The Need to Incorporate Broader Societal Needs in the Decision to Issue a Retail Central Bank Digital Currency

Today, in advanced economies, the only form of central bank money available to the public is physical cash. In contrast, digital electronic payments are the creation, and promises, of commercial banks. A central bank digital currency would upend all this by combining many of the benefits of cash with the undoubted convenience of digital electronic money.

Our recent paper explores why any decision to issue a retail central bank digital currency (CBDC) should encompass its likely impact upon a broad range of societal groups and their needs. In deciding whether to issue, and how to design, a retail CBDC, central banks naturally focus first on how it will impact their mandated policy aims of monetary policy and financial stability. However, the substantive grounds for, and impact of, issuing of a retail CBDC may be much broader, and so we argue for the consideration of these matters in the decision to issue. We also explore why other governmental agencies will likely need to be involved in the decision to issue, and the design of, a CBDC.

In most jurisdictions, the decision to introduce a CBDC rests with the central bank. Guided primarily by their primary mandate, central banks tend to assess CBDCs through a narrower institutional lens—one that may differ markedly from the broader, more politically attuned perspective of democratically elected bodies.

This is on display in the current policy debate. The principal case usually given by central banks for the issue of a CBDC is that it would support the resilience of their payments systems and financial stability. A CBDC could, for example, be designed to advance transparency and resilience in offline settings, such as power outages following natural disasters. A CBDC could also help sustain the role of central bank money as the monetary anchor given the decline in cash usage. A CBDC would be convertible into cash and risk free, and thus provide a backstop for all other types of money—the monetary anchor role that is central to financial stability. Finally, a CBDC could improve cross-border payments, which are now generally slow and costly, as it could ensure near instant and cost-effective cross-border payments.

Central banks argue that a CBDC could foster innovation as it supports choice and would provide a safe infrastructure—a set of rails—upon which private sector payments innovations could be built. Central banks also argue that a CBDC could encourage competition in payments, a policy aim closely associated with the traditional central bank mandate of ensuring resilient payments systems and maintaining financial stability. They also believe a CBDC could encourage competition among private sector intermediaries and address concentration in domestic payment services. Finally, central banks have argued that a CBDC could enhance financial inclusion, especially in less developed countries, by bringing more people into the formal financial system through lowering existing barriers to entry.

The problem with all of these points is that a central bank, when deciding on a CBDC, will not give equal weight to considerations that are beyond its primary mandate. To remedy this, we suggest central banks should apply a ‘needs and effects’ approach when deciding to issue a CBDC. Such an approach entails a rigorous assessment of the consequences of issuing a CBDC, particularly its impact upon the poor, elderly, and vulnerable. The need for a CBDC will vary among jurisdictions based on different societal needs and should be based on addressing an existing problem or likely future problem, as opposed to advances the technology may provide but which may not be essential. For example, the need for a retail CBDC may be less compelling in advanced economies with payment systems that have few existing pain points. However, a much stronger case for a retail CBDC may well exist in developing economies, where payment systems are often inefficient. Whether a CBDC is the best solution for payment system challenges will differ from country to country.

As our paper explains, broad public engagement and participation, led by the government, is required in deciding whether there is an actual need for a CBDC. Traditional public consultation and other targeted mechanisms of public engagement should be adopted to achieve such engagement. In some cases, central banks have made the decision to issue a CBDC without soliciting the public’s input, and then only sought the public’s input on potential design features. Central banks may not be well equipped to consider the broadly impacting policy aims of innovation, financial inclusion, and competition, which typically fall outside their traditional monetary policy and financial stability expertise. They may thus not be the best public institution to consider how these factors should be built into the decision to issue, and design of, a CBDC. We argue that it is for the people’s elected and accountable representatives to decide on such a fundamental restructuring of the form of money, and not the central bank acting alone, and we propose a range of consultative decision-making processes that can be used to inform this process.

The full paper can be accessed here.

Ross P Buckley is the Australian Research Council Laureate Fellow and Scientia Professor and Lucien J van Romburg is a Postdoctoral Research Fellow at the School of Private and Commercial Law, Faculty of Law & Justice, University of New South Wales.