New research from the Bank for International Settlements (BIS) reveals that countries are plowing ahead with central bank digital currencies (CBDCs) despite little public appetite for them and crumbling rationales for proceeding.
CBDCs are knock-off versions of cryptocurrency run by central banks. According to a new BIS survey, nine of 10 countries are exploring CBDCs and more than two-thirds state they will or might likely release one in the short to medium term.
This comes despite little evidence of public clamor for digital versions of fiat money. For example, in the European Union, public response has been “overwhelmingly negative.” Two weeks after the European Commission invited public comment, over 11,000 responses poured in, few in support. In the United Kingdom, a recent poll showed 30 percent believe that a “Britcoin” would be more harmful than beneficial and 24 percent think it could be beneficial. The rest were unsure. In both instances, fears over privacy and security topped the reasons people were distrustful of CBDCs.
In the U.S., the Federal Reserve released white paper in January that invited public comment. Privacy is likely to top concerns over a digital dollar as well. Americans’ fear would be justified. Recent news reports reveal that the FBI conducted as many 3.4 million warrantless searches of Americans in 2021. Moreover, the Center for Disease Control and Prevention paid for data on millions of Americans’ cell phone locations.
Adding to unease, justification for CBDCs are crumbling, particularly in the U.S. The Federal Reserve white paper revealed some expected, but not officially resolved design choices that would reduce CBDCs’ supposed benefits.
For example, the Fed admits that a U.S. CBDC would be account-based (like credit cards as opposed to cash) and intermediated through private banks instead of direct Fed accounts. These design choices counter oft-asserted CBDC rationales.
First, it would not help increase financial inclusion. Being intermediated through the private banking system means CBDC accounts will bear fees and will not mitigate the existing mistrust many unbanked people have toward banks and large institutions. As the Bank Policy Institute (BPI) points out:
Under an intermediated CBDC model, [unbanked] people would be required to establish an account at a bank or other financial company (including going through a full Know Your Customer process as required under anti-money laundering and sanctions rules), upload a digital wallet to a phone or computer, and then have their transactions monitored by the bank and perhaps by the government as well. No one has yet explained why a person reluctant to sign up for a bank account would embrace such a relationship.[Emphasis added]
Furthermore, the Fed’s insistence on account-based CBDCs and attendant Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) monitoring would stifle another CBDC rationale: more efficient cross-border payments. As the BPI explains, AML/CFT requirements currently slow cross-border payments; using the different medium of CBDC would not address that. CBDCs would have to be converted to local currency at each stage, which brings fees. A CBDC-to-CBDC system or multijurisdictional CBDC is years away.
The BIS survey notes that countries’ rationales for plowing ahead with CBDCs have little to do with stated reasons. They fear competition from cryptocurrencies, particularly stablecoins. Nearly 80 percent of advanced economies surveyed stated stablecoins had hastened their foray into CBDCs. Central bankers believe stablecoins pose risks to financial stability.
That fear must be weighed against the financial instability that CBDCs would create. In its white paper, the Federal Reverse admits CBDC-triggered financial instability is a real concern:
Because central bank money is the safest form of money, a widely accessible CBDC would be particularly attractive to risk-averse users, especially during times of stress in the financial system. The ability to quickly convert other forms of money—including deposits at commercial banks—into CBDC could make runs on financial firms more likely or more severe. (p. 17)
When weighing CBDC pros and cons, the verdict should be clear. The public does not want them, official justifications lack credibility, and the potential downsides are not worth the risk.