Central banks should be wobbling in their drive towards Central Bank Digital Currencies

Introduction

Central banks have undertaken many investigations, pilots and proofs-of-concept into Central Bank Digital Currencies (CBDCs), proving little beyond the lack of a convincing case in their favour, but unearthing many risks, drawbacks and unanswered questions.

Recent material from Sweden,¹ Japan,² the European Parliament,³ the UK’s House of Lords⁴ and the central banks’ own supranational organization (the Bank for International Settlements or BIS)⁵ should result in a pause for reflection.

What is CDBC for?

This basic question is not answered. The BIS’ opaque response is to ensure ‘ongoing retail access to central bank money’, whatever that means. The European Parliament sees no clear market niche for CBDC amongst electronic payment offerings. Sweden’s Riksbank sees the unique value of CBDC as enabling conditional payments linked to ‘smart contracts’, but then identifies a major problem: money ‘programmed for special purposes…loses a fundamental property of money: to be useable for payments in all contexts’. The UK’s House of Lords has described CBDC as a ‘solution in search of a problem’.

Public involvement

Lip-service is paid to the need for stakeholder involvement, but this is minimised through impenetrable language, and through narrow stakeholder consultation.

The UK consultation on the ‘digital pound’ – or ‘Britcoin’⁶ – concentrates on implementation issues.⁷ The accompanying Technical Working Paper contains almost nothing about technology.⁸ Unsupportive evidence on the attitudes of citizens and businesses is airbrushed out.⁹

The Bank of Japan disingenuously states that the decisions are for the Japanese public to make, but then descends into a deep-dive into ‘new technologies’ and ‘ledger designs’ which will elude the public. ‘Improving convenience of payments’ is laid down as a main objective, but is articulated as controls that do not deliver convenience but rather restrict people’s usage of their own money, such as ‘Setting upper limits on holdings’, ‘Setting upper limits on amounts and number of transactions’, and ‘Automatic conversion of…excess holdings into bank deposits and other forms of private money’ i.e. the state decides where people hold their money.

Involvement of banks and other private-sector Payment Service Providers (PSPs)

There is no answer to how central banks (who issue CBDC) and banks and other PSPs (who will bring CBDC to the user) will work together in the distribution model that the central banks have unanimously espoused (probably with the help of Visa and Mastercard).

The European Parliament sees a conflict: CBDC will compete with the payment services of banks and PSPs, CBDC being another digital service in an already crowded marketplace.

The Riksbank sees a conundrum: there should be ‘uniform supply and uniformly designed services’ so that the public recognise the e-krona. This requires strong central governance, which might inhibit competition and innovation.

Strong central governance might even stop banks and PSPs offering CBDC unless they are incentivized to do so through deductions-from-face-value as occur on Visa and Mastercard payments.

Risks

The European Parliament articulates several risk areas:

• Privacy – concerns are repeatedly mentioned by central banks, but are nowhere discussed in depth. Nor are there are agreed parameters or even a methodology for determining CDBC’s scope such that privacy is protected;
• Commercial – CBDC should not be a flop in the marketplace, nor should it be so successful that it pulls major amounts of deposits away from banks;
• Systemic – CBDC could exacerbate a ‘bank run’;
• Social – CBDC will make no positive contribution to financial inclusion.

Conclusion

Central banks have made no clear case in favour of introducing CBDC, but loss-of-face will result from shutting projects down.

The UK looks more likely to proceed than others: the public have been sidelined via the consultation. The chain-of-command consists in equal measure of fintech fanatics in government and of Bankers of England keen to demonstrate their independence and future focus – it helps airbrush over their mistakes in the past.

The Bank of England has begun to measure the carbon footprint of physical cash,¹⁰ throwing the supposed imperative of NetZero into the scales in favour of CBDC whilst omitting mention of the emissions of cryptocurrency mining.¹¹ The Bank and HMTreasury can then smear CBDC’s opponents as Climate Change Deniers, and go ahead under a flag-of-convenience: Sustainability.