The emergence of central bank digital currencies (CBDCs) is inevitable. Research on CBDC design and implementation is under way around the world. China is seven years into the process and has pilot programmes for the e-CNY, or digital yuan. The European Central Bank aims to introduce one by 2025. The Bank of England and Federal Reserve, however, are moving more slowly. And I think they’re right. What’s inevitable isn’t necessarily what’s optimal.
The world’s financial ecosystem has been transformed over the past 15 years. Cryptocurrencies and fintech firms threaten to shift payments, deposits and loans out of the banking sector and into unsupervised networks. This could create a wild west for international finance, threatening sector stability and undermining central banks’ abilities to achieve their mandates. The only defence, CBDC proponents say, is for policymakers to retain ultimate control over financial transactions.
With CBDCs, businesses and individuals could hold accounts directly with the central bank. While that could provide efficiency, it would end the role of banks in financial intermediation. The core of bank business models is leveraging deposits to extend loans and collect a fee. With an unstable deposit base, this practice, and bank profits, will dwindle. Fewer loans would be made, a drag on overall growth. To make up for the lost fees, banks might charge more for payment services and accounts. So much for a cheaper and more inclusive financial system.