Major central banks cool on retail CBDC

It may be some time, if ever, before we see the introduction of a retail central bank digital currency in a major economy outside of China or India. The Bank of Japan’s decision to move the idea to its pending tray is a further indication of cooling enthusiasm among major central banks for fiat digital currencies, especially in the retail sector. This follows the UK House of Lords declares CBDC a ‘solution in search of a problem’ and the Bank of England, the European Central Bank and the US Federal Reserve, all separately, continue to study and consult without publicly announcing unequivocal decisions or firm timetables.

up to one hundred Central banks have been seriously studying CBDCswith about a dozen of them in the advanced stages of pilot projects. The Bahamas, Jamaica and Nigeria, among others, have moved to a limited introduction. For now, realistically, these projects should be considered experimental and informational, while attempts to replace national currencies with crypto analogs should be seen as merely quixotic. Until and unless one of the world’s major reserve currencies, in particular the dollarmoves to a CBDC with cross-border functionality, many of these projects will be national curiosities that will be studied with great interest but with little impact outside their home countries.

The most important retail CBDC project is the e-yuan of the People’s Bank of China, which has gone through several phases since 2014 and is now undergoing extensive testing at eight different locations in China. In each of these, different approaches, platforms, and technologies are being tested to develop a preferred solution for nationwide deployment. Preparing for a fully digital economy, while there has been no stated intention to phase out cash altogether for the time being, China has insisted that private, non-bank currencies will not play a leading role and that fiat money will predominate. Eventually, the e-yuan will be implemented as a payment instrument with China’s major trading partners, particularly along the Belt and Road initiative, but for various reasons such cross-border functionality is likely to be some way off. For the foreseeable future, the e-yuan will be limited to China’s vast domestic market.

Similarly, the logic of launching a retail CBDC in India seems incontrovertible. In a vast geography with millions of unbanked or underbanked citizens, the traditional and well-known drawbacks of physical cash, and a large and sophisticated mobile phone infrastructure, there is fertile ground for a Reserve Bank-backed digital rupee. from India.

There is general agreement that payment infrastructures globally and nationally could be significantly improved to improve speed, efficiency, security, capacity and significantly reduce costs. Considerable work is being done by the public and private sectors to establish whether a combination of distributed ledger technology and digital public money could be part of the solution. Similar work is being done in many other wholesale and capital market sectors. Why, then, are retail CBDCs taking a backseat?

One reason is that the world’s central banks are dealing with urgent issues related to its macroeconomic and financial stability competencies. CBDC is not an urgent problem and is even seen by some as a distraction. Interestingly, the detailed studies that have been carried out as part of the CBDC assessment have identified opportunities for significant improvements to national payment infrastructures that do not require the introduction of a CBDC. The little matter of mounting pressure on national budgets is also a factor.

However, perhaps the main reason is that in most advanced economies there is already a sophisticated financial and payment infrastructure with multiple competing providers that meet the needs of most consumers. It’s hard to make an irrefutable case to a savvy consumer in the UK as to why a CBDC (once explained and understood) would be of more use than their existing bank card. OMFIF’s research has revealed similar bewilderment in other countries. In many markets there is a strong attachment to cash and a reluctance to hand over even more personal data to authorities. In short, central banks, with their ears to the ground, in many countries fail to detect a growing clamor from their citizens for the introduction of something resembling a CBDC. They also have other more pressing priorities.

There will likely come a time when the rapid growth of private money and the increased costs and inconveniences of physical fiat currency will force authorities to undertake a fundamental review of whether and in what form fiat money should exist, and therefore , why the introduction of a CBDC. could be a strategic national priority. But that’s not quite yet.

Philip Middleton is Chairman of the OMFIF Digital Monetary Institute.

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