Most theoretical papers assume that Central Bank Digital Currencies (CBDC) should emulate the features of cash and should complement rather than substitute it. But is this feasible?
Motivations behind the exploration of CBDCs by 86% of the world’s central banks vary significantly, but cash is central to the debate. Some aim to offer central bank money in a less-cash future; others, on the contrary, hope to stimulate a less cash-heavy economy. Nevertheless, most central banks are committed to providing digital money that emulates but does not eliminate cash. In addition, they aim to safeguard individual privacy and optimize the efficiency and resilience of national retail payments systems.
Respondents to the 2021 European Central Bank consultation on the digital euro ranked privacy as the essential attribute of a potential CBDC, followed by security. These are currently unique attributes of cash. Cash transactions do not collect personal purchasing data, which could be used for marketing or surveillance by states or corporations. Studies show cash-like anonymity and privacy are, for now, out of reach. ECB’s Fabio Panetta and Ulrich Bindseil argue that anonymity and privacy of user data will be guarded as central banks who are independent and public institutions have neither commercial nor surveillance interests. This might be challenged by the recent invasion of Ukraine as the entire financial sector is required to implement sanctions on both sides of the conflict.
The global pandemic and the invasion of Ukraine, among many other crises, demonstrate the necessity to secure operational resilience of retail payments systems for national emergency preparedness. A central bank’s public digital payment network could serve as a risk diversification alternative to private and highly concentrated payment networks. Cash already functions as a safety backup to electricity or internet outages. For CBDCs to fulfil this role, acceptance and accessibility by the general public and merchants need to be ensured.
During this webinar, John Kiff, formerly from the IMF, and Aleksi Grym, Head of Fintech at the Bank of Finland, debate the issues arising from the parallel circulation of cash and CBDC. This includes interest rates, privacy, legal tender, acceptance, financial inclusion, resilience, trust, etc.
The presentations may be downloaded below.