Any problem on payments is better solved through more practical alternatives.
Central bank digital currencies are the bad idea that won’t go away. There are simpler, more straightforward ways of solving the problems that CBDCs are deemed to address. Yet upwards of 130 countries worldwide are exploring the currencies. If you are in search of a bandwagon effect, this is it.
CBDCs’ proponents champion them on financial inclusion grounds, as a way of providing digital financial services to the unbanked. Yet countries such as India have shown that there are more practical ways to do this. Provide residents with a unique digital identifier, mandate the banks to provide low-cost, no-frills accounts, and install a system to facilitate interbank transactions through mobile phones. Voilà: problem solved.
Some will object that the payments rails provided by banks are inefficient. Transferring funds between banks can be costly and time consuming, especially where data systems are antiquated and banks have market power. But if this is the problem, then the solution is to open up the market to nonbank payments providers, giving them access to the central bank’s real-time gross-settlement system. Enhanced competition will encourage banks to update their technologies, including by adopting the new standard for messaging on the interbank Swift system known as ISO 20022.
Costs and delays in completing payments are especially onerous in the cross-border context. It is here that entities such as the Bank for International Settlements’ innovation hub have concentrated their efforts, experimenting with so-called mBridges — electronic platforms on which licensed dealers would exchange the CBDCs of different countries for one another.
But while the technical solution is reasonably straightforward, its governance is not. To make this platform operational, multiple governments and central banks would have to agree on who to license as authorised CBDC dealers. Regulators would have to oversee their dealings, ensuring that their inventories of the relevant CBDCs were adequate. Central banks would have to stand ready to act as liquidity providers of last resort. All this would require the equivalent of the Basel Committee on Banking Supervision, but on steroids.
The alternative is to allow the most important CBDCs to circulate outside the issuing countries, much as the majority of large-denomination dollar currency notes currently circulate outside the US. If everyone around the world could hold a Federal Reserve CBDC in their digital wallet and use it for transactions, there would be no need for an mBridge. But central banks are aware that de facto dollarisation, since that’s what we’re talking about here, has a downside, namely loss of monetary autonomy. Except in extreme cases where the authorities have already lost control of monetary policy — Argentina? — they will be understandably reluctant to permit this.
Fortunately, again there are more direct ways of addressing the problem. One is by linking instant payments systems across countries. India has linked its Unified Payments Interface to Singapore’s real-time payments system, PayNow, enabling individuals in the two countries to directly transfer and receive funds from one another. Other countries have established similar agreements and are working to “multilateralise” their bilateral payment-systems links through what is known as Project Nexus.
And progress is not limited to banks and banking systems. Western Union has experimented with blockchain as a way of bringing down the cost of remittances. The Japanese transfer service provider SBI Remit is using the blockchain technology of the US-based company Ripple to increase the speed and reduce the cost of remittances.
Officials may worry that, because network effects are strong, a big bank, or even more worryingly a bigtech platform like Amazon or Alibaba, could come to dominate payments. They might then use that dominance to exclude competitors, and even cause the central bank to lose control of the financial system. This fear, of losing control to Alipay and WeChatPay was evidently a motivation for China piloting its CBDC, starting in 2020.
But the more straightforward solution is to regulate these platforms’ payment activities, just as their marketing and advertising practices must be regulated to ensure fair access for competitors. China has taken this approach as well, fining companies for violations of consumer protection and anti-monopoly laws. These efforts have been more consequential than its issuance of what remains a little-used CBDC.
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