CBDCs Gain Momentum

Andrew Singer at CoinTelegraph asked me to comment on the recent BIS results of its survey on CBDCs, which shows a big expansion on research in retail CBDCs around the world. Here are his questions and my answers, which were incorporated in his article, CBDC activity heats up, but few projects move beyond pilot stage:

• Looking at the report, was there anything in it that you found particularly surprising?

What I found most surprising was the speed at which advanced economies were moving toward retail CBDCs. As recently as the middle of last year, central banks in advanced economies were taking a rather relaxed view of CBDCs, not seeing them as particularly necessary or worthy of much attention. This was understandable given the advanced payment systems they already had in place or were developing like the FedNow system in the US. Evidently, all this has radically changed. Just look at President Biden’s recent Executive Order, which is all about advancing a US CBDC, a far step from 2020 and 2021 speeches by Fed officials that questioned the need for any such thing.

• What, in your view, is driving this movement forward? Has the Covid-19 pandemic had an impact? The global proliferation of stablecoins? Something else?

So, what changed? For Developing Economies, I am not sure a lot has changed. Their increasing interest in CBDCs is a natural progression. Developing Economies have led the entry into retail CBDCs for years to increase financial inclusion and payment efficiencies while lowering costs. I just think more such economies are just recognizing the advantages of replacing cash and legacy payment systems with CBDCs.

For Advanced Economies, I do not see much evidence for the impact of Covid-19 and a flight from cash driving new interest in CBDCs. Cash usage remains strong and may be rebounding to pre-pandemic levels. Countries where cash usage was already declining no doubt saw an acceleration of this trend but not to panic, cashless levels that would demand an electronic legal tender as an alternative in the short term.

For Advanced Economies, the catalyst was stablecoins. You could say that 2021 was the year of the stablecoin (a fiat pegged one aimed at payments) with much growth in the area and discussions about legislation and regulations. Thus, all the concerns about “financial stability” in the report. Advanced Economies now had to take seriously the challenge of stablecoins making headway against fiat and impinging on a central bank’s monetary monopoly and concomitant control of monetary policy. The response, which has historical precedent, is a cooptation of the threatening technology to create a counterforce to maintain a monetary monopoly. Hence, retail CBDCs.

• What, if anything, does this movement mean for the crypto/blockchain world? Do CBDCs represent an existential threat to cryptocurrencies?

This movement has a two-fold effect on crypto. The development of retail and wholesale CBDCs will work to popularize and mainstream crypto in general. The public and private sectors will become more informed, familiar, and comfortable with crypto and using cryptocurrency in payments. This should advance the entire industry.

The downside for crypto is that CBDCs will work to crowd out private cryptocurrencies, especially stablecoins focused on retail payment areas. Cryptocurrencies will stay in niches in the payment system where they serve unique functions and provide specialized services. And, there will be efforts to integrate and channelize private cryptos into CBDC and legacy payment systems under the supervision of the central bank.