Cryptocurrencies and Central Bank Digital Currencies (CBDCs): Implications for Monetary Policy and Financial Stability

Abstract

This study presents an in-depth investigation into cryptocurrencies and Central Bank digital currencies (CBDCs), focusing on implications for monetary policy and financial stability. An overview of CBDCs and cryptocurrency is evaluated by analysing their origins, significant characteristics, functionalities and roles in the economic ecosystem. A detailed assessment is carried out on the implication of cryptocurrency and CBDCs on monetary policy. The findings suggest that by facilitating decentralised and anonymous transactions, cryptocurrency deflates traditional monetary control and hence challenges the authority of central banks.In contrast, CBDCs are a better economic policy tool for central banks, thus probably raising policy effectiveness. Researchers analysed the implications of both virtual currencies on financial stability. They found that cryptocurrency poses a severe risk to financial systems due to its inherent volatility and instability.In contrast, they concluded that CBDCs offer a more viable alternative for enhancing financial stability by reducing the threat of financial disintermediation. The study concludes that cryptocurrency and CBDCs have the potential for transformation, but CBDCs align more with existing financial systems to support monetary policy and ensure financial stability. A comparative analysis was carried out to underline further that CBDCs provide, compared to cryptocurrencies, a more predictable and better-controlled environment for economic management, making them a more desirable option for central banks globally.