Should central banks provide reserve accounts to everyone? A number of concrete proposals for central bank digital currency (CBDC) are now being discussed by policy makers as well as the general public. For example, the governor of the Swedish Riskbank has put the probability of issuing an "e-krona" within the next decade at greater than 50%.1 Moreover, in the June 2018 Vollgeld referendum, Swiss voters assessed (and, for now, turned down), a proposal to introduce non-interest paying CBDC. Along with this general interest, an emerging literature is weighing the pros and cons of CBDC.

This paper is a theoretical study of the welfare effects of CBDC. Our approach is to view CBDC as a new product in the market for liquidity, broadly defined: CBDC competes not only with deposits, but also with credit lines offered by commercial banks for liquidity purposes. To illustrate the importance of credit lines for payments, Figure 1 plots deposits at all US commercial banks together with those banks’ outstanding credit card limits. Since credit card limits provide only a lower bound on credit lines used for payments – for example, the figure leaves out credit lines provided to asset management firms by their custodian banks – the message is that credit lines matter.