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% 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.