2022 is starting to look like a defining year for the future of central bank digital currencies (CBDCs). Just a few weeks in and we’ve already seen countries take firm stances for and against the technology – or in the case of the U.S. Federal Reserve Board in its much-anticipated discussion paper released last week, calling for more research and collaboration with the other branches of government. All told, 87 countries are now exploring the development of these digital versions of cash – with 14 in the pilot stage, according to the Atlantic Council’s tracker.
Jason Chlipala is the chief operating officer at the Stellar Development Foundation.
The different needs and concerns of countries will naturally lead to a variety of CBDC designs (or none at all for the countries that opt out for the time being). Faster payment speed, lower costs and more transparent cross-border payments are all being researched as potential benefits of implementation. Financial inclusion has also emerged as a widespread focus of central banks, especially in emerging economies. CBDCs combine the simplicity of physical cash with the reach of electronic money, making them transformational for those without easy access to banks and other digital financial services.
Money is a public good, meaning it is provided without the intention of profit and for the benefit of a society. But money is also technology, with different forms, features and use cases. It’s exciting to see countries around the world look to new innovations, like CBDCs built on blockchain, to make it better. It’s critical that industry players step up to educate decision makers on the considerations at play to successfully develop CBDCs as a meaningful payment option for their citizens and economies. As this process continues, there are three points that all stakeholders, public and private, should keep in mind.
CBDCs don’t have to completely replace cash
Because any CBDC would act like a token and serve as legal tender, cash is the obvious comparison. For this reason, debates around CBDC have sometimes tended toward considering a world where all physical cash has been replaced by CBDCs. While perhaps an interesting thought experiment, that isn’t the case we need to be evaluating.
While CBDCs will supplement the current system, they don’t have to replace it. Even in a world with CBDCs, there will still be demand for physical cash from some consumers in some cases. It’s a matter of providing consumers with options, as different forms of money can serve different needs and individual preferences. The same goes for wires, credit cards and other forms of payment. CBDCs don’t have to solve every payment-related problem; they are worth it if they provide new, useful functionality, especially for those for whom the current system doesn’t always work.
CBDCs don’t have to disintermediate banks
A concern raised by many is the danger of CBDCs disintermediating the commercial banking system. Essentially, the argument goes that if people start pulling their money out of banks and holding it as CBDCs, then the total capital available to banks for beneficial activities like lending will be greatly reduced.
This risk needs to be taken seriously, because credit and other financial services provided by banks are essential to the smooth operation of society. But this concern can be dealt with in a variety of ways, as long as CBDCs are designed thoughtfully.
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For example, a “two-tier system” where banks and other financial institutions issue the asset backed by reserves would mean the capital underlying the CBDC is still sitting in the banking system. Or if a central bank wants to be the issuer of the asset, the programmability of a CBDC means certain limits could be put on balances to ensure capital doesn’t flow out of banks. The flexibility of the underlying technology means that CBDCs can surely be designed to avoid disintermediation.
CBDCs can be issued on open networks
Finally, much of the discussion and research on CBDCs up until now has been around using closed or “permissioned” networks to issue them. This impulse is understandable, because historically making an electronic payments system safe has meant completely controlling the infrastructure on which it’s built (i.e., controlling the databases holding the balances and the messaging for updating those databases). The power of blockchain technology is that asset issuers can now get similar levels of safety and certainty when using common infrastructure.
CBDCs issued on open networks enable more open competition and experimentation. By allowing private sector innovators more direct access to the infrastructure a CBDC is issued on, the technology will lead a wider variety of financial services, especially for those who may be underserved in today’s system. Even if closed-network CBDCs are built with the best intentions for interoperability, they run the risk of returning to the siloed world we experience today.
As we move forward, it’s up to our industry to articulate the value of CBDCs, its greater promise of financial inclusion and improved access to technology that benefits not just for a handful of tech elites, but the overall public good.