Abandoning traditional caution, the U.S. Federal Reserve and other nations’ central banks are likely to introduce CBDCs (central bank digital currencies) in the near future. Supported by the Bank of International Settlements, 105 countries representing more than 95% of global GDP, including the U.S., the European Union and China, are testing or actively considering digital currencies. While details remain sketchy, CBDCs will probably be based on similar technology to bitcoin
and other cryptocurrencies, but with important differences, such as:
CBDCs would be a liability of the central bank, in effect, digital cash fully backed by the state.
Its value would be pegged to the national currency, unlike true cryptocurrencies whose price is determined purely by demand and supply.
It would function identically to existing fiat money and allow making normal payments and meeting financial or commercial obligations.
The only difference from cash would be the lack of bills and physical transferability as transactions would be electronic, similar to existing funds transfers through banks. Although initially voluntary, it could easily be made mandatory. The case for CBDCs, as for banning cash itself, is always couched in terms of enhancing efficiency. However, given that most advanced economies have efficient funds transfer systems and most payments are now electronic in any case, it is unclear what additional benefits would accrue. To the extent that payment systems, especially cross-border, are expensive or slow, improved inter-operability and clearing systems would provide effective solutions. Other benefits cited include deterring criminality or terrorism, increasing the legal economy by reducing the scope of the underground economy, eliminating tax avoidance, reducing the cost of printing money and even preventing contact with bacteria and virus-harboring notes. There is scant supporting evidence for any of these claims. CBDCs create new problems. If savers switch from bank deposits, funding for the banking system could be reduced, disrupting the flow of credit. It might increase the chance of runs on banks (with investors shifting from deposits to CBDCs) during periods of financial uncertainty. These risks would require complex workarounds; for example, implementing permanent or temporary limits on transfers into central bank accounts and deposit withdrawals. This would detract from the essential idea and fragment the payment system. Central banks also risk losing seigniorage revenue (the earnings from issuing currency at a cost below their nominal face va …