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Why dollar CBDCs may never happen

By Alasdair Macleod
Goldmoney Insights January 27, 2022

The Fed has just released its first public consultation paper on a dollar-based central bank digital currency. For many, central bank digital currencies (CBDCs) are a means of heading off private sector cryptos, but coincidentally the prices of bitcoin and others have collapsed, losing half their value since early November.

The CBDC proposition is being sold to us by the central banks as keeping up with the times and taking advantage of the opportunities presented by new technologies to evolve payment systems.

The Bank for International Settlements has been coordinating research into CBDCs, and this article gives a brief description of how the BIS and its committee members sees them evolving. It is early days, and there are several important issues yet to be tackled, such as will CBDCs pay interest, and what will be the likely reaction of commercial banks to seeing central banks muscle in on their territory.

There are also two separate CBDC functions to consider. There is retail, whereby individuals have direct access to their central bank as counterparty, and a wholesale function for financial intermediaries for international settlement.

Whether CBDCs will come into existence is doubtful. To have credibility, their introduction will have to be coordinated at G20 level, and they are unlikely to be widely issued before the end of the decade. That will probably be too late to save the world from a developing financial and monetary crisis which threatens to change everything. Furthermore, the Americans will need to be convinced that their dollar hegemony will not be compromised. And what will almost certainly stop it is the powerful US banking lobby, likely to remind politicians presented with the necessary legislation, that a political survivor is one who once bought, stays bought.

Introduction

This month, the credibility of cryptocurrencies came into question as the price of bitcoin and those of its imitators continued to fall heavily. Bitcoin has halved from its peak, which was only two months ago.

It leaves everyone involved with headaches. As the private sector replacement for failing fiat currencies, the credibility of bitcoin may have suffered a mortal blow, with many observers now comparing it not in the context of rapidly expanding quantities of fiat, but with the wilder tech stocks which coincidentally have taken a battering as well. But a few state actors on the fringes have become strong supporters, notably El Salvador.

As El Salvador hoovers up bitcoin, there are other governments seeking to ban or to restrict them. While appearing to be keen to develop its own digital currency, the Russian central bank recently proposed restrictions on crypto trading — admittedly this is an ongoing debate. China, being the ultimate authoritarian state, banned crypto exchanges long ago, and is already testing its own state-sponsored digital currency.

Other governments are treading more carefully, aware that the formally $3 trillion (now $2 trillion) market capitalisation of cryptocurrencies reflects considerable private sector wealth in their own jurisdictions. Surely, major central banks would love to follow the Russians and Chinese in banning bitcoin and its imitators. But instead of a full-frontal attack on distributed ledgers and the threat they mount to their fiat currencies, major governments everywhere appear to be deploying a strategy of gradual strangulation, hoping the crypto phenomenon will subside. After all, currency is the preserve of the state and other than mavericks like El Salvador, who wants a private sector alternative?

This is the statist’s view. But just in case, research is being conducted into central bank digital currencies — CBDCs. Cynics can anticipate how the relationship between private sector distributed ledgers and a centralised state version will evolve. As the development of national CBDCs progresses, increasing restrictions on bitcoin and other rivals will be introduced. There is one thing that governments and central banks cannot abide, and that is private sector rivals to their currency monopolies.

Research into the development of CBDCs is being coordinated by a committee at the Bank for International Settlements, led by the major central banks (with the notable exception of the Peoples Bank of China) and the BIS itself. All other central banks can expect to benefit from the project and follow its recommendations.

Only last week, the US Fed issued the first in what promises to be a series of consultation papers on a US CBDC. The importance of the Fed’s strategic approach is paramount, since the dollar is the big daddy of all currencies through which America controls the world. A CBDC replacement must not threaten the dollar’s hegemony. If it does, then we can assume the whole CBDC concept will end up being stillborn.

What is a CBDC?

Read full article: [goldmoney.com]