Central Bank Digital Currencies and Their Use by Tax Administrations

Central Bank Digital Currencies (CBDCs) may offer transformative opportunities for tax policy and administration, particularly if features like programmability and enhanced transparency are implemented. Automating fiscal transfers could streamline government payments and reduce administrative burdens, while programmable tax enforcement could simplify compliance and recovery processes. Limited privacy capabilities may help address tax evasion and illicit financial flows by creating a transparent, traceable audit trail. However, implementing CBDCs involves balancing these benefits with challenges such privacy protection and data security. Wide adoption requires a secure, trusted digital currency system that safeguards personal and financial information, preventing unauthorized access and cyberattacks. Additionally, CBDCs present risks like disintermediation and “digital dollarization,” which require careful design to mitigate. Cross-border use of CBDCs could reduce transaction costs and promote economic integration among Belt and Road Initiative (BRI) countries, but coordination on standards is essential to prevent regulatory competition. CBDCs have the potential to reshape financial and tax systems, being thus important to explore their design and governance.