Are central banks thinking radically enough about CBDCs?

“We have yet to hear a convincing case for why the UK needs a retail Central Bank Digital Currency (CBDC),” concluded a report of January 2022 from the Economic Affairs Committee of the House of Lords. “While a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy.” The Committee included a former Governor of the Bank of England and a distinguished economic historian (of the “What would Keynes do?” school). Despite such sceptical voices, the Atlantic Council CBDC Tracker lists 78 retail CBDC projects currently being pursued by central banks around the world and only six that have a wholesale component. Of course, every jurisdiction is different. Each country that has issued a CBDC (the Bahamas) or is experimenting with one (China, the Eastern Caribbean and Nigeria) has its own reasons. For most, the limited reach of conventional banking systems is a major factor. A related concern is the possible cession of monetary sovereignty to crypto-currencies or Stablecoins controlled by private interests. Some (Iran and Russia as well as China) see a CBDC as part of a geopolitical strategy to undermine the dominant position of the US dollar and circumvent reliance on payments systems controlled by geopolitical opponents. In the developed economies of the G7, the momentum is shifting from retail CBDCs back to wholesale CBDCs, where the potentially disruptive effects can be contained within the existing banking system. The emerging use-cases include cross-border payments, trade finance and securities settlement, where numerous experiments led by central banks have proved the technology works. However, concerns that a CBDC might disrupt correspondent banking networks, or undermine the funding of commercial banks with consequently deleterious effects on their capacity to lend, might be fostering an unduly conservative approach in the developed economies. After all, CBDCs also represent an opportunity to re-think the relationship between monetary policy and fiscal policy and how credit is created and distributed in a sophisticated modern economy suffering from pockets of inequality as well as illiquidity. At this webinar, Future of Finance re-visits the arguments for and against retail CBDCs, examines use-cases for wholesale CBDCs and asks whether central banks need to see CBDCs as a massive opportunity to re-design the way money and data flow throughout economies rather than a systemic threat to financial stability.

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