Beware the hype over central bank digital currencies

A great series of experiments with money is running in the UK across eight locations.

These include: Botton Village in the North Yorkshire Moors, managed by a charity that supports people with learning and other difficulties; Burslem, near Stoke-on-Trent, which in 2018 became the first town in the UK of over 20,000 people without a single bank branch or ATM on its high street; and Cambuslang in South Lanarkshire, which saw its last three banks close in quick succession that same year.

The inhabitants of these and other pilot communities live in a different world to the econometricians, experts in monetary and macroprudential policy and data scientists at central banks around the world all now eagerly working to design a central bank digital currency (CBDC).

The BIS found at the start of this year that 60% of 60 central banks surveyed around the world were conducting experiments and proofs of work in CBDC, with 14% having already moved ahead to pilot projects.

CBDC, which analysts at Citi call digital money 2.0, could be very different from the trillions of dollars now moving electronically every day between wholesale and retail bank accounts.

Yes, money is already digital and has been for decades. But CBDC takes this to a new level, putting bank notes into our mobile phones. It could conceivably be token based but will much more likely be account based. And that changes everything, raising the likelihood of lower deposit funding for banks leading to smaller loan books and possible loss of payments revenue.

CBDC has to be held somewhere, presumably in wallets, a new form of post bank account. Providing those wallets may be the crucial entry point for big technology companies into the world of money, potentially breaking banks’ hold on their customers.

This is something banks have long feared. It may have profound implications for bank funding and the whole future of fractional reserve banking. For societies there are big potential trade-offs to reckon with if CBDC brings improved transactions but reduced availability of credit and also sacrifices privacy.

The promised benefits are faster, cheaper domestic and cross-border payments, greater financial inclusion, better safeguards against financial crime and perhaps more targeted monetary and fiscal policy.

No wonder so many central bankers have become so captivated by CBDC.

Retail CBDC

The BIS now finds that central banks collectively representing 20% of the world’s population are likely to go live with a general purpose CBDC – that is a retail one available to their whole populations – in the next three years. China skews that statistic. But a majority of central banks responding to the BIS survey say that a retail CBDC is possible in the next six years.

Surely, this work in financial capitals is much more important than anything being done by shoppers and small businesses in Burslem and Cambuslang? In fact, their work, may be more important. It is taking place in the real world, not in an ivory tower. And it is more urgent, due to run for six months.

This discussion reads like a post-mortem explanation for why a project was abandoned due to undue complexity and cost

Gregory Baer, Bank Policy Institute

Come October, the aim is to have established proofs of concept that might soon afterwards go into live production.

They are testing new ways for individuals and small businesses to cope with the great challenge of the digital age. The other side of the CBDC coin is reduced access to physical bank notes.

“The cost of handling cash in the UK is estimated at around £5 billion per year. That’s spent on everything from 30 high-tech cash sorting centres, on running and maintaining 50,000 ATMs, to the cost of transporting cash and counting cash in shops,” Natalie Ceeney, chair of the community access to cash pilot board, tells Euromoney. “Most of these cash handling services are provided by commercial entities that need to make a profit and as cash use goes down, so does the commercial viability of many of these services.”

The problem, Ceeney points out, is that we have an infrastructure built for the age of high cash usage. Now, in an age when use of cash is declining sharply, that infrastructure no longer looks sustainable. “Providers have a choice – they can keep running services at a loss, stop delivering those services or charge more for them.”

That hits vulnerable populations disproportionately.

When Ceeney wrote the final report of the Access to Cash review in March 2019, she calculated that eight million people in the UK would struggle to cope in a cashless society. They are not all elderly.

“There is already a ‘poverty premium’ for those who depend on cash,” she says. “Most ATMs were once free to use. But the commercial providers of ATMs earn a tiny fee per transaction and people are taking out less cash, so ATM providers have raised their charges. Now, 25% of ATMs charge people to use them – with those on lowest incomes having the least choice to travel elsewhere. And if it costs £2 to take out £10, that hits the poorest the hardest.”

More recent estimates suggest that maybe closer to five to six million people in the UK are heavily dependent on cash. That’s still 10% of the adult population.

Bank branches

Banks once saw their branch networks as a competitive advantage. Now they are an overhead, a sunk cost. A lot of bad press typically attaches to whichever bank is the last to close down in any town or village. The race not to be last can cause the kind of sudden rush for the exit as happened in Cambuslang. For years you have three banks, then suddenly none.

