Central Bank Digital Currency versus Deposit Insurance By ANDR ´ AS KOLLARIK * Draft: September 22, 2021 This paper compares account based Central Bank Digital Currency (CBDC) with deposit insurance (DI) in a moral hazard setting. The relevant agents’ utilities are the same in the two systems when either the deposit insurance fee is paid ex post or the deposit insurance fund (DIF) bears the risk-free interest rate. If the DIF’s return is lower than the risk-free rate, then CBDC yields higher welfare than DI. As in reality the DIF mainly invests in claims on the government, CBDC and DI can be regarded equivalent in practice. However, in old times of metallic standard the DIF could have invested primarily in non-interest bear- ing metal, which is in line with the fact that early central banks issued demand deposits to the non-bank private sector. JEL: E41, E42, E50, G21 Keywords: Central Bank Digital Currency, deposit insurance, safe as- set, moral hazard An account based central bank digital currency (CBDC) system and a deposit insur- ance (DI) system are similar from the viewpoint of all the relevant agents. CBDC is demand deposit held by the general public at the central bank. In a CBDC system, the central bank lends funds to commercial banks, which is a backing behind CBDC. In contrast, the current monetary system is a DI system in which commercial banks issue demand deposits which are insured by the government. From the investors’ point of view, both CBDC and insured deposits are risk-free assets due to the unlimited taxation * Central European University, N´ ador u. 13., 1051 Budapest, Hungary, kollarik ¯ andras@phd.ceu.edu. I thank my supervisor ´ Ad´ am Zawadowski for his extensive help. I am also grateful to Soomin Lee, ´ Akos Acz´ el and the CEU PhD research seminar participants for their comments and advices. 1