This paper is the executive summary of a response to the March 2020 discussion paper from the Bank of England[1] on a possible approach to the introduction of a Central Bank Digital Currency (CBDC). It is not sponsored by anybody; it is purely a personal opinion and any errors or omissions are entirely the author’s own responsibility. The full paper is available from the author.
The core hypothesis is that CBDC as proposed would not succeed, fundamentally because it could not achieve the level of take-up by participants in the economy that would be needed to be able to achieve its aims. New payment technologies can grow quite successfully in a greenfield, for example Wechat pay and Alipay pay in China or M-Pesa in Kenya. Where there are existing payment mechanisms it’s very hard to achieve market share. For example, in 2008, SEPA payment schemes were introduced across European countries as an additional alternative to the domestic schemes. There was virtually no take-up of SEPA payments. SEPA only became used when the payments participants were coerced by a legal obligation to drop the domestic payment schemes and replace them by SEPA. Likewise even though contactless payments, first piloted in 2007, were a substantial improvement over cash payments their take-up was not achieved until given a massive nudge by Transport For London adoption in 2014.
The second hypothesis is that even if the use of CBDC in some large scale could be achieved it would not create the benefits desired.
- A key aspiration is that the overall payments system would become more resilient because of the parallel nature of the payments and accounts processes around CBDC versus those of commercial bank money. This seems attractive at first sight but “under the covers” it is highly likely that there will be a significant reliance on the existing elements of the payment systems; the same companies, suppliers and technologies that underpin current payment systems. As a result the true resilience would still be at the mercy of the viability and technical robustness of these companies, suppliers and technologies.
- The second major hope is that CBDC would be an attraction as a risk-free asset in comparison to commercial bank money. This seems implausible for the target market of this paper (i.e. individuals and small businesses); they already have access to risk-free money in the form of commercial bank money underpinned by the deposit guarantee scheme.
- Finally, the hope that the CBDC platform would be the basis of an innovative digital ecosystem is highly improbable given that innovators would not prioritise Bank Of Englancd CDBC until it had a majority market share. Innovators already have a perfectly acceptable alternative in the form of Faster Payments and Open Banking, so CDBC will always be a secondary platform from their perspective. It offers nothing sufficiently different from a payment services provider’s point of view to prioritise developments for the CDBC platform over the commercial bank money platforms.
If the Bank of England wishes to improve the resilience of the payment systems there are probably better ways of achieving that within the current payments ecosystem;
A low cost way to improve the resilience of the payment systems would be to enforce technology, ownership and control splits between the cards based schemes and the account-based payment schemes. These are technologically speaking fairly independent and give a degree of resilience because of that. Furthermore these schemes are starting to compete with each other; the card schemes are now offering direct credit services and, through Open Banking, account-based payment schemes are offering point-of-sale payments.
A more demanding in investment (but still substantially less than that required to set up a CBDC set of schemes) would be to revisit some of the thinking that was developed around 2014 under the umbrella of account number portability. This envisaged, as an option among many, the creation of a central ledger to allow the ability to move accounts between one legal entity and another. In this case however it was about moving accounts with commercial bank money in them rather than CBDC money. Also, under some of this thinking were the possibilities of central utilities for KYC; common-data-schema for customer data and customer data transfer utilities. These kinds of central utility would increase the overall resilience of the system and promote competition.
If for some monetary policy reason the central bank wishes to have this tool in its armoury then it seems much better to develop a CBDC scheme as an asset class aimed at those depositors who have deposits over £85,000 in commercial bank money. These are the ones who are more likely to be sensitive to the benefits of risk-free money and therefore in a position to make trade-offs between rates of interest on commercial bank money versus risk-free digital currency.
[1] https://www.bankofengland.co.uk/paper/2020/central-bank-digital-currency-opportunities-challenges-and-design-discussion-paper