G4S sold its conventional cash businesses in 2020 even before Covid hit. The pandemic has accelerated the reduction in cash use.

It was only in 2015 that digital forms of payment, principally contactless debit cards, overtook cash in the UK. Today they account for three quarters of all payments. In February 2021 Ashok Vaswani, chief executive of consumer banking and payments at Barclays, revealed data from Barclaycard that 88.6% of all eligible payments in the UK in 2020 were contactless.

I would certainly advocate a concerted effort to get everybody able to use digital payments

Natalie Ceeney, Access to Cash review

He noted that smaller businesses have seen the biggest change in their volume of digital activity through the pandemic.

“During the first UK lockdown payment volumes fell between 40% to 45%. And during the second lockdown payment volumes fell between 20% to 25%. What that tells you is that, since the first lockdown, businesses have put systems in place to be able to do more online.

“It’s not only the pace of change that has surprised me, it’s the permanence,” Vaswani adds. “The level of digital activity didn’t diminish between the first and second lockdowns in the UK, which indicates a lasting behaviour for the customer.”

But not every customer. The search is on for what can be done for those left behind by the switch away from physical cash. Is central bank digital currency really the answer?

“I would certainly advocate a concerted effort to get everybody able to use digital payments,” says Ceeney. “But the barriers to using digital payments are pretty profound. There are 1.5 million households in the UK without internet connection, primarily because those households can’t afford the service, and 1.3 million without a bank account. To include them means getting the basics right – they aren’t going to be early users of a new digital currency.”

A key driver of the CBDC debate is the need to maintain trust in fiat currencies and enable central banks to retain control of monetary policy. “There are some very real concerns that as cash use declines, central banks will lose critical levers. But for the general population, even though there are likely to be some end-user use cases, CBDC is almost a red herring as far as inclusion is concerned,” says Ceeney.

Look at what Nickel, now owned by BNP Paribas, has done for financial inclusion in France. Offering a no-overdraft basic banking service for payments on mobile phones doesn’t require a CBDC at all.

Swish success

In Sweden, which has seen an even steeper decline in cash usage than the UK, banks came together in 2012 to launch Swish, a mobile payment service originally designed for friends to share the bill after one of them had paid at a restaurant.

Soon Swedes could pay at markets with it. Within a couple of years small businesses were accepting it. By 2019 seven million Swedes, out of a population of just over 10 million, were using Swish and it was the preferred payment method online for 18 to 40 year olds.

Sweden’s Riksbank is now pilot testing technical solutions for a central bank digital currency, the e-krona, together with Handelsbanken and TietoEVRY.

The central bank wants to investigate how integration of the e-krona network and the participants’ existing internal systems could work and to get their opinions and feedback on the distribution model and technical solution for the e-krona.

The European Central Bank has launched multiple experiments in retail and wholesale CBDC. The Bank of England has a new task force, along with Her Majesty’s Treasury. It has some smart thinkers on the topic but is behind the curve putting theory into practice.

The Swiss National Bank continues to innovate in wholesale markets; the Bank of Canada too. The Bank of International Settlements is playing a coordinating role, preaching interoperability. Asian and Middle Eastern central banks, from Thailand and Singapore to the UAE and Saudi Arabia, are all over CBDC and now looking to build bridges between the new domestic payments systems that would emerge to enable cross-border payments.

Countries outside the large advanced economies find themselves in the lead for now. The Bahamas, with its sand dollar, is the first to have introduced a CBDC. Cambodia is in advanced stages, so too the Eastern Caribbean Monetary Union. These are countries that have difficulty in providing physical cash and conventional banking services at an acceptable cost to dispersed populations.

The US Federal Reserve is content to be a follower but, like every other central bank, is awaiting with keen interest the full launch of what is now called the e-CNY in China – which some US politicians see as a potential challenge to the dominant reserve currency status of the dollar.

The Federal Reserve Bank of Boston is partnering with Massachusetts Institute of Technology’s Digital Currency Initiative on Project Hamilton to build and test a hypothetical digital currency platform using leading edge technology design options.

If we want to make payments faster, easier and cheaper for individuals and businesses and to achieve greater inclusion, should societies concentrate their efforts on moving beyond physical cash to digital forms of central bank money?

It is not clear why.

Yes, this is the direction in which cutting edge financial technology has long been taking us, with wallets on our phones for contactless payments, albeit ones in Europe and the US linked to bank cards and bank accounts.

