CBDCs Can’t Give You Everything, Everywhere, All at Once
If this is the best that officials can come up with, CBDCs should be rejected.
Central bankers have promised everything when it comes to central bank digital currency (CBDC). One would hope they would realize just how outlandish it is to say a CBDC can do everything, everywhere, all at once if they just took a moment to review their promises. However, these are busy times.
So, let’s briefly look at everything that has been promised. Across speeches, reports, and proposals, policymakers have claimed that a CBDC will:
Expand financial access to the unbanked.
Improve the application of monetary policy.
Increase the speed of payments.
Create programmable payments.
Enhance the digital transformation of the economy.
Strengthen the international role of currencies.
Prevent dependency on foreign payment services.
Establish universal acceptance.
Compete with private services while also not competing with all private services.
Replace cash while also complementing cash.
Create a free option for consumers while still paying businesses’ fees.
“Future-proof” the economy.
Reduce currency fragmentation.
Reduce costs for businesses and consumers.
Create a foundation for financial innovation.
Prevent discrimination against central bank money.
At best, this list showcases extreme optimism in the efficacy of government programs. At worst, this list borders on false advertising. More importantly, many of these goals pull in different directions, requiring tradeoffs that policymakers often gloss over. A system designed to maximize surveillance, for example, is not easily reconciled with one meant to expand financial inclusion. Likewise, a CBDC cannot simultaneously be a lifeline without undermining the existing financial system. And that’s to say nothing of the fact that these officials almost never address the risks of CBDCs.
Perhaps my skepticism is the foil to their optimism, but I’m not alone. Federal Reserve Governor Christopher Waller recently addressed CBDC proponents head-on:
I just don’t see the use of CBDC for what everybody was advocating for. … What is the major problem this thing is solving? And why is a CBDC and only a CBDC the answer to fixing that problem? … So once you ask that basic question and you realize everything works pretty well without it. There’s no reason to spend a lot of money on it.
It’s not often that I commend central bankers, but Waller is spot on. A CBDC can’t do everything, everywhere, all at once. In fact, what little it can do seems to fall into just two categories: duplicating existing services (e.g., faster payments, financial inclusion, and financial innovation) and expanding government control (e.g., payment programmability, financial surveillance, and cash replacement). If that’s the best that officials can come up with, CBDCs should be rejected.
CBDCs, stablecoins, and tokenized deposits are all versions of the same thing, in that they allow a digitally native form of value transfer.
In the Bahamas there is a unique story of seeking financial inclusion across a far flung archipelago where people live beyond the range of cell towers and where there are no bank branches. So that implementation was totally unique, unlike any other. The Sand Dollar CBDC runs on equipment designed for remote meter reading and creatively uses white space technology to overcome the distance issues. But the total addressable market on the Family Islands, the smaller islands away from the three main islands, is only about 40,000 people. The country itself has a population of about 400,000 so even that is a tiny TAM and for internal reasons the initial focus was on the main 3 islands, the whole thing has been botched by failing to admit that it’s a solution that is really custom-design designed for these 40,000 people.
Then you look at places like Nigeria, where the decision to experiment with the eNaira was mostly made for political reasons internal to the central bank, somebody wanted a fiefdom. Nigeria has a long established real time payment system and a large banked population (about 60% of adults) so the eNaira did not really address any gaps in the market. Financial inclusion was the ostensible argument to paper over some internal power dynamics at CBN. Worse for the first couple years, it was bank-led and mobile money providers were excluded. It would be a challenge to come up with a ‘more DOA’ implementation strategy.
The private sector moves quickly whereas central banks are plodding by design. Private sector initiatives can and do fail all the time but central banks don’t have this luxury. So in the enthusiasm for stable coins and tokenized deposits (and the wonderous riches that will flow to the sponsors) the private sector says there’s no need for CBDCs. Meanwhile, stablecoins and tokenized deposits come with many of the downside risks associated with CBDC‘s and they introduce all sorts of other risks. Just look at the history of PayPal’s stable coin which is backed by 10 pounds of poo in a 5 pound sack.
Wholesale account-based CBDCs have been around for something like 50 years, ever since commercial bank deposits got computerized. In this new world of digitally-native tokenized currency and currency-like products their justification remains a “fill in the blank“ exercise.