Central bank digital currencies and financial stability

Most Central Banks in the world are currently considering - or at least studying - the launch of a Central Bank Digital Currency (CBDC). For instance, on 14 July 2021 the European Central Bank decided to launch a two-year investigation phase of a possible Digital Euro [European Central Bank (2021)]. Those announcements have raised many expectations and also some concerns. There is a fear that once the general public has easy access to the Central Bank balance sheet through electronic means (in addition to physical banknotes), competition will increase on the deposit taking activities of banks. This would compromise their funding, reduce their profitability and destabilise their business models. The perspective of frequent and ample bank runs would be very bad for financial stability. These are legitimate concerns, especially in the euro area, where banks and bank credit take a major role in financial intermediation. However, there is another side to the issue. Central Bank money - and easy access to it - are crucial to financial stability. Contemporary monetary systems are based on a close complementarity between private and public money. CBDCs are necessary to preserve that equilibrium in a rapidly transforming digital econom