But payments have already gone digital without widespread access to digital public money.

The established banking system is moving more and more activity onto permissioned blockchains. Large banks are providing custody and other services to customers speculating on all the crypto-coins, which central banks once dismissed as a niche activity, but which regulators are now trying to get their arms around. Instant payments are one new feature amid a proliferation of new payment methods.

And CBDC has somehow become lodged in among all this.

“The pace of activity is picking up and things are now moving quite fast, at least by comparison with how central banks normally move,” says Todd McDonald, co-founder and chief product officer of R3.

Given its capacity to provide blockchain infrastructure on the Corda platform, R3 has a seat at the CBDC table and McDonald traces three streams of activity.

“At the top, you have China, the US and the ECB, working out how to execute a CBDC and navigate its potential impact on global trade and reserve currency status. Then you have the rest of the G7 and G20, where the BIS is focusing and emphasizing interoperability,” he says.

“We also have focused on interoperability all along from the start of R3, making Corda open source. Our technology enables interoperability between two sovereign networks, without requiring the network operators to trust each other or give up control over their assets. A great example of this is the recently announced Project Jura.”

Euromoney explains this in detail later.

“Finally, there is a much longer tail of central banks in the rest of the world, taking a strong interest in CBDC,” McDonald adds. “We have been rolling out our sandbox to them and the large number of requests for proposals indicates how many are considering seriously what they might do domestically and what happens if connecting to CBDC becomes more imperative in cross-border payments.”

McDonald sees the most obvious use case in wholesale markets. “If you look at the work the Swiss National Bank is doing with SIX Exchange, the financial market infrastructure of Switzerland, there is strong demand for a risk-free settlement cash asset.”

However, taking that next step to retail CBDC is a much bigger leap than it first sounds.

Private money

Here’s something that almost no one in any advanced economy ever thinks about. The physical cash in their purse or wallet or in the bedside drawer or under the mattress is the only risk-free public money they own.

In the UK, the Bank of England has for over 300 years promised to pay the bearer on demand the value printed on its bank notes. We assume the money in our bank accounts, including the wages paid in by our employers, is exactly equivalent.

And in practice it is. We can always take it out at the ATM.

Distributed ledger is not magic money. It has benefits and drawbacks just like every other form of technology

David Shrier, Imperial College Business School

But what sits in our accounts is not public money. Rather, it is private money, created by the high street banks. It is an article of faith that it is interchangeable, at no loss of value, with public money in the form of physical cash.

All money systems are faith based, including most obviously the newest cryptocurrency ones which hang over the whole debate about central bank digital money.

The clearing, commercial and retail banks, as wholesalers of money as well as retail distributors, do have access to great stores of public money in electronic – or let’s say digital – form, through their own accounts with the central banks.

If lots of individuals want to take their cash out, the banks can get it from the Bank of England, even going temporarily overdrawn if they have to. But the rest of us don’t have accounts at the Bank of England and so the only fully state-backed money we have are the physical notes that we might also describe as tokens.

Most of the time this system works perfectly well, although back in 2008, when queues were forming outside branches of Northern Rock, Alistair Darling, then Chancellor of the Exchequer, found it necessary to go on radio and TV and say that the state would guarantee the money in everybody’s bank account.

In the aftermath, regulators around the world woke up and a much better capitalized and supervised banking system came through the Covid pandemic unscathed.

In May, Jon Cunliffe, deputy governor of the Bank of England, considered in a speech to the OMFIF Digital Money Institute the fact that 95% of the money held by UK citizens is private money and not at all a claim on the state or backed with the resources of the state.

That nobody even thinks about this, he suggests, is a good thing. “It is not an accident,” said Cunliffe. “It is due to the credibility of the institutional framework governing money in the UK that tethers private money to the public money issued by the state.”

So why disrupt the system then?

Stablecoin fears

No one is crying out for central bank digital currencies, certainly not in Europe. There’s a popular notion that cash is used more in countries with large informal economies, such as Italy and Spain. In fact, it is more heavily used in Germany and Austria. There is no widespread call for CBDC even in the US where a higher portion of households is unbanked (5.4%) or underbanked (18.7%).

The broad mass of people have no interest in CBDC and couldn’t explain what problem it is meant to solve.

At the same time, however, a growing number are investing in cryptocurrencies and, much more troubling for central banks, might be tempted to use stablecoins, especially in low-value cross-border payments such as remittances, which are still expensive.

