The Case Against CBDC

The Case Against CBDC Central Bank Currencies

Before the summer of 2019, the case for central bank
digital currencies was not positively received by central bankers, judging by the sentiment of their policy
speeches and the state of play of public sector digital
currency innovation. Indeed, in these digital currency
“before times,” the typically invisible hands of central
banks were busy dealing with macro-level policy issues,
warding off inflation, and keeping employment and other stability targets in line—ostensibly the core competencies of central banks—
while avoiding domestic political pressures to break their independence.
This comparative policy peace would be shattered by a white paper announcing the Libra project (a stablecoin payment network backed by the company formerly known as Facebook and twenty-seven other organizations),
whose tagline “reinventing money” would cause a global frenzy, raise important questions about the boundaries of money, and, critically, accelerate a range
of market responses from the farcical to the adversarial, geopolitical, and competitive. In keeping big tech at bay, 105 central banks began flirting with an
even more perilous societal prospect, namely that central banks would become
retail banks.
DIGITAL CURRENCY SPACE RACE

The Diem Association (née Libra) was an accelerant of crucial market, policy, and regulatory responses about the future of money and payments. Not
Dante Alighieri Disparte is Chief Strategy Officer and Head of Global Policy
for Circle.

Disparte

all of them were good and most ignored
how the past is prologue in this debate. On
the one hand, financial inclusion advocates
underscored the possibilities of pulling 1.7
The real innovation lies in the petals of the money flower
billion unbanked and 1.3 billion underand where and how they overlap.
banked people into the perimeter of the formal economy with lower-cost payments.
Digital
Central bank-issued
While perhaps oversimplified (especially
in light of unevolved post-9/11 financial
crime compliance frameworks requiring
know-your-customer screening), superimVirtual
Widely
pose the global penetration of messaging
currency
Peer-to-peer
accessible
applications with mobile teledensity, and
Central bank
approximately one billion of the unbanked
reserves and
settlement
have access to low-cost, internet-connectBank
accounts
deposits
ed devices. If those devices become part
of a compliant payment endpoint, propoLocal
currency
nents argue, the bottom rung of economic
Central bank
Central bank
digital tokens
digital currency
mobility is lowered in a global parallel of
(wholesale only)
the financial inclusion gains from welldocumented mobile money networks like
Central bank
M-Pesa in Africa. This is no longer an abdigital tokens
Wholesale
(retail)
straction, as well-regulated dollar-backed
cryptocurrency
digital currencies such as U.S. Dollar Coin
CryptoCash
currency
(USDC), issued by Circle, are available in
more than 191 countries via a network of
Commodity
open digital wallets.
money
Opponents of this idea, however, would
argue—poor be damned—that issuing money is a sovereign activity and, therefore, the
Source: Bank for International Settlements.
only solution is for central banks to digitize
their national currencies. The boldest and
most material of these CBDC developments
was launched by the People’s Bank of China following
and open banking networks, which are perilously behind
the Chinese government’s accelerated national blockschedule in the United States and other major economies.
chain plans, which were also catalyzed by big tech fears
Tellingly, many CBDC designs, including China’s,
and geostrategic motivations.
impose balance limits on digital wallets for fear of flightAccording to the Atlantic Council’s GeoEconomics
to-quality pressure on bank deposits. The question is thus
raised: Should central banks disrupt the intermediated
banking and regulated payment system in such a way,
when these intermediaries are the conduits of monetary
policy transmission?
The case for CBDCs is often framed as a panacea
for ills in the banking system that could be solved with
policy and rules-based competition, rather than taxpayerborne science experiments with money. One such example is a U.S. postal banking project in 2021 that only
had six people participate, which underscores that in a
Center, 105 central banks representing 95 percent of the
democracy, the most prominent features of money are
world’s GDP are in some form of study on the risks and
value-added intermediation, privacy preservation, and
opportunities presented by CBDCs. These efforts often
censorship resistance. Technological obsolescence, cyobfuscate a void of real-time gross settlement systems
bersecurity, and compliance concerns militate against

The Money Flower

CBDCs may be little more than

a solution looking for a problem.

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Payment Stablecoins (e-money tokens)

CBDCs

Issuer

Regulated bank and non-bank actors.

Central banks.

Intermediation

Issued via bank and non-bank actors and intermediated across
multiple, open blockchain networks, virtual asset service providers
(VASPs), banks, and payment companies, among others.

Depending on the design structure (for example, wholesale, retail,
general purpose, or hybrid), CBDCs may be intermediated via authorized
bank and non-bank actors.

Holder/User Rights

Digital bearer instrument with the right of redemption at par for one
unit of the underlying reference fiat currency, even in the issuer’s
bankruptcy, subject to bankruptcy remoteness, segregation of funds,
and preservation of principle under money transmission and or
e-money frameworks.

