I am saying in my book that if all goes well, Central Bank Digital Currencies (CBDCs) will disappear as mysteriously as they appeared. The energy that we see at all levels of government today will fade because of a number of important reasons. Firstly, they can’t keep up with the innovations that are taking place in cryptocurrencies today. The sheer energy being put into developing applications and functionalities into cryptocurrencies
As the fifth pillar of society (after the executive, legislature, judiciary and the press) central banks wield considerable power through their management of the economy, but they are often caught wrong footed when it comes to their judgment in technology. In the years leading to 2000, they were collectively sold into the idea that there was a “millennium bug” in every computer and promulgated that the world had a Y2K problem. Billions of dollars were spent on upgrading computers on the advice of management consultants who created work for themselves.
It’s really the way that central banks hype each other up at their annual meetings, whether at Jackson Hole or at the Bank for International Settlement (BIS) in Basel that defines their peculiar personalities. Usually one central bank will start a theme, whether it is Y2K or “inflation targeting” and then the rest subscribe to it as representing some wisdom, and it becomes commonly accepted.
Central Bank Digital Currencies (CBDCs) are now the next non-event. Afraid that cryptocurrencies will overtake fiat currencies, many central banks around the world set out to introduce their own CBDCs. One of the earliest CBDC pilots or experiment, call it whatever you want, was in Uruguay, about 10 years ago. The central bank there declared the pilot a success and then shut it down quietly that nobody even noticed.
Then China announced that it was piloting a CBDC. This time because it was China, the other central banks took notice and started sharing papers at their BIS and other meetings. before you know it, just about every central bank in the world subscribed to the idea and pilots or experiments began in earnest.
I expound on the reasons that even CBDCs will fade away in my book. You really need to understand the beast called central banks and how it eats and breathes to appreciate why this conclusion is as clear as daylight to me. But here are some of the reasons in a nut shell.
1. CBDCs cannot keep up with the innovations taking place in cryptocurrencies. Cryptocurrencies are not just bitcoins gone crazy. Thousands, if not millions of computer nerds around the world are creating applications and functionalities around cryptocurrencies for free, including the transparency, liquidity, non-repudiation and inter-operability between cryptocurrencies of all kinds that central bank technology teams just cannot compete with. The reason so many CBDC projects around the world are still called “pilots” four and five years after they have started is because they are just trying to keep up mimicking new functionalities as they appear in the crypt world.
2. Something that central banks do not understand and are not sufficiently invested in is the marketing money required to jump-start any new payment system initiatives. The reason Alipay and WeChat Pay became the defacto digital payment platforms for China is because of the billions of dollars these companies spent to build critical mass of acceptance. They were able to do this because of the massive investor funding.
3. Dismantling the existing payment infrastructure is nearly impossible in most countries. The existing credit card and bank account payment infrastructure is incredibly profitable for the banking system. Several layers of players are on the gravy train of profiting from every transaction – the issuing bank, the merchant bank, the bank that provides the foreign exchange, the card players, the technology companies that support the card players and a whole series of loyalty players. These existing ecosystems will eventually erode on the weight of their own costs, but not without a fight. For a CBDC to overtake them, it will have to achieve critical mass enough to bring these existing players into its own ecosystem. But if it does, then nothing changed, which means that staying in electronic banking does the job anyway.
4. The central banks of most countries do not have the governance structure to administer the anonymity of the CBDC in a way that will earn the trust of the users. Already, events like that in Canada where the state froze the bank accounts of truckers who were protesting against the pandemic, do not engender the trust of ordinary people. Yet, the Canadian central bank continues with its CBDC pilots as if it is out of touch with reality on the ground. In the same way, Americans simply do not trust their government, period. Still the Federal Reserve Bank continues to explore CBDCs as if it is an option.
To be continued…
