In the rapidly evolving world of digital finance, Central Bank Digital Currencies (CBDCs) have emerged as a persistent yet contentious innovation. Despite being criticized as a solution in search of a problem, over 130 countries are currently exploring CBDCs, riding a wave of global curiosity and experimentation.
This intense global interest in CBDCs is perhaps more indicative of a bandwagon effect rather than a response to a clear financial need.
Addressing Financial Inclusion Without CBDCs
One of the most frequently cited justifications for CBDCs is their potential to enhance financial inclusion by providing digital financial services to the unbanked. However, the experience of countries like India suggests there are more pragmatic and efficient ways to achieve this goal.
By offering a unique digital identifier to residents, mandating banks to provide low-cost accounts, and enabling interbank transactions through mobile phones, India has managed to significantly improve financial inclusion without resorting to these digital currencies.
The inefficiencies of bank-provided payment rails, particularly in terms of cost and time, are often highlighted as a problem that CBDCs could solve. Yet, opening the market to nonbank payment providers and granting them access to the central bank’s real-time gross-settlement system seems a more direct solution.
This approach would stimulate competition, prompting banks to modernize their technologies, including adopting the new ISO 20022 standard for interbank messaging via Swift.
Cross-Border Payments and the Governance Challenge
Cross-border payments, notorious for their costs and delays, are another area where CBDCs are seen as a potential solution. The Bank for International Settlements’ innovation hub has focused on this aspect, experimenting with platforms like mBridges, where authorized dealers exchange different countries’ digital currencies.
However, while the technical aspects of such a solution are straightforward, its governance is not. Implementing such a system would require an unprecedented level of international cooperation and regulatory oversight, raising questions about its feasibility.
Alternatively, major CBDCs could be allowed to circulate internationally, akin to the U.S. dollar. However, this raises concerns about monetary autonomy, as countries may be reluctant to permit widespread use of foreign digital currencies within their borders.
This fear of losing monetary control is exemplified by China’s motivation behind piloting its CBDC, primarily as a response to the dominance of platforms like Alipay and WeChat Pay. There are more direct solutions to improving cross-border payments without relying on CBDCs.
For instance, linking instant payment systems across countries, as seen with India’s Unified Payments Interface and Singapore’s PayNow, enables direct transfers between individuals in different nations.
Additionally, private sector initiatives like Western Union’s experimentation with blockchain and SBI Remit’s use of Ripple’s technology are making strides in reducing the cost and increasing the speed of remittances.
Regulation as a Straightforward Solution
Concerns that a single big bank or a big tech platform could monopolize the payments system are valid. However, regulating these platforms’ payment activities could be a more straightforward solution, similar to how their marketing and advertising practices are regulated.
China has also adopted this approach, levying fines for violations of consumer protection and anti-monopoly laws, which have proved to be more impactful than the issuance of its relatively underused CBDC.
The persistent interest in CBDCs globally does not necessarily reflect an urgent or clear-cut need. More practical and direct solutions exist for the problems they aim to solve.
Whether it’s enhancing financial inclusion, streamlining cross-border payments, or maintaining control over the financial system, alternative strategies are proving to be more effective and less complicated than the introduction of CBDCs.
As the search for CBDCs’ true purpose continues, it becomes increasingly evident that sometimes the best solution is the simplest one.
