Why Do Central Banks Need CBDCs?

Ralph Wintergerst, CEO of the G+D Group, has recently written an article published in the International Banker magazine. The article’s title is ‘Britain needs a digital central bank currency’, but in fact the article is an explanation of why any central bank needs a Central Bank Digital Currency (CBDC). It is an excellent article and well worth a read. It does raise some questions as well as making some sound points.

In the rather wild west situation we have today with payments changing rapidly as technology allows new entrants and ways of working, the public going digital more quickly due to the pandemic, and cryptocurrencies and stablecoins offering the world new ways to think about value, CBDCs offer a route to restore order and reduce risk. However, the article suggests that CBDCs match what cash does. Why? If cash did not exist perhaps one can argue CBDCs must match cash to maintain continuity during change, but cash does exist and needs to until the real risks and opportunities of digital are understood.

The article makes a couple of interesting statements. First, 'behind the supposedly digital current payment transactions in e-commerce are rather traditional, long established infrastructures and workflows.' True. But it would be interesting to understand what change a CBDC enables and how, otherwise this is a statement of hope. Second, 'Without the anonymity of transactions, the demand for security, which is elementary for a currency, cannot be fulfilled either.' But no digital transaction is anonymous. Surely, we just have to live with that fact, albeit with every effort made to maintain privacy.

There is the suggestion that the potential security threat is lower for state-protected digital central bank currencies than for stablecoins or private cryptocurrencies but the article does not explain why. It is not clear why CBDCs will be better than what we have today.

The description of the move from the financial system of today to a future system, only commercial banks are referred to, with no mention of new non-bank service providers. The commercial benefits described rely mainly on how smart contracts linked to value chains can help e-commerce (and international trade). If one reads some of David Birch’s work, he paints a significantly more disrupted and bold future.

At the end the article makes a bold claim about resilience in a crisis. It says a CBDC will provide access at any time independent of internet access, mobile phone networks and even power supply, but does not explain how. Perhaps using a token and a wallet for small sums of money but beyond that?

The piece ends with the claim that a CBDC will help financial inclusion. This is a statement frequently associated with digital payments in general and CBDCs in particular. But is the reality is different? A large number of people will either find digital too complex or undesirable. For the majority, it is fine but we must never forget those who won’t make the transition.

The article is one of the most coherent and straightforward summaries of the role and benefits of CBDCs. Clearly space does not allow G+D to substantiate or fill out every claim and statement, hence these questions, but it remains a good read.