Central Bank Digital Currency: A Lost Cause?

Augustín Carstens, the head of the Bank for International Settlements (BIS), has once again claimed that digital currency is a non-starter and, worse, a likely panic accelerant in the event of another global financial crisis. BIS is called the “central bank for central banks” because it provides banking services to institutions such as the European Central Bank and the Federal Reserve. In February, Carstens called bitcoin a “combination of a bubble, a Ponzi scheme, and an environmental disaster.” In a lecture at Goethe University in 2018, Carstens said that “the rise of cryptocurrencies only highlights the important role central banks have played, and continue to play, as stewards of public trust.”

Addressing colleagues at the Bank of Ireland on March 22 of this year, Carstens offered that central bank digital currencies (CBDC) would come into play – hypothetically – if a major cryptocurrency were to be widely recognized as a means of payment. “A CBDC would allow ordinary people and businesses to make payments electronically using money issued by the central bank. Or they could deposit money directly in the central bank, and use debit cards issued by the central bank itself.” And that would be unfortunate, in his mind, because it would encourage people to stop making payments with a debit card tied to a commercial bank account.

Undesirable Consequences

The argument is not that banks are angelic or infallible. Rather, Carstens is worried because “the [traditional] monetary system is the backbone of the financial system.” By financial system, he means the whole enchilada: central financial authority, regulators, payment systems, commercial banks, fiat, custodians, etc. “Before we open up the patient for major surgery, we need to understand the full consequences of what we’re doing.”

To underscore his point, Carstens cited a colleague, Yves Mersch, as saying, “We understand the repercussions for the people we serve. And we recognise that adopting untried technology [cryptocurrency] that ultimately proves unreliable could seriously endanger public trust in the currency and in the central bank.”

Carstens vows that central banks’ actions and services will evolve with technological developments, and in the meantime, the rise of cryptocurrencies only highlights the important role central banks have played, and continue to play, as stewards of public trust. Carsten’s sentiments were much like those expressed in his 2018 lecture, when he said, “Private digital tokens posing as currencies, such as bitcoin and other crypto-assets that have mushroomed of late, must not endanger this trust in the fundamental value and nature of money.”

Ultimately, the BIS leader also worries that CBDCs would disrupt the way in which interest rates impact the public’s demand for money. That, in turn, could force the central bank(s) to tinker with the money supply and cause central bank balance sheet(s) to swell and thus impact financial market liquidity. That would be very bad. One can almost hear the theme song for Mad Max, the post-apocalyptic movie.

Still, Carsten makes several valid points. The underlying technology is still under development. The reputation of digital currency has suffered in the eyes of the general public due to fraud and hacks. That will take time to overcome. Finally, clear value propositions and general education are needed to power the adoption curve. Until then, dramatic socio-economic change cannot occur.

Mary Driscoll covers finance and business trends as a staff writer for ETHNews. She formerly served as an editor for management and finance at the Economist Intelligence Unit and a research principal at APQC. In addition, she has written for The Wall Street Journal CFO Report, HBR-online, and strategy + business. Her book on corporate treasury management was published by John Wiley & Sons, Inc. Mary enjoys hiking and skiing in the Sierras with family. Her goal in life is to win big on Jeopardy.

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