In a quest to retain control over money, several governments are making plans to launch Central Bank Digital Currencies (CBDCs) as an alternative to cryptocurrencies. For example, India recently proposed a ban on all private cryptocurrencies while including a framework to develop a digital asset, which would be issued by the Reserve Bank of India.
Survey result from the Bank for International Settlements (BIS) also shows that more than four-fifths of the world’s central banks (86%) are engaged in Central Bank Digital Currency projects, up from “about one-third” in 2019. The survey found that some 60% are actively conducting experiments or proofs-of-concept, and 14% are moving into development and pilot phrases.
However, a pair of European economists – Peter Bofinger and Thomas Hass, speculate that this approach is ultimately bound to fail. In a paper released this week, the duo argued that there is no “obvious justification” for launching digital cash substitutes. Hence, digital cash is at risk of failing soon.
The pair also believes that central banks have been overwhelmed with plans to launch CBDCs when private banks already offer a wider array of products. Instead of creating a new medium of exchange, central banks should focus on rolling out supranational digital assets that function as an international store of value.
The fuss about CBDCs is not necessary
Although we are yet to get more opinions from other industry observers, Bofinger and Hass have made some very salient points. Considering the global financial landscape, would the U.S. accept China’s CBDC as a recognized medium of exchange? The same applies to other CBDCs. And if central banks insist on sticking to their current approach, there are chances that CBDCs will become a major failure.
The BIS survey also suggested the same:
“Most central banks are now exploring the case for CBDCs in some way. And the survey indicates an overall continuous move from purely conceptual research to experimentation and pilot projects. Yet despite these developments, a widespread rollout of CBDCs still seems some way off.”
Additionally, looking at the standards set by PayPal (the giant of global payments), instead of creating national schemes that would be limited to the national currency and system-specific accounts, the most preferred concept is seeking a supranational solution. This solution would permit multi-currency operability and unlimited payment objects.
Meanwhile, China and the Bahamas have already rolled-out pilot stages for the CBDCs, and the European Central Bank is still seeking public opinion about a digital Euro. As mentioned above, several other countries are already researching and testing digital versions of their national currencies for payments.
The BIS survey was conducted among 60 central banks in late 2020, and the full results can be downloaded in PDF format here.