currency. Many central banks are engaged in similar research. Several are in the process of testing technical solutions. Both Sveriges Riksbank and the central bank of China launched pilot projects earlier this year. The European Central Bank (ECB) signalled last month that it was stepping up its research on a digital euro. Central banks are considering introducing a CBDC for a variety of reasons. In emerging economies, the focus is on financial inclusion and low-cost payments. In advanced economies, the focus is more on the role of cash and the emergence of new monetary and payment systems. A trend specific to Norway and some of our neighbouring countries is the low and falling level of cash use. Users increasingly choose solutions offering contactless payments and payments via smartphone apps. These solutions use bank deposits as the means of payment. At the same time, cash has some unique characteristics that could be important to preserve in the payment system of the future: Cash is part of the contingency arrangements if the electronic contingency solutions fail. Cash is a credit risk-free alternative to bank deposits and can promote competition in the payment market. 2/6  BIS central bankers' speeches  Cash is legal tender that is widely accessible.