As surprising as it sounds, a Fed governor recently raised a thought-provoking question:
What is the fundamental market failure a central bank digital currency will solve?
This statement was made during the opening remarks at the Economics of Payments XII Conference, which concluded on Friday. During the conference, members of the Fed met with policymakers and intelligentsia to deliberate on the future of our payment system, with special attention paid to Central Bank Digital Currency (CBDC).
Governor Christopher J. Waller reiterated that he has yet to hear a compelling answer to this question, which he posed over two years ago in the speech, CBDC: A Solution in Search of a Problem?
Despite his skepticism, in the same speech he also noted the Bank of International Settlements called CBDC’s:
… the most promising way of providing central bank money in the digital age.
Herein illustrates the problem: on one hand, it remains unclear as to what the benefit of a CBDC will be; and on the other, CBDC’s will become ubiquitous, one day. Of course, no one can adequately predict the future, but considering that earlier this year, Reuters wrote how:
A total of 130 countries representing 98% of the global economy are now exploring digital versions of their currencies, with almost half in advanced development, pilot or launch stages…
It’s safe to say that no matter how long it takes, how destructive the process is, as recently seen in Nigeria, and how costly it will be, there’s little to no chance that the USA will be left behind in the CBDC race.
While the governor’s question is deserving of an answer, when the inevitability of technological advancement is coupled with the inevitability of the central bank overreach, it ultimately doesn’t matter what, if any problems a central bank currency will solve. Eventually it will be here to stay.
Central bank crypto and a future cashless society might take some time, but as we wait for the future to unfold, it’s a good reminder to show how policy makers slowly introduce monumental changes, with an air of sagacity and deliberation.
By this Wednesday the European Central Bank (ECB) is moving on to the “preparation stage,” in its CBDC development. This phase will take two more years.
It will involve finalising the digital euro rulebook and selecting providers that could develop a digital euro platform and infrastructure. It will also include testing and experimentation to develop a digital euro that meets both the Eurosystem’s requirements …
After the two years are complete:
… the Governing Council will decide whether to move to the next stage of preparations, to pave the way for the possible future issuance and roll-out of a digital euro.
As for the Fed:
…Chair Powell has made clear that U.S. currency is not going to be replaced by a CBDC. Thus, a fear of imminently vanishing physical currency cannot be the reason for adopting a CBDC.
And so, our economic leaders continue to investigate this matter, reassuring us that physical cash will never be made obsolete. Yet, not knowing what problem the CBDC will solve, we should start to consider the problems it will create.
