A Critical Evaluation of Central Bank Digital Currencies: Payments’ Final Frontier?
Central Bank Digital Currencies (CBDCs) are the latest advancement in the area of digital money and payments. A number of central banks around the world have expressed an intention to introduce (eg. the Bank of England, the European Central Bank, and the US Federal Reserve), or have already introduced (eg. the People’s Bank of China) CBDCs in their economies, in an attempt for the state to reassert monetary sovereignty, perhaps in their last opportunity to do so. In our recent paper, we postulate that CBDCs, rather than merely heralding the return of the state in the realm of money and payments, constitute a final frontier in the field of digital money and digital payments.
On the other hand, CBDCs present a number of challenges including legal characterization and practical function, as well as questions pertaining to the technology central banks will utilize to deploy CBDCs in the economy. In legal terms, CBDCs would constitute a claim on the central banks, ie. a central bank liability, and are envisaged to be a form of fiat money.
CBDCs may not only be used in a domestic context; given the digitalisation of international payments subject to connectivity of the technology used, some CBDCs may potentially be used on a cross-border basis.
The most important question that has been raised in connection with the introduction of CBDCs refers to the preservation of the privacy of citizens’ payments. Another concern is the role to be played by the private banking sector in the distribution and storage of CBDCs. A number of rationales have been suggested for the introduction of CBDCs, from inter-areal financial inclusion, providing citizens with cost-free access to payment systems, curbing the competitive power of the private sector in the field of money payments, and advancing the digitalisation of the economy (eg. the ECB CBDC plan). In principle, CBDCs are not meant to replace cash but are to be used alongside cash (eg. the ECB Blueprint).
Furthermore, there is no widespread consensus as to the utility of CBDCs within an economy with a developed banking sector and a network of advanced private sector payment systems. All in all, CBDCs are envisaged to be a form of digital money as distinct from cryptocurrencies, and to remain so.
Whether CBDCs would restrict the ability of citizens to spend money would depend on whether smart contacts would be attached to the CBDC, which in that context means that the use of CBDCs would be programmed and thus possibly restricted in some contexts, eg. with regards the use of CBDCs to purchase alcohol or tobacco or for their use for gambling. This, of course, would be a strong form of state paternalism but not unprecedented; there are presently in force in the UK age restrictions with respect to the purchase of alcohol. Accordingly, relevant fears are premature, and mostly promoted by libertarian proponents of cryptocurrency, spreading skepticism with respect to the introduction of CBDCs as a means of exchange (means of payment) in our societies.
In a jointly authored article, we have tried offer possible answers to these questions. In addition, we deal with issues of financial stability and monetary policy, and we explain how policy makers could deal with relevant risks. Finally, the article deals with the underpinnings and possible geopolitical consequences of corresponding use of CBDCs.
The author’s complete article can be accessed here.
Emilios Avgouleas is the Chair of International Banking Law and Finance at the University of Edinburgh.
Sir William Blair is the Professor of Financial Law and Ethics at Queen Mary University of London (QMUL) and a member of the Institute of Banking and Finance Law, CCLS.
Share
YOU MAY ALSO BE INTERESTED IN
With the support of
