Abstract

An experimental study examines the effects of central bank digital currencies (CBDC) on payment behavior in a banking system with risk-free and risky money. The research is based on Gresham's Law, which predicts that people hoard risk-free currencies and use risky money for payments. Laboratory experiments with 120 participants show: Without restrictions, people use risk-free accounts for both saving and paying. However, with caps or negative interest rates, they hoard risk-free balances and preferentially pay with risky bank money – a phenomenon with significant consequences for the banking system.

Authors

Topics

  • Central Bank Digital Currencies (CBDC)
  • Gresham's Law
  • Payment behavior and hoarding
  • Banking risk management
  • Experimental economic research

Detailed Summary

The modern banking system is based on two types of money: risk-free central bank money (banknotes) and risky bank money (deposits at commercial banks). The digitalization of central bank money in the form of CBDC would make risk-free money as convenient as bank deposits – with potentially destabilizing consequences.

The core problem: If households could hold unlimited risk-free digital central bank money, they would massively reduce their deposits at commercial banks. This could endanger the banking sector, as banks depend on customer deposits to finance their operations.

The SNB and other central banks therefore consider two limitation mechanisms:

  1. Caps on CBDC holdings per person
  2. Negative interest rates on digital central bank money

Experimental Design: The laboratory experiment with 120 participants (primarily students from the University of Strasbourg) tested six different scenarios over 42 periods. Each period consisted of two decisions:

  • Decision 1: Money allocation between Account A (risk-free, like CBDC) and Account B (risky with 10% probability of a 50% loss, like bank deposits)
  • Decision 2: Choice of payment account for transactions

Main Results by Scenario:

  1. Scenario X1 (no restrictions, 0% interest on both accounts):

    • Participants allocated 87% of their money to Account A
    • They paid from Account A in 71% of cases
    • Interpretation: Risk-free money is preferred – both for saving and for paying

  2. Scenario Y1 (cap of 10 ECUS on Account A, 0% interest):

    • Allocation to Account A fell to 21% (forced by cap)
    • Payments from Account A dropped to 9%
    • Interpretation: Gresham's Law occurs – people hoard risk-free money and pay with risky bank money

  3. Scenario Z1 (negative interest rate -5% on Account A, no cap):

    • Allocation to Account A was 41%
    • Payments from Account A were 26%
    • Interpretation: Negative interest rates reduce demand for CBDC but continue to promote its use for payments

Comparison of Limitation Mechanisms:

  • Caps are more effective at reducing quantities (21% vs. 41%), but lead to stronger hoarding
  • Negative interest rates are less restrictive but allow more payment traffic with CBDC

Key Findings

  • Gresham's Law is experimentally confirmed: Risk-free money is hoarded as a store of value, while risky money is used for payments – a centuries-old economic truth remains valid.

  • CBDC without caps endangers the banking system: Unlimited supply of digital central bank currency could lead to massive withdrawal of money from the banking sector.

  • Caps are stronger but less efficient: They curtail demand for CBDC more effectively, but also promote massive hoarding and payment inability.

  • Negative interest rates are a compromise: They allow continued payments with CBDC while demand remains more moderate.

  • Paradigm shift needed: The ECB and other central banks should design CBDC primarily as a means of payment, not as a savings instrument – caps are therefore inevitable.

Stakeholders & Affected Parties

GroupImpact
Commercial BanksRisk of massive customer deposit withdrawals; financing crisis; credit-granting capacity endangered
Central Banks (SNB, ECB)Increased balance sheets and credit risks; difficulty in optimal CBDC design
Private HouseholdsPotentially better payment means; but hoarding incentives reduce actual payment use
BusinessesDependence on banking system remains critical; credit costs could increase

Opportunities & Risks

OpportunitiesRisks
Safer payment means without default riskBanking system destabilization through deposit withdrawal
Faster digitalization of payment trafficGresham effect: CBDC is hoarded instead of used
Better control by central banks possibleNegative effects on credit provision and economic activity
Reduction of cash misusePrivacy concerns with digital full surveillance

Action Relevance

For Central Banks:

  1. Reconsider CBDC design: Not as a universal savings instrument, but specifically designed as a means of payment
  2. Implement caps: Currently unavoidable – but communicate transparently
  3. Consider negative interest rates: As a more flexible alternative to rigid limits; empirical calibration required
  4. Stabilize banking system: Prepare parallel compensatory measures for commercial banks (e.g., central bank facilities)

For Regulators:

  1. Monitor deposit outflows during CBDC implementation
  2. Prepare macroprudential tools for risk management
  3. Develop communication strategy to maintain trust stability

For Commercial Banks:

  1. Review business models; seek less dependence on mass deposit financing
  2. Develop alternative funding sources

Quality Assurance & Fact-Checking

  • [x] Central claims and figures verified
  • [x] Experimental methodology validated (6 sessions with 20 participants each, 42 periods per session)
  • [x] Theoretical equilibrium predictions correctly interpreted
  • [ ] ⚠️ External validity: Laboratory experiment with students; transferability to real markets limited
  • [x] No identified political bias in presentation

Additional Research

  1. ECB Digital Euro Project – Official documentation on planned CBDC architecture and cap systems
  2. Bundesbank Studies on CBDC Risks – National perspective on banking stability
  3. Bank for International Settlements (BIS) CBDC-Tracking – Overview of globally planned CBDC systems and their design parameters

Bibliography

Primary Source:
Baeriswyl, R., Boun My, K., & Cornand, C. (2026). Central Bank Digital Currency and Gresham's law: An experimental analysis. SNB Working Paper 2026/03. https://www.snb.ch/en/publications/research/working-papers/2026/working_paper_2026_03

Supplementary Sources:

  1. ECB (2023). Digital Euro - Project update. European Central Bank
  2. Keister, T., & Sanches, D. (2023). Should central banks issue digital currency? Review of Economic Studies
  3. Camera, G. (2024). Interest-bearing money and monetary trade. Experimental Economics

Verification Status: ✓ Facts verified on 23.01.2026

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This text was created with support from Claude (Anthropic).
Editorial Responsibility: clarus.news | Fact-Checking: 23.01.2026
Source Citation: SNB Working Paper No. 2026/03