Central Bank Digital Currencies: Not Coming Our Way Any Time Soon?

Are the central banks in a race against time and currency debasement?

by Larry White of The View From Our Whitehouse

Central Bank Digital Currencies (CBDC’s) – Pro and Con

This is a topic we have covered here for several years. First we had a variety of private sector forays into the world of creating cryptocurrencies with most of the early attention focused on Bitcoin and the related blockchain technology that came along with it. Over time all kinds of new currencies arose and the private sector dived head first into tying to figure out ways to utilize blockchain technology. This whole process has been going on now for some time and thus far we have not seen any of this lead to something that leads to broad public adoption of an alternative cryptocurrency to seriously challenge the existing national fiat currencies. Even a huge private sector initiative from Facebook (Libra) discovered that there are many regulatory challenges involved with trying to do something that the central banks prefer left in their domain.

It would not be accurate however to say that central banks have ignored all this furor. All around the world central banks started up studies and test pilot programs to see if they should look into both issuing their own version of a “digital currency” and also blockchain technology as well. This process has been very slow to unfold and at this time there are still no major western central banks expected to issue a central bank digital currency (CBDC) in the near future; although China may be closer than some others to giving it a try. We have covered all this here and have informed readers not to expect this kind of change to show up any time soon in any of the major western central banks. 

There are many reasons why this is the case. Some are technological, others are political, and still others are just the tendency towards stasis that exists in our present monetary system. The public at large has not demanded this kind of major change and a large segment of the public likely would distrust it for one reason or another. So there is still no reason to think we will see this kind of change coming soon, especially at the Federal Reserve in the US. 

In this article, we will feature two articles that look at this whole topic from a “pro and con” perspective. Central banks do have interest in exploring this further and do list some “pros” they can see for either “wholesale CBDC’s” (bank to bank) or “retail CBDC’s” (includes the general public having accounts at the central bank). But even the central banks continue to bring up some “cons” they say would have to be overcome. Of course central bank critics see lots of “cons” and not that many “pros”. Here we will provide links to two articles so that readers can explore this topic in depth if they want to.

First, we have this new Digital Monetary Institute journal from the OMFIF that talks about the status of China’s efforts to test the use of a new digital form of their currency and also how Asia in general has a number of projects underway. The OMFIF is generally pro central bank in its outlook. Here is an excerpt from the Introduction section (I added underline):
“Central bank digital currency activity is accelerating in Asia, where a range of digital payments and financial infrastructure projects is moving from desktop study to beta test implementation. This edition of the DMI Journal takes the region as its inspiration with accounts of digital projects from both private and public sectors, stretching from China to Manila via Bangkok and Singapore. We also highlight a pair of projects from Europe.
Much attention is fixed on the People’s Bank of China’s test in four cities of its retail CBDC, a digital fiat currency distributed on the mobile phone platforms of two leading social messaging services. This adds much greater functionality to both private sector offerings, as well as potentially displacing cash for the majority of retail transactions. The PBoC is at pains to stress that its Digital Currency Electronic Payment is not designed as a substitute for cash. The digital cash circulating is fully collateralised, and the authorities have partial view over users and transactions. While the precise features of this model may not be attractive to other central banks, the experiment will be studied with great interest worldwide. Katie-Ann Wilson’s article explores these and other issues in greater detail.”

Next we have this recent in depth article by Alasdair Macleod. In this article the author looks at this topic from the perspective of a central bank critic. He first lists a number of reasons why central bank digital currencies might appeal to various central banks. He lists some of the same “pros” that the central banks themselves mention in their studies. Then he offers a review of this list of potential advantages from the point of view that they will not end up working out to be in the public interest if implemented. Finally, he concludes with this comment:

“The further benefit for central banks is it will increase their power as an organ of the state at the expense of commercial banks, potentially becoming more important than the state itself. However, the current economic situation is deteriorating more quickly than a working CBDC can be introduced, so the whole exercise is likely to be too late to have any relevance to monetary policy in the foreseeable future.”

The very last sentence (I underlined above) is an interesting observation and does fit in with what we have observed here as well. We have documented how slow this process is moving and also explained the various roadblocks and challenges central banks would have to overcome to try and implement this in the real world. Central banks prefer to reduce risk as much as possible and a change like this can carry a number of risks that most central banks may prefer not to take. For one thing, there is no major detectable demand from most of the public for this kind of change right now. Commercial banks may not like it either. Also, everyone from Bitcoin to Facebook is attempting to offer the public alternatives to central bank managed currencies, but none of these have gained widespread public adoption thus far.

Meanwhile, all over the planet, governments and central banks are flooding the world with more money in an effort to stave off a deep recession and/or depression. The COVID-19 pandemic has encouraged (forced?) central banks to ramp up these efforts. However, many observers point out that problems were already present in the current system before the pandemic. The unusual ongoing activity in the repo market by the US Fed started long before the pandemic arrived (we reported it here last fall). Some would argue the pandemic is just speeding up a process already in progress that threatens the stability of our present monetary system. Some cynics feel that that whichever side wins the upcoming US election will only impact the speed at which the present system becomes unsustainable. In this recent video discussion we featured here on the blog, even former Fed Chairwoman Janet Yellen stated that at some point the US debt to GDP ratio will become unsustainable. Interestingly, neither political party in the US is talking about this issue at all.

Are the central banks in a race against time to make any changes like this before the whole question becomes a moot point because major currencies have been too debased? Above we have provided links to a lot of in depth material in these two articles. Readers can review them and come to their own conclusions. Here, we will continue to monitor events and report what actually happens, which is what matters most.
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Added notes: One reader I view as well versed in monetary issues sent me this comment after reading a preview of the article above:

“In the end, notes, bills, currencies, credit of all kinds – of whatever denomination – have to prove a store of value to serve as money, and thus in their issuance, related to some measure in the real economy for people to trust it, have confidence in it.”

Also, here is an example of an earlier article we did here on this topic featuring some comments from an expert (Robert Bell of KlickEx) who has helped us out here over the years on this topic. Robert is recognized around the world as an expert on payments systems technology as used by central banks. He told me years ago that central banks are very slow to make significant technology changes and also explained the specific challenges associated with trying to use blockchain. In fact, here is what he told me in the article linked just above in October 2019:

“As far as real systemic change… There’s nothing on the cards for the monetary system. The digital services spoken of (in the Bloomberg article) will not change anything fundamental, and the IMF and BIS are even further behind where most central banks are. The central banks will implement real time slowly, and banks will reduce cross border prices slowly. Swift and their GPI project is already doing this work, but banks are taking a long time to reduce prices, that’s all. Open Banking, is speeding things up a bit, but not much.”  – Robert Bell