CBDCs: Scepticism and Challenges

The CBDC Conference took place in Istanbul 12-14 September, with over 60 speakers, 40 central banks and 200 delegates meeting to consider the state of play for CBDCs.

Three papers asked the audience to reflect on whether and how a future CBDC might proceed.

Anchor of stability or gigantic flop?

Professor Peter Bofinger, from the University of Wurzburg, asked whether CBDCs are a payment object or a payment system using the analogy of a car or a highway.

He started off by suggesting digital cash as an offline payment tool is as attractive as an alcohol free wine. While the European Central Bank’s (ECB) CBDC survey had reported that people wanted CBDCs to work offline, respondents had gone on to say they didn’t expect to use it.

He then queried just how useful a digital euro will be:

• What is the advantage to the citizen of a CBDC when there are deposit insurance guarantees on bank accounts?

• While a CBDC is attractive as store of value, this is not on offer with holding limits in place.

• Foreigners will be unable to switch funds to euros from abroad.

• Merchants will not be able to hold CBDC balances.

The importance of cash acting as a monetary anchor is frequently used in the justification for the digital euro in a less cash world and/or a highly digital world. But with low holding limits, is it really credible to make this claim for the digital euro?

Further, given the complexity of the digital euro payment system, who will pay for accounts and the system? The consultation says that there will limits on fees for payment service providers and that those fees must be shared with the banks. The fees will be capped to match the fees on existing digital payments. Is this viable?

Professor Bofinger finished by pointing to alternative QR code-based payment systems, such as PIX, or Switzerland’s Twint, and asking whether they might not achieve the same goal. He also pointed out that central bank reserves work effectively even in less cash environments, providing the necessary stability and monetary system control tools that we have today.

Less haste, more speed

Prof Alistair Milne, from the UK’s Loughborough University, considered CBDCs in high income jurisdictions. He argued that central banks are currently assuming that the uptake of CBDCs will be strong, but that caution is required. Network effects, barriers to adoption and the viability of business models means that such an assumption is risky.

The Bank of England has talked of a target of 20% of broad money being in the form of CBDCs. Network effects will drive either high, or low, adoption. But how does a central bank influence how popular CBDCs will be? If interest is not paid on CBDCs, then non-commercial incentives will be needed to encourage adoption, but the risk of disintermediation also requires disincentives for adoption.

Prof Milne suggested that several different types of CBDC can exist for different niche applications, and that central banks don’t need to launch CBDCs as a mega project meeting the needs of all. In the Bank of England consultation there were 17 different use cases for CBDCs. But when is a CBDC better than commercial bank money?

Because this isn’t necessarily clear, the suggestion was that central banks focus on the vulnerable and offline business cash to start with, leaving more ambitious goals for later. There is a risk that CBDCs will either fail to compete with commercial bank money or be too successful displacing commercial bank money.

Building ecosystems for CBDCs

Professor Pinar Oscan, from the Said Business School in Oxford, looked at the barriers and motivators for investment in the creation of the ecosystem that needs to exist if CBDCs are to be a success.

There is a tension between the need for inter-dependence and collaboration. Partners need to benefit but also there is a need to avoid technology lock-in and dependence. Central banks will need to decide between participation and regulation to achieve this.

The mobile phone payment market offers an example of silos and dominance which are created when there is no investment. M-Pesa succeeded because the banks in Kenya were weak while the mobile phone operator was strong. Central banks will need to look out for turf wars.

Inevitably there will be ecosystem resistors and timing will matter. Collaboration moments will need to be seized when they arise. Value will need to be found for the resistors to bring them on board. Professor Oscan finished with the thought that while all this is being sorted out, what payment alternatives will emerge?

Final word

In discussion there was a strong view that the increase in digital payments means that there needs to be government issued digital money. The way forward still needs to be worked out, and challenges outlined here answered, but work on CBDCs is important and urgent.