Obviously, central banks are scrambling to get on the CBDC train before it even leaves the station. But what inspires this mad dash?
One argument is that, by providing digital access to anyone with a cellphone or smart card, a CBDC will bring modern payment technology to the masses. But the experience of countries like India shows that there are easier ways to achieve this goal.
India was able to solve its ‘unbanked’ problem by requiring commercial banks to offer no-frills savings accounts with no minimum-balance. The ‘Pradhan Mantri People’s Wealth Scheme’ similarly works with public banks offering zero-balance, low-cost accounts to underbanked rural residents. Till last year, about 400 million ‘people’s accounts’ had been opened.
India has also created the United Payments Interface, an efficient, low-cost electronic payment infrastructure. UPI is a real-time payment system operated by National Payments Corp, a non-profit organization sponsored by the government. Banks, e-money companies and tech firms have introduced UPI-enabled mobile-payment apps that allow users to send money between bank accounts.
But, while around 300 banks participate in the system, the government is keen to introduce the CBDC. Perhaps this is driven by the belief of policymakers that CBDCs will benefit the information technology sector. From the point of view of financial inclusion and ease of payment, however, the entity would be redundant.
Cross-border payments are not that cheap or easy. Furthermore, governments are becoming increasingly uneasy about their reliance on the US dollar as the principal vehicle for such transactions, as financial sanctions are being resorted to by the US. CBDCs are expected to provide a digital alternative.
Strictly speaking, there are no barriers to exchanging CBDCs from different countries and using them for international payments. Multiple CBDCs can run on the same blockchain. With the help of the Bank for International Settlements, central banks have experimented with platforms, known as mBridges, on which CBDCs can be traded.
But, although we have the technical know-how, there are formidable political barriers to widespread adoption of these systems. Can you imagine China and the US agreeing on how to operate a platform on which their CBDCs are exchanged? Can you imagine the agreement by 120 central banks?
Yet another motivation for the stampede to CBDCs is that financial and even geopolitical primacy will be triggered, which central banks are quickest to issue. This view is encouraged by economic and political tensions between the US and China and China’s rapid move towards issuing a CBDC, which is seen as a threat to dollar dominance.
But this argument assumes that CBDCs will be used across borders and replace the international interbank market as a vehicle for international transactions. But, given the political constraints that hinder a common trading platform for different CBDCs, this is unlikely to happen.
Ultimately, central banks face a ‘triangle’ when considering the issuance of a CBDC.
Central banks can only have two out of three things: a digital currency, privacy of transactions, and financial stability.
When issuing CBDCs, European central banks must respect the EU General Data Protection Regulation (GDPR), the strictest data privacy law in the world. If they issue digital currency through authorized intermediaries, their users will enjoy privacy. But authorities will have limited ability to track transactions using their CBDC.
Those using currency in transactions already enjoy anonymity, but one can imagine other transactions in which bank transfers are being executed using a CBDC instead. Central bankers and others worry that commercial banks will not be arbitrated. Transactions that would normally be completed by bank transfer would be transferred to a CBDC. Along with transaction confidentiality, this could allow financial risks and imbalances to be kept out of sight of regulators. This is the reason why the European Central Bank is moving slowly towards issuing CBDCs.
The People’s Bank of China is not required to provide confidentiality. While downloading a digital wallet capable of unlimited transactions, it requires extensive information from the user. While downloading a limited wallet capable of small retail transactions, it only requires a user’s cellphone number, and makes promises, for what it’s worth, of not tracking his or her transactions.
we will see. These measures should prevent individuals from using e-CNY to evade China’s capital controls, siphon large amounts of money out of the country, and otherwise act in a manner that threatens financial stability. Given these conditions, whether people will trust China’s CBDC, only time will tell.
International finance, as scholars of exchange-economics know, is full of triads. Instead of avoiding them, CBDCs just create one more. ©2022/Project Syndicate
Barry Eichengrin is Professor of Economics at the University of California, Berkeley and author of In Defense of Public Debt.
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