The advantages of CBDCs are too nice to disregard | USAEMALL.com

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The writer is an FT contributing editor

Objections to central bank digital currencies are legion and vociferous. And the concerns raised over privacy and control are not without substance.

In 2020, Fan Yifei, then deputy governor of the People’s Bank of China, boasted that the digital renminbi would provide the central bank with access to full transaction data, allowing artificial intelligence to scan for illegal and terrorist activities. From that, it is easy to see how a CBDC could be used as another tool in the kitbag of an authoritarian government.

Digital currency plans in the UK and the Eurozone incorporate meaningful checks against government snooping. But western publics are far from sold on them.

A recent consultation on the Bank of England’s CBDC programme drew more than 50,000 responses. An online petition asking the government not to allow any CBDC to be programmable — allowing the issuer to restrict how people use it — amassed more than 30,000 signatures even though such a move is not planned. It seems that Robert Kennedy Jr, the new US secretary of health, captured the fears of many when he wrote that “CBDCs grease the slippery slope to financial slavery and political tyranny”. One of Donald Trump’s first acts in his new presidential term was to ban the creation of a US CBDC.

And in some countries, well-regulated faster payment services look to accomplish many of the same objectives as CBDCs without requiring the creation of an entirely new form of money. Brazil and India have had great success with Pix and the Unified Payment Interface respectively, lowering transaction costs and supporting economic growth. These systems work by better connecting the existing commercial banking network, rather than cutting banks out of the payments picture altogether.

But, argue John Barrdear and Michael Kumhof, two senior economists at the BoE, the prize of adopting CBDCs could be substantial. Their analysis — calibrated with US data — considered an initial stock of CBDC equal to 30 per cent of GDP issued against an equal amount of government debt.

It concluded that adopting a digital currency on that scale could permanently lift GDP in their model of an economy by about 3 per cent. The gain comes from materially lowering the interest burden on government, reducing distortionary taxes and cutting transactions costs. For context, this boost is midway between the UK Office for Budget Responsibility’s estimate of the long-term economic costs of Covid and Brexit.

CBDCs would also bolster the role of public money — existing today only in the form of physical cash — at time when its use is diminishing. Cash’s share of transactions in the UK has shrunk from more than 60 per cent in 2007 to only 12 per cent in 2023. In the US, its share of transactions has halved since 2016 to 16 per cent. Increasingly, it is not feasible to pay with cash. This may not pose a problem if the market for private payments is competitive and if security concerns are absent. But this is not the case.

So far, competition has not worked in bringing down the cost of private digital payments. In their interim report on reviewing processing fees last year, the UK’s Payment System Regulator found that British companies had little choice but to pay fees issued by Visa and Mastercard, which together account for 95 per cent of transactions using UK-issued cards. Moreover, these fees had increased 30 per cent over the past five years in real terms with little or no link to changes in service quality. In the US, it took the settlement of a long-running class action antitrust lawsuit against the two companies to cut so-called swipe fees rather than the invisible hand of market forces.

Moreover, there is a national security case for CBDCs. “In an era of mounting geopolitical division, nations may increasingly view digital payment infrastructures as strategic assets — sovereign capabilities too vital to entrust to foreign firms,” says Jens Larsen, head of geoeconomics at Eurasia Group. As such it makes sense for the EU and the UK to develop their own digital payment ecosystems, even if the same imperative is absent in the US.

Use of physical public money is fading fast. While the project risks of getting CBDCs up and running are substantial, the economic prize could be meaningful. With proper safeguards around privacy, CBDCs will set the baseline for digital currencies while offering a benchmark alternative that helps regulate commercial pricing. Their use should not be forced on citizens, but their benefits are too great to ignore.