Nicholas Anthony
There is no question that governments and international organizations are pushing central bank digital currencies, or CBDCs. One need only take a cursory glance at the Human Rights Foundation’s (HRF’s) CBDC Tracker to see these developments. Yet, if still unconvinced, one could also look to the speech International Monetary Fund managing director Kristalina Georgieva gave the day after the HRF CBDC Tracker was launched to see where she said, “If anything… we need to pick up speed [with CBDC development].”
Perhaps the most striking feature of the speech is where it calls for “courage and determination” from those pushing CBDCs forward and warns that now “is not the time to turn back.” In doing so, the speech almost sounds more like a political rally than the typical central banker’s address:
I come in the footsteps of my predecessor, Christine Lagarde, who five years ago gave a speech here encouraging policymakers to follow the “winds of change,” and embark on a digital money voyage by exploring the use of central bank digital currencies, or CBDCs, and fintech.
Five years on, I’m here to provide an update on that voyage. … First, countries did set sail. Many are investigating CBDCs.… Second, we have not yet reached land. There is so much more space for innovation and so much uncertainty over use‐cases. Third, this is not the time to turn back. The public sector should keep preparing to deploy CBDCs and related payment platforms in the future. …
We’ve left port and are now on the high seas. This calls for courage and determination. We can learn from you: entrepreneurs, business leaders, and investors. You are sailors in the world of fintech. Every day you brave the open waters. Waves and winds are your inspiration.
If anything, we need to raise another sail to pick up speed.
As Georgieva later noted, “Adoption of CBDCs is nowhere close.” According to the HRF CBDC Tracker, approximately 62 percent of the world’s governments are actively researching, building, or deploying CBDCs. As it currently stands, nine countries and the eight islands making up the Eastern Caribbean Currency Union have launched CBDCs. Across these jurisdictions, governments have struggled to increase consumer adoption.
It’s also worth noting that despite efforts by both the Federal Reserve and the European Central Bank to say a CBDC would not replace cash, Georgieva openly said, “CBDCs can replace cash which is costly to distribute in island economies.”
Yet, while Georgieva was correct to note that adoption is low and CBDCs could replace cash, other claims in the speech are questionable. For instance, Georgieva argued that CBDCs “can improve financial inclusion where few hold bank accounts.” However, Norbert Michel, Kevin Dowd, and I have all explained on many occasions that this claim simply does not hold up to scrutiny when one looks at why people do not have bank accounts.
The speech also advised government officials that, “Country authorities wishing to introduce CBDCs may need to think a little more like entrepreneurs.” Yet governments should not be inventing products and steering innovation to see what sticks like their entrepreneurial counterparts. Doing so not only distorts the market but also risks locking people into an inferior product or service.
When the market can’t deliver, products fail. When governments can’t deliver, products are forced upon people. So, to the extent governments intervene, it should be because there is a clear and substantial market failure that only the government is able to address.
The lack of a fundamental justification for governments to issue CBDCs can be seen elsewhere in the speech as well. Georgieva said, “In some countries the case seems dim today, but even they should remain open to potentially deploy CBDCs tomorrow.” Perhaps referring to the numerous government officials from around the world who have said CBDCs do not offer any benefits, she explained that CBDCs should be pursued because they might become useful if conditions change in the future—an argument reminiscent of what former Federal Reserve vice chair for supervision Lael Brainard told Congress.
In other words, there are no market failures to justify the intervention and there are no unique benefits to generate adoption, but that might change in the future.
Georgieva concluded her speech by saying, “We will be in the high seas for some time. But the potential payoff is clear—a more inclusive international financial system that meets our future needs.” That payoff is far from clear. What is clear, however, is that CBDC proponents have failed to make their case and that people are beginning to recognize the risks of CBDCs.
So let me conclude by simply saying that central bank digital currency is one idea that is probably best left out at sea. Rather than let themselves be weighed down by a bad idea, policymakers shouldn’t be afraid to swim away.