Can the introduction of a digital currency by the central bank improve social welfare?

While money is issued in the form of physical paper and coins, the digital currency of the central bank (CBDC) involves recording information about transactions in a digital register kept by the central bank. A study published in Economic research examines how the introduction of the CBDC affects welfare in an economy where tax evasion occurs in monetary transactions.

By building a model in which both cash and CBDC can be used, the authors find that when there is economic inefficiency associated with tax evasion in monetary transactions in an economy with restrictions on transfers from the central bank to the government, the introduction the CBDC with a strictly positive interest rate can eliminate inefficiencies and therefore improve welfare by discouraging tax evasion and rewarding tax payments.

“We also found that eliminating cash does not necessarily improve welfare in an environment where government spending is not so high or tax avoidance is not serious. This means that when a currency with record-keeping technology can be introduced, it is not necessary to record all transactions, as the central bank can transfer between transactions that use the record-keeping currency and transactions that they don’t, “said lead author Seungduck Lee, Ph.D., of Sungkyunkwan University in South Korea.