CBDC – R.I.P.

This week, the Economist wrote the draft obituary of Central Bank Digital Currencies (CBDCs).?And the Financial Times also published a bizarre eulogy, which said current CBDCs are dead or dying but new ones might emerge.

Why the turnaround from the previous cheer-leading by these commentators??In truth, Reality has bitten!

First, what is a CBDC?

A CBDC is ‘official’ money issued by a Central Bank in digital form, similar to the (digital) money in a commercial bank account. It is a digital form of cash and is often characterized as the “safest money there is”.

The immediate catalyst for this volte-face by commentators was a report by the IMF on the progress of the eNaira, one of the first ‘live’ CBDCs and issued by the Nigerian Central Bank in 2021. The “one year in” report found that ordinary Nigerians are just not using this new form of the local currency.

“Most wallets appear to remain inactive except for a limited window of weeks of activity surge. The average number of eNaira transactions since its inception amounts to about 14,000 per week—only 1.5 percent of the number of wallets out there. This means that 98.5 percent of wallets, for any given week, have not been used even once. The average value of eNaira transaction has been 923 million Naira per week—0.0018 percent of the average amount of M3 during this period. The average value per one transaction has been 60,000 Naira[i].”

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In itself, such low adoption rates would not be alarming for or damning to the CBDC concept, except that it mirrors exactly what has happened with other CBDCs that have made it to the starting line but are falling at the first fence. There is an initial uptake, sometimes driven by ‘free money’ deposited into a citizen’s wallet, but after the initial excitement, usage drops to near zero.

CBDC- I

Ignoring the Finnish AVANT in the 1990s, the first CBDC in the current generation to get off and running, was the Sand Dollar issued in 2020 by the Central Bank of the Bahamas.?Some three years later, the Sand Dollar is just not being widely used by Bahamians

“The CBDC currently makes up less than 0.1 percent of currency in circulation and there are limited avenues to use the Sand Dollar”.

?This difficulty in gaining traction is not a unique experience!

?One of the much-fancied favourites to win the Tour De CBDC race, was/is the People’s Bank of China (PBOC) which began a ‘pilot’ of their digital e-CNY in 2020. Much was expected of this CBDC, nicknamed the e-Yuan, with world domination and replacement of the ?US Dollar in the world economy sure to happen and soon too!?

But after much ballyhoo, the e-Yuan is still firmly stuck on the starting grid as ordinary Chinese are just not using it – they have much easier to use digital money in their digital wallets already.?Ever an area for conspiracy theories, commentators are musing that the Chinese government will soon begin paying some of their employees in CBDC, to make the adoption figures look better.

?CBDCs are definitely a fad with central bankers, with almost all central banks publishing what they plan to do to join in the fun. Some 80% of central banks have produced a set of pretty pictures on what they would like to do AFTER they have completed a Pilot or Proof of Concept (POC).?However, very few have got beyond this stage but have had a very good time patting themselves on the back for trying.

Some central banks, such as Canada, USA, and Australia have politely (and presciently) declined the opportunity to be a competitor in the CBDC race at this time, recognizing that they don’t actually need to take part.??On the other hand, the European Central Bank (ECB) has enthusiastically joined in with a highly centralised model that would not be out of place in Stalin’s Russia of the 1950s.

In the UK, in a rush to be part of the 21st Century economy as opposed to drifting back to the 19th Century, the UK government has set the hares running with a plan to investigate the possibility of potentially, at some time in the distant future, if all works out, implementing a CBDC. However, this so-called ‘Digital Pound’ can, has been well and truly kicked down the road, “if we do decide to issue a digital pound, it won't be for a few years.”

After being a leader in CBDC thinking since 2017, Sweden has realized that they don’t need a CBDC after all but, for some reason they claim to need yet another real-time payment system, this time run by the Swedish Riksbank[ii].?

And, other proofs of concept and pilot projects, such as the ECB’s and the e-Naira have turned out to be little more than government-sanctioned payment system, certainly not the high-falutin goal of universal access to safe currency envisaged at the beginning of those exercises.

And therein lies the key reason why uptake of current CBDCs and POCs has turned out to be so disappointing – why would one use a CBDC if there was/is a better alternative available??

Why would one use a payment system that does not have a critical mass of other users to make adoption beneficial?

The answer, of course, is – one wouldn’t!

And underlying this lack of understanding is that central bankers have not bothered to ask citizens what they actually need, but, as good economists, have determined what citizens should have!

Finding out what people actually do with money, as opposed to what they say they do, is called Behavioural Economics and far from what central bank economists are used to as Classical or neo-Classical economics.?

Most CBDC models assume that digital currencies will be held in a separate electronic ‘wallet’ and that people will ‘pre-fund’ or move money into such a wallet to make a purchase or purchases.

Really??Why would anyone move money from their commercial bank accounts (into which is paid their salaries or government payments) just to make a payment, say for a meal or a journey[iii].?Come On!

Of course, a citizen might choose to keep all of their wealth in a CBDC wallet but that is only realistic if ?everyone, every business and every person is plugged into the CBDC system, which of course they are not yet and will not be for many, many years, if at all.

There might be some reason to spend time moving money around between various wallets if, for example, one wallet was somehow ‘safer’ than another but if a government provides a universal deposit guarantee (which many countries do) there is little reason to undertake such a tortuous process[iv]. Millions and millions of unnecessary transactions will be needed just to keep central bank accounting in shape.

Central bankers have only themselves to blame.?They need to ask citizens how they use money today at the micro-level and develop experiments to test how citizens might react to changes in what they currently do.

It is called Behavioural and Experimental Economics.

It is obvious that current experiments in CBDCs have failed and, if they are to be taken seriously, central bankers have to go back to basics and ask two very important questions:

1)??What is the problem that CBDCs are trying to solve? And

2)??How would citizens react to various solutions proposed to solve that problem?

Back to the drawing board then and leave egos at the door!

The author somewhat rashly forecasts that the need for a revaluation of the current attempts at developing CBDCs will become apparent in the next two years and the current head of steam built up around the concept of CBDC will fairly quickly dissipate. There is evidence of failure to engage citizens in different jurisdictions, with differing economic objectives[v], designs and approaches and this is part of the problem – there is no coherent and agreed thinking about what a CBDC should do and how it should do it.

CBDC- II

If, and it is big if, there is a real need for something that resembles what is today called a CBDC, then the starting point must be to proactively engage with citizens as to what those needs really are.?

But to do that central banks must step back and do some real research into what the strategic benefits and boundaries of a CBDC could be and how the benefits could be achieved. And to do that central banks must talk to bankers and ascertain the real costs and benefits of implementing a preferred model of CBDC, always recognizing that the costs and risks may well, and probably will, exceed the benefits.

Thinking and planning for the investigation phase of such a program could commence in 2024.

[i] Note 60,000 Naira is roughly $130.

[ii] Note the Riksbank’s attempt to build a working model of a CBDC has been a complete disaster, so this new payment system, in a country that has very efficient payment systems already, appears to be some sort of consolation prize.

[iii] The Bank of England envisages that people would do that at 8 pm each day – how very, very organised?

[iv] Note in the ECB model, a user of a CBDC wallet would also have to move money out of their wallet if the balance exceeded a central bank limit.

[v] Borrowing the terminology of cryptos, such opportunities are called ‘use cases’.