Central Banks Had to Up Their Money Game This Year – And They Did
This year, Pandemic and all Central Bank (CBDC) digital currencies became famous for 15 minutes. In 2019, Facebook woke central banks to the possibility of serious private competition. And while the Libra, now diem, remains a paper tiger, it's not hard to imagine other big tech firms joining the pack. The central banks needed to improve their gambling - and they did.
The end of this strange year is a good time to examine the state of the CBDC and reconsider some basic questions, starting with the most basic: What is a CBDC? With so many definitions and models, it becomes harder (not easier) to understand what CBDC means. Here's a good place to start: a CBDC is a direct claim on the central bank. You own or hold something that is issued directly by the central bank rather than an intermediary.
This post is part of CoinDesk's 2020 Annual Review - a collection of posts, essays, and interviews on the year in Crypto and beyond. Marcelo M. Prates is a lawyer at the Central Bank of Brazil and holds a PhD from the Duke University School of Law. The views and opinions expressed here are his.
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If your money doesn't appear as a liability on the central bank's balance sheet, it is not a CBDC. So when we hear of indirect or two-step or synthetic CBDCs, chances are we are not looking at reality. This doesn't mean that these models are irrelevant, just that they promote something other than CBDCs.
In fact, most of these models were designed with one goal in mind: to prevent CBDCs from being a radical departure from the current system. The main concern of central banks is that people easily switch from bank deposits to CBDCs in times of crisis, increasing financial risk and pulling banks out of circulation at the worst possible time.
See also: Coronavirus drives interest in CBDCs, say central bank bosses
As Jon Cunliffe, Assistant Governor for Financial Stability at the Bank of England recently said, the role of central banks is “not to protect banks' business models; Our job is to ensure that we manage the financial and macroeconomic consequences if banks' business models change. "
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CBDCs are about more than making money digitally. Nine out of every ten dollars spent on savings and transfers are already digital in the form of deposits in checking and savings accounts. This is a reality not only in the USA and the European Union, but also in Brazil.
New to CBDCs is the possibility for anyone to open a simple checking account with a central bank. Maybe we've been using the wrong name all along. Instead of the "digital currency of the central bank" we should have spoken of "central bank accounts" - although CBACCT would not be a good acronym.
Another relevant question when examining the opportunities for CBDCs is "Who needs them?" It's not difficult to find skeptics, even among central bankers, who believe that the CBDC is a solution to a problem in search of a solution. Many will say, with good reason, that central banks are not made to provide retail services.
Central banks have successfully operated and monitored complex technological infrastructures for decades.
Others will add that ordinary people don't care whether their money is deposited with the central bank or a commercial bank as long as their account has deposit protection. Most people may not even notice the difference between a CBDC and the money they are already using to make payments through their debit cards or PayPal and Venmo apps.
Brazil offers some good examples here. The combination of a thriving payments sector with the recently introduced instant payment for retail customers makes it easier and cheaper to use payment services anywhere, anytime. With the advent of open banking, which should allow people to compare, select, and even mix financial services from different institutions, things could continue to improve in the next year.
How would a CBDC fit into this ecosystem where multiple private options work well, from bank deposits to e-money? Central banks have at least one good reason to prepare for a CBDC. Imagine a country where money and payments are controlled only by private institutions. Sure, private parties are good at innovating and moving quickly. However, once they dominate a market and suppress competition, they tend to increase the price of their products and services, leaving many customers behind.
In the increasingly digital world, however, lack of access to digital money means not being a full citizen. The pandemic has made this even clearer. It is true that a CBDC alone does not promote financial inclusion. Digital currencies are proving useless to those who don't have regular access to smartphones, connectivity, or even electricity.
See also: Marcelo Prates - 4 Myths Debunked About CBDCs
However, unless central banks offer a safe, stable, and inexpensive public option for digital money and payments, people and small businesses who cannot afford private digital currency will be deprived of an essential service in the modern economy.
Furthermore, we know all too well how this story of private parties providing essential monetary services ends. The global financial crisis of the past decade has shown us how far governments must go to bail out private institutions that provide services that are vital to everyone, such as money and payments. These institutions will always not only be "too big" but "too important to fail," said Mervyn King, former governor of the Bank of England.
The third and final question relates to the technology of CBDCs. The general assumption is that central banks are using blockchain to start a CBDC. This is not correct.
Central banks have successfully operated and monitored complex technological infrastructures for decades, including the payment systems that facilitate the flow of money in the economy. The case of central banks moving from their reliable centralized system to a blockchain is ambiguous, especially since the blockchain has not yet been tested on a large scale for retail customer payments.
See also: Stanford Prof. Darrell Duffie on our great stablecoin future
From a technology standpoint, it's much more important to find a way to have a CBDC that can be used and broadcast offline without leading to double spending or fraud. A reliable offline CBDC is the holy grail for central banks ready to go digital.
Again a current example from Brazil shows the practical relevance of this function. Last month, a northern Brazilian state was faced with a power outage lasting several days. Can you imagine living not only without electricity but also without money because your digital currency only works online? Although still in its early stages, some promising hardware solutions for an offline CBDC appear.
To a 2021 low for viruses and a high for digital currencies. Bottom up!
The central banks had to improve their gambling this year - and they did
The central banks had to improve their money game this year - and they did
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