I don’t think anyone aged under 30 believes in the financial system

Antony Welfare, NEM

Was it an accident that Cunliffe settled on the word “tethers” to describe the regulated framework giving populations confidence that risk-free public money and bank-created private money are interchangeable?

It was the emergence of stablecoins, especially the prospect of ones from large network technology companies like Facebook’s Libra (now renamed Diem), that drove central banks to pour more resources into CBDC in 2019. They feared that their currencies might be supplanted by new forms of private money, this time created outside the regulated banking system.

Tethers were one of the first and most widely used dollar stablecoins. In February 2021, New York attorney general Letitia James announced the results of an investigation showing that Tether had misled users by claiming its stablecoins were always fully backed one to one by fiat currency reserves.

For a period starting in 2017 it had no banking relationships and reserves were well below the value of Tethers in circulation.

So maybe that was a little central banker in-joke.

Facebook backlash

Facebook has been brought to heel. Libra was conceived as a new global currency that would be backed by high quality reserves in a basket of fiat currencies, which the social network’s close to three billion users could transact among themselves. This could have been the special drawing right – the obscure unit of account for IMF member countries valued against a basket of global reserve currencies – that billions of people might actually have used as money.

It was a revolutionary concept. No wonder central banks, regulators and politicians came down hard against the very idea of a new currency with so many potential users over whom they would have no control.

Some people … may find themselves unable to buy food with mobile wallets in a cashless society. Older people on their own could starve

Chinese banker

This January, Agustín Carstens, general manager of the BIS, declared: “Overall, private stablecoins cannot serve as the basis for a sound monetary system. There may yet be meaningful specific use cases for stablecoins. But to remain credible, they need to be heavily regulated and supervised.” In other words, they need to be part of the existing financial system.

In May, the Diem Association, successor to Libra, announced it would withdraw its application for a payments system licence from the Swiss Financial Markets Authority and shift its primary operations to the US, where it will work on a US dollar stablecoin, with Silvergate, a California state-chartered bank and a member of the Federal Reserve.

Diem Networks US will register as a money services business with the US department of the Treasury’s financial crimes enforcement network. Stuart Levey, chief executive of Diem, stated at the time of the announcement that: “Our plans take the project fully within the US regulatory perimeter.”

The biggest threat to central banks appears to have been headed off. But so many have jumped on the CBDC bandwagon that, now with it speeding up, it may be hard or humiliating to get off again.

Cunliffe raises the key question: do we need public money in a new digital form?

If physical cash now has a largely symbolic function, reassuring the public that their digital money in the bank is actually worth something, does it matter if the number of day-to-day transactions it is used for continues to decline, while contactless cards and wallets on phones become the means for the overwhelming majority of all payments?

Maybe it’s not such a great idea for societies to become cashless through managed decline.

Banknote paradox

Central bankers point to the banknote paradox. Even though cash is used less and less, more banknotes are held than ever before, perhaps a function of people withdrawing a store of paper money for emergency use during the pandemic – and perhaps future imagined climate catastrophes – as well as recipients becoming reluctant to visit a bank and deposit it.

If the public still wants access to public money, but the cost of providing that in physical cash is unsustainable, does it follow that we therefore need CBDC?

Can’t the existing regulated financial system, now embracing real time, or close to real time, domestic payments and even cross-border payments, improve its efficiency and pricing to give populations what they need?

A glance at the stock prices of quoted payment services providers and the private market valuations of those that remain unlisted, shows where all the innovation in finance is coming. Central banks have played a role in providing domestic instant payments and might be better advised to work, for example with Swift gpi, in further extending fast payments at low costs across border.

One payments banker tells Euromoney: “I’d rather see the Fed get on with [instant payment service] FedNow than a CBDC or, as my team have started to call it, FedLater.”

Central banks and governments want to ensure sovereign control over the national currencies that underpin their societies and in which people pay tax. Like water and electricity, money is an essential public good. And, notionally at least, central banks and governments are answerable to their populations.

Control of the national currency is not something to be handed over to shadowy figures pumping the latest crypto Ponzi scheme or selling users of their social networks to advertisers.

Cryptocurrencies are not going to be widely used as a means of exchange or a unit of account. Corporate treasuries like Tesla’s buying them is just advertising – building the brand with under 30s by appearing cool – with maybe an inflation hedge thrown in.