Digital legal tender status invoking the full faith and credit of the issuing
central bank’s public balance sheet and backstop.

Legal Classification

Emerging treatment as electronic stored value in the United States, or
e-money tokens in Europe and other jurisdictions.

Digital legal tender status or as yet undefined as CBDCs remain largely
theoretical among most central banks.

Prudential Risk

Potential for losses of confidence and bank-like run risks if economic
stabilization mechanisms skew from conservative cash, short-dated
government obligations, and high-quality liquid assets (HQLAs).
Potential for direct custody of cash at central banks.

Notional infinite liability and no counterparty risk. However, depending
on the CBDC structure, central banks would move from becoming a
responder of last resort to systemic financial risk, to a responder of first
resort.

Governance

Governed by regulated single-issuer or multi-issuer frameworks,
payment system consortia, banks, and non-bank actors.

To be determined, but ostensibly governed by central bank authorities,
boards, or public-private consortia involving authorized intermediaries.

Financial Integrity

Anti-money laundering (AML), countering the financing of terrorism
(CFT), sanctions compliance, and know-your-customer (KYC)
obligations borne by regulated intermediaries and virtual asset service
providers (VASPs). On-chain financial transactions are transparently
recorded down to micropayments combating illicit activity.

Anti-money laundering (AML), countering the financing of terrorism
(CFT), sanctions compliance, and know-your-customer (KYC) obligations
possibly borne by central banks (depending on CBDC design) and
authorized intermediaries. Transactions potential recorded in opaque,
non-public records.

Fungibility

Possible one-to-one exchange of comparably regulated and backed
payment stablecoins or e-money tokens, subject to market conduct
and payment system interoperability.

Possible free exchange inside contiguous national territory, with the risk
of global balkanization on geopolitical, strategic, and economic grounds.

Economic Design

Designed with constant one-to-one backing of underlying reference
currency reserves, while holding strict asset-liability management
retaining price parity, liquidity, and redeemability at par (even in
conditions of market stress), without maturity transformation
or fractionalization. Designed as an open, programmable, and
composable medium of exchange on the internet fighting buyer’s and
spender’s remorse.

Designed for economic parity with national currency(ies) affording legal,
price, and economic certainty to end users, subject to account balance
limitations for fear of sparking a run on bank deposits.

Technology
Infrastructure

Multiple open-source, non-proprietary permissionless blockchains or
closed proprietary bank and payment system technologies, including
distributed ledger technologies (DLT). Constantly upgradable
technology subject to competition.

Permissioned or proprietary technology, subject to public procurement,
vendor captures, or national encroachment or soft expropriation
of financial services or technology firms. Operating certainty and
conservatism poses technology obsolescence risk.

Digital Wallet(s)

Global, open networks of device-centric digital wallets serving retail,
wholesale and emerging use cases for payment stablecoins,e-money
tokens and other digital assets.

Government or authorized intermediary-issued proprietary digital wallets
depending on CBDC design.

Monetary Policy

Responsive to monetary policy and its transmission as a function of
underlying reference assets and circulation being driven by supply and
demand factors.

Monetary policy directly transmitted by central banks and authorized
intermediaries, with potential dislocations of fractional reserve bank
deposits or implied domestic “flight to safety” risks.

Balance Limitations

None. Subject to payment stablecoin open value chain, liquidity,
circulation custodians, VASPs, and other regulated market
participants.

Balance limits likely to be imposed based on CBDC design
considerations, geographic limitations, and concerns about deposit base
and interoperability.

Geographic Scope

Global.

Domestic with likely cross-border interoperability, subject to capital
controls, balance, and other limitations.

Principle Use Cases

Internet scale, device centric, low-cost, high-trust, programmable,
composable internet money and payments.

Authorized domestic fast payments, government-to-citizen money
transfer, financial inclusion, provision of digital public goods.

Privacy Features

Intermediated, privacy-by-design features, cryptography powered
competitive blockchain networks.

Still being determined depending on CBDC design and authorized
intermediary approaches.

Settlement Finality

Increasingly approximating mature payment system transaction
throughput with near-instant settlement finality, approaching fractional
transaction costs when compared to proprietary systems.

As yet undetermined, but based on reported experiments, such as
the Federal Reserve Board’s Project Hamilton report, high-throughput
transaction flows at population scale are possible, but necessitate
centralized technology more suitable for wholesale use cases than retaillevel transactions.

