When the crypto bubble was on the rise, it prompted governments to step up development of their own form of electronic cash, known as central bank digital currencies. Now that enthusiasm for crypto has waned, will CBDCs fade away, too?
I believe they still have ample potential to fulfil the promise of a more efficient and inclusive financial world. But their impact will likely be more evolutionary than revolutionary.
CBDCs are coming, because they represent a big upgrade over money as we know it. Like dollar bills, they’re direct liabilities of a sovereign nation, not of private financial institutions. Like electronic cash on a banking app or credit card account, they should be convenient to hold and easy to exchange over long distances.
That said, their widespread use is not guaranteed. They might not catch on among people who are already comfortable with banks, who trust deposit insurance and who enjoy the various perks that credit-card issuers provide — even if such systems entail greater costs. And they must also overcome concerns that they’ll help governments monitor people’s transactions. China’s digital yuan (or e-CNY), for example, still represents a miniscule share of the country’s payments, with Ali-Pay and WeChat Pay dominant.
The role CBDCs play will depend on two main conditions. The first is each country’s starting point. CBDCs probably won’t be transformational in places that already have efficient payments and sound banks, and where existing arrangements are hard to break (high-spending people love their credit-card airline miles). They could make more of a difference, though, in countries with less robust financial systems and large unbanked populations. Also, cross-border payments are still slow and expensive just about everywhere, with migrant workers often paying fees of more than 5 percent to send money home. A network of interoperable CBDCs could make such transfers much faster, safer and cheaper.
Second, CBDCs must be properly designed. Central banks are not well equipped to handle millions of individual customers, so they’ll want to rely on traditional banks to manage accounts and maintain customer relationships. To limit their role to a medium of exchange (as opposed to an investment asset), and to avoid undermining banks’ role in the economy, CBDCs should pay no interest. To ensure people don’t flee from deposits to CBDCs in times of stress, limits must be placed on how quickly anyone can add to their holdings. And to gain trust, issuers must convince people that their private information will be protected.
To that end, the Bretton Woods Committee (of which I’m a member) has issued a new report with two urgent recommendations. First, global regulators — under the auspices of the Bank for International Settlements — should establish principles for CBDCs similar to the ones they created for market infrastructure following the 2008 financial crisis. These should provide guidelines for CBDCs’ functionality, how they will interface with one another, how to balance privacy with law enforcement, and how to handle data protection, risk management and dispute resolution — while leaving the ultimate decisions about how to achieve these outcomes to individual central banks.
Second, the BIS should propose settlement terms and standards for cross-border CBDC payments. It’s well-positioned to do so given its long-standing role as the central bank for central banks, and the expertise it has developed on CBDC design and technology.
The full promise of CBDCs can’t be realised, however, without leadership from the issuer of the world’s dominant currency. So far, the US Federal Reserve has focused mainly on upgrading the country’s internal payment system to 24/7 immediate settlement (via FedNow). Worthwhile as this may be, the Fed should also put greater effort into developing a US CBDC. Properly developed, implemented and managed, CBDCs can improve national payment regimes and make the global financial system more useful for people everywhere.
Bill Dudley is a Bloomberg Opinion columnist. Views do not represent the stand of this publication.
Credit: Bloomberg
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