Last week, Currency Research held its inaugural Digital Currency Conference in Washington, D.C. The event brought together experts, policymakers, technologists, central bankers, and stakeholders to discuss the future of digital currencies––namely, central bank digital currencies (CBDCs). It covered everything from quantum computing to the digital divide in payments.
While the event led to too many discussions to list in one sitting, here are three of the key takeaways that seemed to echo throughout the day.
A CBDC Is a Solution in Search of a Problem
The most pressing question of all was whether a CBDC was a “shiny new toy” for central bankers or the next great step forward in the history of money. It’s certainly might be a “step in history,” but the current outlook for CBDCs is far from great.
Douglas Elliott and Larissa de Lima at Oliver Wyman addressed the issue well last summer when they detailed six policy mistakes that need to be avoided when crafting CBDCs. One of the most important mistakes they describe might be the mistake of ignoring the other policy tools that are on the table. Luckily, some policymakers appear to be taking note of this warning. For example, Philip Lowe, Governor of the Reserve Bank of Australia (RBA), recently said, “The RBA is open to [the possibility of a CBDC]. To date, though, we have not seen a strong public policy case to move in this direction, especially given Australia’s efficient, fast, and convenient electronic payments system.”
The U.S. payments system is years behind that in Australia, but even here, a CBDC is not a unique solution. Not only has the private sector made great strides in speeding up payments, but the Fed itself is expected to launch a new service (FedNow) in 2023 specifically to update the payments system.
And much like with the payments system, the other issues a CBDC is purported to fix are all being addressed through more‐targeted, private‐sector endeavors. It’s just not clear what unique issue a CBDC will solve in practice, and how that solution would justify reinventing the dollar. And if that question can’t be answered, the United States would be better off renouncing plans to launch a CBDC.
Costs of Cryptocurrencies are “Too High”
Another common question throughout the conference was about the energy cost of cryptocurrencies like Bitcoin. Dave Mills, associate director at the Board of Governors of the Federal Reserve, noted the following: “If anything is to be a viable option, its costs need to be comparable to the existing banking system.” Mills is half right. However, with some tweaking, the statement can capture the full story:
If any cryptocurrency is to be a viable alternative to the traditional banking system, its net benefits need to be equal to or exceed those associated with the existing banking system.
In fact, Lawrence White wrote an essay this week explaining exactly that. A cost analysis may be one piece of the puzzle, but to judge the full picture, one must weigh both costs and benefits. It doesn’t matter if the item at hand is a bridge or a blockchain, a decision is only half informed if it’s solely judged by its costs.
Questions and Uncertainty
Finally, Sunayna Tuteja, chief innovation officer at the Federal Reserve, summarized the last takeaway when she said, “Just because you’ve been relevant for the last 100 years does not mean you’ll be relevant for the next 100 years.” Although the Fed may see a CBDC as a ticket to relevancy, there is still much uncertainty about how secure that ticket really is. For example, one of the greatest challenges in thinking about a CBDC is pinning down exactly which type of CBDC someone is talking about.
A CBDC can be wholesale, retail, synthetic, token‐based, and the list goes on. Each variation has its own unique costs and benefits. So it’s important for central banks to nail down exactly what type of CBDC they want to pursue because it will ultimately undermine their attempt if they take a “Swiss Army knife approach” and try to blend them all together. It would be better to have a focused approach that delivers one or two benefits that improve (on net) problems in the current system than a scattered approach that does the minimum to check all the boxes.
The Fed did, after nearly a year of deliberations and postponing, outline its vision for a CBDC, but even that left many questions still unanswered. As time moves forward, the Fed will have to make some hard decisions about exactly what it wants in a CBDC if it is going to make the case to the American people. Until then, the future of a CBDC in the United States is far from certain.
For Next Time
With these takeaways in mind, it’s safe to say that Currency Research’s inaugural Digital Currency Conference set a great foundation for their future events to come.
