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Central banks around the world have started exploring the possibility of issuing Central Bank Digital Currencies (CBDC). A CBDC would be similar to digital cash and could, in theory, substitute for commercial bank deposits as the money used by households and businesses. This paper explored the potential implications for financial stability and monetary policy stemming from potential CBDC adoption in Central and Eastern European countries (CEEs). We conducted an empirical analysis using publicly available data from the European Central Bank’s database to assess how introducing a CBDC could impact the business models of the largest CEE banks. Our findings indicated that a CBDC could support financial stability by accelerating the adoption of digital payments in CEEs, improving anti-money laundering, and thus supporting banks’ ability to finance the economy. We found that the impact of a CBDC on the profitability of commercial banks would be impacted more by any change in interest rates than by the quantity of CBDC replacing stable bank funding. Furthermore, a CBDC could be beneficial for monetary policy by improving the control over inflation and accelerating the implementation of countercyclical instruments when classical monetary policy instruments are no longer effective. Hence, non-Euro CEE countries would benefit the most from the introduction of a CBDC. Keywords: central bank digital currencies; financial stability; monetary policy; financial institutions

The Future is Near: On the Prospects of Central Bank Digital Currency Adoption in Central and Eastern European Countries