09 November 2022

Project Syndicate's Eichengreen: The Trilemma of Central Bank Digital Currencies

Countries have a variety of rationales for seeking to modernize their payments technologies. Ultimately, however, central banks weighing whether to launch a digital currency must recognize that if they do, they can have confidentiality of transactions or financial stability, but not both

Central banks around the world continue to contemplate issuing their own digital currencies (CBDCs). Some have already taken steps in this direction. The People’s Bank of China launched a trial of its e-CNY in Shenzhen in 2020 and has since extended its use to other cities. The Sveriges Riksbank is testing its e-krona for commercial and retail payments. Even the relatively staid US Federal Reserve Board has issued a paper weighing CBDC pros and cons.

Evidently, central banks are scrambling to board the CBDC train before it leaves the station. But what motivates this mad dash? One argument is that, by providing digital access to anyone with a cellphone or smartcard, a CBDC will extend modern payments technology to the masses. But the experience of countries like India suggests that there are more straightforward ways of achieving this goal. India was able to address the problem of “unbanked” by requiring commercial banks to offer no-frills savings accounts with no minimum-balance requirements. “The Prime Minister’s People’s Wealth Scheme” similarly tasks public banks with offering zero-balance, low-cost accounts to underbanked rural residents. As of last year, some 400 million “people’s accounts” had been opened. India has also created an efficient, low-cost electronic-payments infrastructure, the United Payments Interface. UPI is a real-time payments system operated by the National Payments Corporation, a government-sponsored nonprofit. Banks, e-money companies, and tech firms have introduced UPI-enabled mobile-payment apps that allow users to send money between bank accounts. But, while some 300 banks participate in the system, the government remains anxious to roll out a CBDC. Perhaps the motivation is policymakers’ belief that a CBDC will benefit the IT sector. From the perspective of financial inclusion and ease of payment, however, the unit will be redundant.

Cross-border payments are not so cheap or simple. Moreover, governments are increasingly uncomfortable with their dependence on the dollar as the dominant vehicle for such transactions, given recourse by the United States to financial sanctions. The hope is that CBDCs might provide a digital alternative.

Strictly speaking, there is no obstacle to exchanging different countries’ CBDCs and using them for international payments. Multiple CBDCs can run on a single blockchain. With help from the Bank for International Settlements, central banks have experimented with platforms, known as mBridges, on which CBDCs can be traded. But, though we possess the technical knowhow, there are formidable political obstacles to widespread adoption of these arrangements. Can you imagine China and the US agreeing on how to govern a platform on which their CBDCs are exchanged? Can you imagine agreement by 120 central banks?...

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