Likewise, then bemoaning the environmental damage of maintaining the proof of work system for bitcoin is more brand building, this time burnishing Tesla’s credentials as a company committed to sustainability.

The fact that more and more institutional investors are allocating to cryptos, more banks are trading them and custodians holding them, simply shows the infrastructure amassing for a new and rather speculative asset class. It does not show the payment system emerging for a new form of money.

“Apple stock has a bigger market capitalization and much greater stability than bitcoin. But I don’t think we’ll ever be using Apple shares to pay for our groceries or our electric vehicles,” Gregory Baer, president and chief executive officer of the Bank Policy Institute, a public policy, research and advocacy group representing the largest US banks, tells Euromoney.

Yes, bitcoin is a store of value. So is your house. No one calculates the price of a car in fractions of their semi-detached dwelling and nor do they try and pay for it that way, although blockchain enthusiasts have inevitably tokenized fractional ownership of real estate.

“As to central bank digital currency, there are complex policy considerations,” says Baer. “Can we do it? Should we do it? How do we do it? These are the kinds of questions central bankers and economists love to engage with. And there is a whole cottage industry of central bankers busily looking into it, some keener than others. However, when it gets to hard design choices, they may be less enthused.”

Baer, who was previously head of regulatory policy at JPMorgan Chase, served as assistant secretary for financial institutions at the US Treasury and was managing senior counsel at the board of governors of the Federal Reserve, sees CBDC as much more than a new version of paper currency in digital form.

He believes its adoption could have profound and potentially disruptive impacts on the US financial system and on the economy. His key observation is that proponents often package up a long list of potential benefits from introducing CBDC without acknowledging that many of these are mutually exclusive.

“We might possibly get some of them. But they usually come with potential risks. And we certainly cannot have all of them,” says Baer.

Credit crux

There are inherent systemic risks in any general purpose or retail CBDC that makes it easier for individuals to hold much more of their money as direct claims on the central bank in a digital account, instead of as a small store of physical bank notes held for normal weekly use and emergencies.

“The biggest tension is taking money out of bank deposits that enable maturity transformation and can be leveraged into lending to the real economy and which may also reduce banks’ capacity to provide the backstop credit lines so many companies drew on in the pandemic,” says Baer. “If banks have to pay much higher rates to attract deposits away from central banks, then credit will become less available and more expensive.”

Central banks have spotted this. They have no ability or desire to underwrite and extend loans to large businesses, small and medium-sized enterprises or households themselves.

Governor Lael Brainard laid out the Federal Reserve’s view in an update on CBDCs at the CoinDesk 2021 conference in May. “Banks play a critical role in credit intermediation and monetary policy transmission, as well as in payments,” she said. “Thus, the design of any CBDC would need to include safeguards to protect against disintermediation of banks and to preserve monetary policy transmission more broadly.”

This is why CBDC is anathema to crypto purists. Forget about taking out those rent-seeking intermediaries or shifting to a decentralized system where we are each our own bank. The interdependencies are too entrenched between central banks and private banks. If CBDC does sweep the world, the banks will likely survive.

Retail caps

Fabio Panetta, executive board member of the ECB, has suggested capping individuals’ holdings of CBDC, perhaps at €3,000. The use of caps is now widely assumed to be a feature of retail CBDC. But by definition that limits its use, for example in domestic and cross-border payments, compared with stablecoins.

If we are going to restrict its use, that may also curtail the inclusion benefit and raise the question why bother with general purpose central bank digital currency at all.

In December 2019, Switzerland’s governing Federal Council reached a decision that has been curiously overlooked amid all the recent excitement about central bank digital currency. Its report on CBDC stated: “Universally accessible central bank digital currency would bring no additional benefits for Switzerland at present. Instead, it would give rise to new risks, especially with regard to financial stability.”

The Swiss government took note of all the promised benefits: better access to payment and financial services for the general public; making payments more efficient; making monetary policy more effective and the financial system as a whole more stable; and helping reduce tax offences and money laundering.

But it decided that central bank digital currency cannot meet these expectations (or only partly), that the repercussions can be far reaching depending on the design and that there are better solutions for most of these areas.

In essence, the current system can do all that stuff anyway.

Potential compromise

Because most preliminary analyses of CBDCs are exploratory they rarely present the net costs and benefits of any single approach – instead assembling a greatest hits list of benefits.

