Central bank digital currencies — digital currencies backed by a central bank — have received renewed interest with the United States President Joe Bi
Central bank digital currencies — digital currencies backed by a central bank — have received renewed interest with the United States President Joe Biden’s Executive Order on Ensuring Responsible Development of Digital Assets. Proponents of CBDCs argue that widespread adoption will promote financial inclusion, expand public access to safe money, improve the efficiency of payments and more.
But their rationale remains tenuous. Many analysts and practitioners increasingly view CBDCs as fundamentally at odds with the purpose of cryptocurrency, which is to provide a secure, decentralized peer-to-peer mechanism for transferring funds. And the hypothetical benefits of CBDCs remain hypothetical — no evidence exists yet that suggests any advantages over other examples of distributed ledger technologies in financial services, especially given the new risks they pose.
The status of CBDCs worldwide
Nine countries have already developed their own CBDCs, and the U.S. has joined a list of over 100 countries exploring issuing one. Most CBDCs take a hybrid approach whereby “The central bank issues the CBDC to banks and other and other payment service providers, which in turn distribute the CBDC to users throughout the economy and provide them with account-related services,” according to a recent report by the Hoover Institution.
There are other types, according to leading experts at the Bank for International Settlements — which consists of stakeholders from major central banks. These include a synthetic CBDC, where the consumer has a claim on an intermediary, with the central bank only keeping track of wholesale accounts; and a direct CBDC, where the consumer has a claim on the central bank, with it handling all the retail.
Some scholars have underscored that DLT has a role to play in helping central banks become more efficient and secure, but such technology should be introduced with “a ‘minimally invasive’ CBDC design — one that upgrades money to current needs without disrupting the proven two-tier architecture of the monetary system,” according to Raphael Auer, head of the BIS Innovation Hub Eurosystem Centre, and Rainer Böhme, a professor at the University of Innsbruck.
The fact that central banks are interested in digital currencies is not surprising. As countries look to rebound from nearly two years of lockdowns and other restrictions on mobility, coupled with rising inflation, central banks have been feeling the pressure to promote employment and manage price levels u20 their “dual mandate.” Across the world, central banks have bought a significant amount of bonds, thereby expanding the money supply and arguably further contributing to inflation. For example, the Federal Reserve has expanded the U.S. money supply from roughly $4 trillion to over $20 trillion over the past two years, but we are only now seeing the resulting inflationary effects.
Evaluating the potential benefits
In a 2020 report, the BIS outlined a handful of potential benefits brought up by proponents of CBDCs: financial inclusion, cross-border payments, financial resilience and stability, increased efficiency of fiscal transfers, and privacy. But cryptocurrency fulfills all of these aims better than government-backed currencies.
Let’s take a look at these potential benefits one by one.
Financial inclusion: The expansion of decentralized finance and emergence of nonfungible tokens are already changing the economic landscape. Thousands of content creators have sold NFTs and joined the DeFi community, removing intermediaries and allowing revenues to go directly to the creators.
“We’re entering a ‘Web2.5 era’ where content creators have benefited from the rise of social media, but what they create is owned by centralized groups,” Avery Akkineni, president of VaynerNFT, tells Magazine. “Now they are starting to own the end-to-end process, and we’ve seen some of these creators become wildly successful. […] That is inspiring a new generation of creators.”
Furthermore, existing financial institutions have already expanded access to credit by lowering the barriers to adoption. My research from 2021 found that the expansion of mobile banking in the U.S. since 2014 has been concentrated among those who are younger, single or a part of minority groups.
Even if these patterns were not true, it’s unclear how CBDCs expand financial inclusion.
Cross-border payments and efficiency of fiscal transfers: While financial transactions across borders are already possible, they are time-intensive and costly. However, several Web3 companies enabling cross-border transactions have emerged, including Ripple.
Financial resilience and stability: Resilience is integral to cushion against unanticipated…
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