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By Arjun Ramani
New technologies have changed the nature of money many times in the past. The Lydians invented coins in the seventh century BC; paper money emerged in seventh-century China. Credit and debit cards spurred a shift away from paper money and cheques. In the 2010s, smartphone-based payments took off. Use of cash is now plummeting: its share of retail transactions in ten of the world’s biggest markets fell from about three-quarters to one-half from 2011 to 2021, according to McKinsey, a consultancy.
As the world goes cashless, central bankers have been pondering the next evolution of money. Some are keen on “central bank digital currencies” (CBDCs). Most money is already digital, so what is different about a CBDC? It is a liability of a country’s central bank, rather than of a commercial bank. So CBDCs do not come with the run risk of commercial banks. But not all are the same. China’s e-CNY has programmable rules; Brazil’s is only for retail use. Yet all major CBDCs are intermediated by commercial banks, easing the management burden for central banks.
In 2016, CBDCs were barely on the central-banking agenda. But things changed, for two reasons. First, Facebook’s announcement of a global digital currency called Libra in 2019, and the rise of cryptocurrencies such as Bitcoin, prompted fears among central bankers that the bank-based financial system would lose clout to digital alternatives.
Second, many countries grew enamoured with the idea of instantly settled cross-border CBDC payments to reduce fees and even sidestep the dollar. Interest in building new cross-border payment methods grew after the West imposed sanctions on Russia for its invasion of Ukraine. The Atlantic Council, a think-tank, now says that 130 countries, representing over 98% of global GDP, are exploring a CBDC.
More recently, though, there have been murmurs of dissent. “What actual problem would a CBDC solve?” asked Neel Kashkari, president of the Minneapolis Federal Reserve, in May. Libra was scrapped because of regulatory pushback, and cryptocurrencies have failed to gain wide adoption. Cross-border CBDC projects have struggled to find sources of liquidity outside traditional capital markets, and remain in the pilot stage.
After doing their homework, central bankers from Denmark to Japan have expressed scepticism. Sweden’s government released a 900-page report in March arguing that the case for a CBDC was weak, citing the nation’s already advanced payment system. An economist at a major central bank observes that digital-payment systems already provide most of the benefits of a CBDC.
CBDCs also pose new questions. For example, if they are safer than commercial-bank deposits, customers may flock to CBDCs in times of stress, which might increase financial instability. That is why major CBDCs have caps on holdings and offer no interest, relegating them to the sidelines. Technological innovation will continue, and some new and improved type of CBDC may yet become important. But that is unlikely to happen in 2024. Expect the FOMO around CBDCs to continue to fade. ■
Correction (18th December 2023): A previous version of this article said Sweden’s central bank had written a report expressing scepticism with CBDCs. In fact, it was Sweden’s government. Sorry.
Arjun Ramani, Global business and economics correspondent, The Economist