One exception to this was the joint central bank report into foundational principles and core features of CBDC published by the BIS in March 2020. Baer quotes it at length on the key trade-offs over designs: “It is currently easier to calculate and pay interest using a centralized ledger. Using only a centralized ledger potentially reduces the payments convenience of a CBDC (for example, making peer-to-peer and offline payments more difficult or subject to caps) and using a combination of centralized and decentralized ledgers adds complexity to the system.”

The joint central bank report stresses that even a basic CBDC offering would still need features that make it convenient and attractive enough to drive adoption.

It is essential for central banks to stay on top of technological developments

Todd McDonald, R3

However, improving user convenience by making offline and peer-to-peer payments possible would necessitate additional safeguards to counter the risk of fraud, since security features and centralized controls – for example to lock stolen funds or query suspicious transactions – are more difficult to implement on a distributed system.

A centralized ledger with a cap on allowable offline transactions is a potential compromise, say the central banks.

The report says: “However, an offline cap could limit functionality in the event of a prolonged operational problem (such as a natural disaster) and thereby reduce the resilience of the system.”

In addition to being resilient, a CBDC infrastructure will need to settle instantly a very large number of authenticated payments and potentially increase its capacity substantially as future demand increases.

There are murmurs around the now vast CBDC talk circuit that there is no guarantee China’s technology will be up to the task.

In the joint report, the central banks focus on getting the technology for CBDC right: “This may require compromises on some features that might otherwise be desirable – such as computationally demanding privacy techniques or programmable payments – as additional complexities could increase the processing demand on the system.”

Baer, coming from the banking industry, sums this all up in one damning sentence: “To those who have ever worked in business, where rising enthusiasm is not considered proof of concept, this discussion reads like a post-mortem explanation for why a project was abandoned due to undue complexity and cost, with the project team reassigned or dismissed.”

Risks v benefits

As more central banks now come down to hard design choices and find it impossible to achieve all the promised benefits of general purpose CBDCs, might they soon conclude, like the Swiss Federal Council, that the risks outweigh the benefits?

Sure, it’s a great thought problem and central bankers enjoy those. Do they perhaps want to be seen to investigate CBDC seriously but then ditch the idea and declare the current system works well enough?

Antony Welfare, executive director (enterprise) at blockchain company NEM, has advised formally and informally on CBDC projects. “Smartphones allow us to do anything, anywhere, anyhow,” he tells Euromoney. “But the technology has almost moved ahead of our brains. We need to work out what we want it to do and central banks and governments are trying to do that.”

As to the banking system, he says: “For whom do you think it works well? It may be slanted to large companies and the banks themselves, but I’m not sure it works well for ordinary people and I don’t think anyone aged under 30 believes in the financial system.”

He sees CBDC as part of rebuilding the system around ease of use and inclusion, starting from where technology is now not the banking mainframes that took us to digital money half a century ago.

Loss of privacy may prove a defining issue. Survey data compiled by the ECB showed privacy as the most important feature of any CBDC according to respondents, ahead even security, cost and ease of use.

“Governments will have to be honest about what they want to do with our data,” says Welfare. “But DLT [distributed-ledger technology] allows people to take greater ownership of their digital data footprints.”

David Shrier, professor of practice at Imperial College Business School and non-executive director of crypto firm Copper.co, believes the pandemic may have shifted the debate.

“Distributed ledger is not magic money, it has benefits and drawbacks just like every other form of technology,” he says. “However, in the case of CBDCs, I believe that several countries will find the advantages compelling. For example, in the recent pandemic, we have seen the urgent need for a strong state to be able to help its citizenry. This includes unprecedented levels of government assistance flowing back to citizens, which needs to be timely, transparent, auditable and cost efficient in delivery.

“It is a use case very well suited to CBDCs,” Shrier concludes.

But moving to the future state brings risks. “You do this over a generation, over decades,” Welfare says. “You don’t do it in one step.

“CBDC is not utopia. It won’t fix everything, but the system in 10 years will be better than today. And it’s down to central banks to educate people about this.”

Personal data

In fact, populations need to be wary of the hype around CBDC.

First, it inevitably comes with loss of privacy. With token-based transfers, the key issue for recipients is whether the token is legitimate and not a fake bank note or a double-spent crypto.

In account-based systems, which is almost certainly how CBDC will operate, spenders need to prove they are the account holder. The system will track your transactions. Banks already monitor our accounts and can be subpoenaed to provide details and so can wallet providers. Only physical cash is truly private.

