The Need For A Very Good Reason for a CBDC

The Federalist Society in the US has published a useful, and brief, summary of where key economies are in their CBDC thinking ¹.

It notes that leading central banks have not agreed to or encouraged the tokenisation of assets because of questions of governance and ownership, regulatory, legal and monetary issues, and transparency and enforcement, particularly Anti-Money Laundering and Countering the Financing of Terrorism (AML/CTF) considerations. This includes the challenge of how to provide access to a country’s CBDC by non-resident financial institutions.

The Bank of England is now on part two of a study developing an Application Programming Interface (API) platform to distribute a retail CBDC. Payments Canada is working with the Bank of Canada on the implications of a CBDC. The Riksbank announced on 31 March 2023 that its enquiry did not find ‘sufficiently strong societal needs’ for an e-krona. It will now look to see if there are sufficient other needs to introduce one.

The European Central Bank (ECB) identified privacy of transactions as a key issue for CBDCs in its public consultation. Both the Bank of England and the ECB will include approved intermediaries to carry out AML/CFT checks. The EU Commission will publish its regulations this summer for the EU Parliament to approve.

The Bank of England’s consultation paper proposed hosting a core ledger with the private sector providing ‘wallets’. End users would interact with the wallets, not the Bank. Transactions on the core ledger would be anonymous.

The Bank of England has proposed people could hold £10,000 to £20,000 in CBDCs, sufficient for salaries, bonuses and overtime payments. Commercial holdings would not be limited.

The Bank of England believes a Digital Pound may be possible by 2030, the ECB sooner than that. The Bank leaves room for if ‘new forms of privately issued digital money emerge and how they interact with existing forms of money and payments’. Perhaps, with good regulation, stable coins could be incorporated into the payment mix.

Privacy for a user’s transaction is not guaranteed in the ECB and the Bank of England’s current proposals. The Federal Reserve January 2022 consultation paper, ‘Money and Payments: The US Dollar in the Age of Digital Transformation’, says a CBDC would have to be ‘privacy-protected, intermediated, widely transferable, and identity-verified.’ 

The paper ends by pointing out that Alipay and WeChat Pay are preferred to the digital yuan (e-CNY) despite the best efforts of the Chinese government with its ability to order public sector wages to be paid in e-CNY and to offer generous incentives to use it. Every transaction is recorded and is traceable on the digital ledger a part of China’s ‘social policy’.

Other unknowns, including for wholesale CBDCs, are the cyber security risks of using a single technology to transfer and record most of the transactions in the domestic economy, as well, possibly, as international transfers. Given the effective private national and international transfer systems already exist, there will need to be a very good reason to introduce a CBDC and this is not yet clear.

1 - Should the Major Central Banks Actually Introduce CBDC? | The Federalist Society (fedsoc.org)