At a conceptual level, CBDC is a compelling idea. It envisions everyone having an account with the central bank consisting of a direct claim against digital fiat currency that can be used as a safe and efficient form of payment. Since all debiting and crediting of accounts occurs on the central bank’s balance sheet, all the costs and counterparty risks associated with intermediated payments is eliminated. All individuals and businesses would have access to secure, low-cost real-time payment services. Moreover, concerns over data privacy and ownership can be dealt with directly and in a manner consistent with societal preferences.
I have nothing against a retail CBDC per se. Indeed, there may even be some merit to the idea as a basic public option. But is it really something that is essential? What existing problems is a CBDC supposed to solve that cannot be solved through a wholesale-CBDC with supporting legislation?
A wholesale-CBDC is an old idea. It is basically a proposal to permit free-entry into the business of narrow-banking. Let Novi, Square, PayPal and other reputable firms have Fed accounts. Let them issue “stablecoin” liabilities fully-backed by interest-bearing reserves. Consider adopting the U.K.’s open banking legislation. Let the private sector work its magic. What else needs to be done?
Do we really think that consumers would flock to CBDC for reasons of safety? Bank deposits are close to fully-insured for most people, and all deposits would effectively be fully-insured in a narrow bank. Do we think that big banks overcharge for basic payment services? I see many online banks offering free checking accounts and I see service fees generally declining over time—something that would be spurred on with a wholesale-CBDC. I do see interchange fees in the U.S. remaining stubbornly high. But I diagnose this as a by-product of American’s love-affair with the cash-back and rewards programs offered by credit card issuers. I do not see how a CBDC is supposed to discourage consumers from using cards that effectively pay them to spend money. (This seems to be less of a problem outside of North America.)
But more importantly, do we want to rely on the government sector to deliver high-performance customer service at the retail level and to keep up with technological advances in the space? A well-functioning government is essential for a well-functioning private sector (and vice-versa), but these two sectors should probably stick to their knitting. Let the central bank handle monetary policy, bank supervision, lender of last resort operations, and wholesale payments. Let the private sector handle servicing the vast, demanding and rapidly-evolving retail sector. It’s a model that has proven to work best, in my view.
As for financial inclusion, one should keep in mind that the most significant progress along this dimension in recent years has been the outcome of private initiatives, not state initiatives. Consider, for example, the hundreds of millions people who now have access to digital payments thanks to M-Pesa, WeChat and AliPay. Contrast this to the many developing countries that already have CBDC issued by their state banks. If their state banks have not been able to deliver on this score, what makes us think that retail-CBDC is essential?