This chapter sets out the fundamentals of CBDCs.

We start by defining a CBDC and comparing it to various existing near substitutes, and explain the difference between token and account CBDCs.

We explain that a CBDC could be, but will not be, anonymous, for essentially political reasons.

We then explain the difference between wholesale and retail CBDCs, observing that wholesale CBDCs raise no new policy issues that are of any particular interest to us.

Focussing then on retail CBDCs, we set out the difference between direct retail CBDCs and indirect CBDCs and explain that the central bank does not have the capability to manage direct CBDCs itself. Thus, the only practical way to deliver CBDCs is indirectly, through other financial institutions.

However, indirect retail CBDCs would pose the problem of who would pay for the costs of those institutions maintaining CBDC accounts for their customers: neither the customers nor the financial institutions have any incentive to bear those costs themselves. Such considerations suggest that retail CBDCs would be opposed by both the public and the banks and that CBDCs would need to be subsidised by the central bank if retail customers are to be induced to hold them. They also suggest that CBDCs are a more expensive payment system than one based on traditional deposits which, in turn, tells us that CBDCs are an inefficient payment system.

We then discuss the fraught, even intractable, questions relating to the payment of interest rates on CBDCs.

Finally, we discuss the various instabilities to which CBDC systems are prone.

We have here multiple compelling reasons for CBDCs to be dismissed.