A solution looking for a problem
The Financial Times ran a good opinion piece on central bank digital currencies (CBDCs) last week, arguing that they “are a solution looking for a problem”.
For those out of the loop, CBDCs have been all the rage since China’s central bank announced it was testing the E-Yuan in the real world, with the aim of having it operational by the Beijing winter Olympics in February 2022. The announcement was met with calls from influential authors such as Niall Ferguson and Martin Wolf for central banks in countries such as the United States to introduce their own CBDCs as soon as possible, or risk the “rise of an alternative financial system that essentially bypasses the Federal Reserve and potentially also the U.S. Treasury”.
However the authors, Stephen Cecchetti and Kim Schoenholtz, argue that such fears are misguided. Their reasoning is threefold —
- one, “the public and private sectors are already moving to provide cheaper, faster, more reliable, and more accessible systems that operate both within and across borders”;
- two, CBDCs would risk “disintermediation, currency substitution, and a greater role for the state in credit allocation”; and
- three, “using CBDC means everything we do becomes traceable”.
Last month the RBA told the committee on Australia as a Technology and Financial Centre that its report on wholesale market use of CBDCs was close to being finalised, and that it was “continuing to closely monitor the case for a retail CBDC and is engaging with some other central banks on possible use cases, including for cross-border payments”.
While RBA governor Philip Lowe has previously said Australia’s central bank “does not consider that a policy case has yet emerged for issuing a CBDC”, if every other central bank jumps off the CBDC bridge, you can be sure the RBA will follow. If that looks like it might happen, the issues highlighted above will warrant serious debate.