With digital payments becoming more and more popular, many central banks are investigating the issuance of retail central bank digital currency (CBDC) as a new central bank monetary liability in addition to banknotes and commercial bank reserves. CBDC will have broadly the same central bank balance sheet and profit implications as the issuance of banknotes. While the decision to issue CBDC is often thought to likely increase the size of the central bank balance sheet, the net impact of digitalization on the central bank balance sheet size could also be negative, as CBDC’s design feature could limit its take-up as store of value and banknotes in circulation may decline. We use scenario analyses to illustrate the key drivers of the impact of CBDC on central bank profitability, with the part of CBDC not created from an exchange of banknotes being an important factor in this respect. The central bank’s financial risk implications of CBDC can be managed within well-established frameworks and such implications depend primarily on the balance sheet size and asset composition impact. The paper concludes with a discussion how the profit and risk channels affect central bank capital.