The emergence of private digital currencies such as Bitcoin have attracted the attention of central banks，and related technologies – such as blockchain and smart contracts – have been of even greater interest. But private digital currencies have some serious drawbacks，among them volatility and their use by criminals for illegal activities such as money laundering and tax evasion. This has posed a significant challenge to central banks as they try to protect their sovereign currencies and make use of new and promising technologies. Central banks realize that in the era of digitization，only through legal digital currencies can their market positions be protected and their legal tender status defended from private digital currencies. With successive reports on Central Bank Digital Currency (CBDC) released by the Bank for International Settlements (BIS) jointly with the European Central Bank，the Bank of Japan，and five other major central banks，legal digital currencies have once again become a major talking point. The successful pilot program for digital currency in Shenzhen has added to the pressure for a policy response. This article looks at the possible impacts of digital currencies on the traditional financial and monetary system.

Impact I: Improved Financial Efficiency

At present，there are mainly two types of central bank digital currencies – retail CBDC and wholesale CDBC. Both of them can improve the efficiency of the financial system，but the principles behind them and the extent of the improvements are quite different.

Retail CBDC can improve the efficiency of the financial system by direct and indirect means.