It’s impossible to generalize about people’s attitudes to privacy. Most of us willingly give it up to the handful of giant technology companies that have come to dominate commerce, search and social interaction on the supposedly decentralized internet for the convenience of getting whatever we want right away.

“Some countries have populations that will be highly resistant to CBDCs due to the fear of government insight into their financial affairs, extending the surveillance state,” says Shrier. “Other peoples will welcome the flexibility and cost advantages that this could provide.”

Carstens says that genuinely token-based CBDC cannot fly and that CBDC must be considered in the wider context of digital ID. “The use of personal data is necessary to improve the provision of financial services. Financial inclusion is about overcoming inequality, in particular by reducing information asymmetries. CBDCs can be the entry point for financial services, but they need to be linked to an ID. By offering the unbanked access to a digital ID, authentication can help to support inclusion in the long term and to formalize the informal economy.”

People will just have to give up on the anonymity of physical cash. You don’t get privacy and inclusion.

Second, even if CBDC does address exclusion from the formal banking system – a non-issue in most of Europe – how does it address digital exclusion? One Chinese banker, working in the west, tells Euromoney: “I talk to my family a lot about this. Some people who have worked hard all their lives and have money may find themselves unable to buy food with mobile wallets in a cashless society. I am quite serious. Older people on their own could starve.”

Third, if internet and mobile networks go down, perhaps due to an extreme weather event, how do we then buy emergency supplies?

The view of many central banks, often overlooked, is that CBDC should work alongside physical cash, not replace it. Given that the current financial system works reasonably well, that does beg the question of why bother?

Maybe this is the central banks’ own survival instinct at work. They see bewildering payments innovation, the rise of cryptos beyond the niche activity they once thought they could ignore and the emergence of private stablecoins – not just Diem but also JPM Coin, a new digital deposit. If imposing CBDC on largely indifferent or even reluctant populations keeps central banks at the center of the financial world, maybe they would quite like the rest of us to pay that price.

Loss of privacy is one thing. But if central bankers do go ahead with CBDC and unleash financial system instability, they will never be forgiven.

Commitments to cash

Let’s look again at what is going on in Burslem and Cambuslang.

The pilots being tested among the eight UK communities include bank hubs. These are essentially shared branches where post office workers staff the counter each day for regular cash deposits and withdrawals and community bankers from the largest UK banks come in for one day a week to deal face to face with their customers.

It’s a classic shared cost arrangement with what was once the core building block of banking, the branch.

In May, UK Finance, the banking industry lobby group, announced that Barclays, Coventry Building Society, HSBC, Lloyds, Nationwide, NatWest, Santander and TSB have together made five commitments to ensure cash remains available to those who need it, focusing on the elderly, the vulnerable and small businesses.

They may have to.

“The government has already announced that there will be legislation requiring banks to maintain suitable cash access and deposit facilities for their customers,” says Ceeney. “Shared infrastructure, including branches, could be a good low-cost way to provide that.”

The pilot schemes are also looking at ways small businesses can do their bit.

Many years ago, UK supermarkets trained staff at the checkout to ask customers if they would like cashback after they paid for the weekly shop with their bank cards. It was an easy way to reduce the amount of cash supermarkets had to total up, store securely and then deliver to the bank. And it saved customers a trip to the ATM. But the associated transaction fees, mirroring those a bank pays for any transactions from another provider’s ATM, rose and made it costly.

Customers can still ask for cashback, but checkout staff no longer volunteer it. There’s a disconnect here.

Legislation in the UK will soon permit cashback without making a purchase. The hypothesis is that if customers have to travel to another location to get cash, that’s where they’ll spend it and not at local shops. But if they can still get cash locally, they will spend it locally. There is, in theory, an incentive for shops to become part of the cash infrastructure. However, there is no commercial model for this.

“A merchant fee of 3% would mean that it costs a shop 60p to hand a customer £20. That’s why you hardly ever see cashback anymore,” says Ceeney.

“We need a new commercial model which incentivizes retailers to take the hassle of cashback. But this would make sense for the banks – it would be an inherently lower cost channel than branches or ATMs and has the potential to significantly increase access to cash if it’s widely adopted.”

If this all sounds rather old fashioned, the pilot schemes also include some digital technology: a phone app for individuals to order cash ahead of time at a particular shop; and a stored value card for shops to load on the value of small change instead of handing over and accepting actual coins.

It’s not exactly digital money 2.0. But maybe this is the future and not central bank digital currency after all.