I have been reading up on 'Central Bank Digital Currencies' (CBDC) - it seems to me that central banks really are mostly are driven by fear our 'private' crypto currencies and really have little idea about why they need CBDCs....

...I on the other hand think CBDCs could improve the functioning of monetary policy and could be useful in the conduct of monetary policy - particular with the natural interest rate close to the Zero Lower Bound.

In my view it would be better to talk about Central Bank Digital CASH (rather than Currency) indicating that it would be a digital version of non-interest rate bearing cash.

It would preferable that all citizens would get a CDDC wallet through which the CB could conduct monetary operations. This could significantly reduce the role of commercial banks role in the conduct of monetary policy.

The CB should be able to make direct transfers of e-cash directly to the citizens' e-wallets. The would make it very easy to undertake monetary easing - also at the ZLB.

Banks and other financial institutions should also be given an option to get a e-wallet, but monetary operations should not be made these e-wallets.

Obvious the c-cash should be convertible into the regular currency on par. To the extent the CB the central bank would want to tighten monetary conditions it should 'pause' the issuance of e-cash and conduct regular monetary to tighten monetary conditions.

The amount of e-cash could be 'printed' by an algorithm as with private cryptocurrency but might as well (and much more like) be determined by the policy making body of the CB.

Ideally I think the CB should use the CBDC as a supplement to regular monetary operations and it should change the CB's policy target.

Lets say we have an central bank with an inflation target. We are at the zero lower bond and inflation expectations have dropped below the inflation target.

The CB will now announce that it will transfer x e-cash units to every citizen's e-wallet. The could announce it would do this monthly and say it would continue to do so until inflation expectation returns to the target.

This obvious would be CBDC version of Friedman's helicopter drop.

In terms of the monetary transmission mechanism it would be some what different from how quantitative easing through asset purchases works, but the result would be the same in terms of increasing nominal demand in the economy - just a lot more direct so to speak.

When the e-cash enters the e-wallets the citizens can directly spend the money - retailers and webshops would accept the e-cash as it would be legal currency and payments would be made with credit/debit cards and mobile payment.

The citizen could also transfer e-cash to bank accounts - effectively selling e-cash for a regular cash desposit in a commercial bank or buy financial assets.

So how about commercial banks? What would this mean?

In an environment with the natural interest rate being zero or even negative the introduction of a CBDC could potentially support the outflow from bank deposits.

It you can't earn interest rates on deposits then there is little incentive for anybody to keep money commercial banks and many - citizens and corporates would exchange deposits into e-cash in their e-wallets.

Would that be bad news for banks? Not necessarily - at the moment banks are not in need of deposits and in countries with zero or negative policy rates and very lower or negative bond yields it would be a relief for banks to lose some of their deposit business.

However, it should also be remember that one of the reasons nominal interest rates are low is because central banks have had a hard time conducting monetary policy via the interest rates instrument at the ZLB and consequently have undershoot their inflation targets.

With a CBDC where the CB more or less automatically would undertake a helicopter drop into citizens' wallets it would be more likely that the CB would hit its inflation target. In the present environment this would increase inflation expectations and hence increase nominal rates

This in turn likely would steepen the yield curve, which would likely also make commercial banking more profitable.

On the other hand commercial banks - or rather investment banks would lose money from not being able to act as a 'monetary agent' for the CB when it undertake quantitative easing.

On the other hand this is not going to be a the party for citizens that some might think. And it is not some kind of 'Universal Basic Income'.

The reason is that if monetary policy is conducted in a credible fashion then the CB will hit its target and would therefore not need to undertake a helicopter drop.

Obviously if inflation is below the inflation target then there would be a transfer of e-cash to the citizens' e-wallets but that transfer would stop once the policy worked in inflation (expectations) returned to the target. In that sense the 'party' would be short-lived.

Therefore, one should NOT seen the CBCD as a 'social program' now more so than regular cash or money.

However, the CBDC provide a secure and low-transaction cost tool for store of value for citizens, corporations and financial institutions and a instrument for making e-payments.

Therefore, I do think it would make very good sense for CBs to introduce Central Bank Digital CASH, but it CBs should not try to compete with banks in the allocation of capital and should not compete in the development of payment systems.

The CB should provide the 'core' technologic for the CBDC but only as an API. Commercial companies should develop mobile and card apps.

So again in that sense I actually see CBDCs as a return to a more basic monetary policy. The CB controls the money base - including the e-cash base and does not try to manipulate financial market prices or influence risk taking of investors and consumers.

Down the road the control of the e-cash base though helicopter drops into citizens' e-wallet be the only way the CB conduct monetary policy. This would be a lot more transperable than present policies around the world.

We are likely not going to see widespread use of CBDC in the near future but in for example the Scandinavian countries where physical cash has more or less has disappeared we certainly are getting close to the introduction of a 'e-krona' has it has been suggested by @riksbanken

None of this however changes anything in terms of what is the proper role of a Central Bank in a free market economy: To ensure nominal stability - meaning a stable development in nominal income and prices and securing a safe and trustworthy unit-of-account.

Therefore, it is also very important that CBs does not try to either compete with commercial banks in the allocation of capital and with banks and other companies in the development the wider payment technology.