Best Before? Expiring Central Bank Digital Currency and Loss Recovery

Abstract

AbstractPhysical cash enables payments in the absence of electricity or network coverage. Such offline payment functionality promotes the operational resilience and, particularly in developing countries, the accessibility of payments. Central banks are exploring issuing digital cash substitutes with similar offline payment functionality. Such substitutes could incorporate novel features, making them more desirable than physical cash. This paper considers automating personal loss recovery for offline digital currency balances through the introduction of an expiry date. Our results show this functionality could have a substantial positive impact on consumer demand for offline digital currency balances. We find an asymmetric impact on welfare of adjustments to the expiry date: small increases from the optimum cause little damage, but small decreases from the optimal expiry date can have a large negative impact. More information‐sharing between user devices and the central bank can improve loss recovery but has an ambiguous impact on social welfare.