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Disparte

most CBDC structures as presented today, among other
risks that are often ignored. These would only amplify
the prevalence of single-source-of-failure infrastructure
and honey-pot databases in the global economy. Recall
the 2017 Equifax data breach. It not only laid bare the
case for new forms of digital identity, but also exposed a
lifelong societal erosion of privacy for the basic right of
financial access. Simply put, a central bank has to make
a hundred-year technology bet for a CBDC return on investment to make sense. Meanwhile, free societies, from
whom central banks are endowed with their sovereign
authorities, would have to make a generational bet that
the extreme temptations of deplatforming people from
money or micro-level surveillance are resisted.
In the United Kingdom, a parliamentary inquiry
on CBDCs concluded with an indictment that CBDCs
may be little more than a solution looking for a problem.
Other central banks and public authorities are joining
the chorus, from Australia to Scandinavia, although their
voices are still whispers compared to calls for CBDCs to
be launched.
Meanwhile, the prospect of another “vanity coin”
project from a big tech firm seems unlikely, particularly
if the transmission networks resemble those of closed
monetary airline miles due to anti-competitive pressures.
China tech fears, however, have been realized
with the launch of the e-CNY at the Beijing Winter
Olympics in 2022. By some estimates, more than 260
million e-CNY–enabled digital wallets were activated

The United States is not losing
the digital currency space race.
It may be winning it.
as of January of 2022, a number that has surely grown
exponentially. National security experts argue that the
e-CNY may become the tip of a technological spear
that can spread a parallel, global, and sanctions-evading
money movement network through China’s Belt and
Road Initiative. Thus the supremacy of the U.S. dollar
as the global reserve currency wanes. In the race to “outChina China,” CBDC proponents would be wise to remember that a national digital currency is the sum of its
parts, as former U.S. Treasury Secretary Hank Paulson

The case for CBDCs is often framed
as a panacea for ills in the banking
system that could be solved with
policy and rules-based competition,
rather than taxpayer-borne science
experiments with money.
admonished. The real digital currency breakthrough innovation is in the underlying payment rails.
But is there a counter-narrative to the CBDC argument
that often gets lost in the cryptocurrency conundrum? The
real space race was won when political leaders marshaled
a whole-of-society response by providing a destination.
Challenging the reign of the internal combustion engine
does not change the rules of the road for safe mobility. The
same should hold true with responsible financial services
innovation in the movement of money. After all, virtually
all “value-added” money in the global economy is already
privately issued through the two-tiered fractional reserve
banking system or via private sector or consortium money
transmission rails. By this measure, a CBDC would be
tantamount to the Federal Aviation Administration flying
planes and building jet engines, rather than defining competitive, rules-based safe passage in the skies. The geopolitical reality of air travel gave rise to national flag carriers.
Perhaps the same will hold true of private sector actors in
the digital currency market?
Traditional “brick-and-mortar” forms of money, like
the internal combustion engine, have some limitations in
their fitness for a technology-powered future. Economytransforming industries emerged from the space race,
enhancing connectivity, economic competitiveness, and
security. A similar trans-Atlantic policy tipping point
may be at hand, but the United States and Europe should
follow the example of the UK Parliament by eschewing
CBDCs and embracing well-regulated free market competition for the movement of money.
Continued on page 68
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Disparte
Continued from page 57
There is no better place to start than pulling privately
issued digital currencies backed by fiat currencies (payment stablecoins or e-money tokens) into the regulatory
perimeter. Europe’s far-reaching Markets in Crypto Assets
Framework, which was also accelerated courtesy of big
tech fears, comprehensively achieves this, but appears in
conflict with the European Central Bank’s insistence on
digitizing the euro. The French can create a new word for
email (courriel) to avoid language-corrupting transliteration. However, a digital euro issued by the ECB would be
the equivalent of European authorities creating a closed
pan-European monetary intranet.
A THOUSAND FLOWERS BLOOMING

The Bank for International Settlements has long studied
the emergence of cryptocurrencies and potential financial
technology challengers to central banking and the macroprudential framework. In classifying the different types
of money in circulation in the global economy, the BIS
money flower (see figure) offers a useful taxonomy for
the universe of money, its form factor, and market accessibility. Rather than letting a thousand flowers bloom, the
real innovation lies in the petals of the money flower and
where and how they overlap. Neither big tech nor China
tech are powering this revolution in money. Rather, it is
being increasingly powered by pro-competition opensource technology, which leverages public blockchain infrastructure to create a veritable internet of value, albeit in
its dial-up phase.
Where widely accessible, digital and peer-to-peer
forms of money overlap is where the emergence of wellregulated payment stablecoins begins. Nearly all of these
privately issued digital currencies, more than $150 billion
worth, reference the U.S. dollar to varying but increasingly

A CBDC would be tantamount
to the Federal Aviation Administration
flying planes and building jet engines,
rather than defining competitive,
rules-based safe passage in the skies.
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The United States and Europe should
follow the example of the UK Parliament
by eschewing CBDCs and embracing
well-regulated free market competition
for the movement of money.
improving degrees. While none of them enjoy the full
faith and credit of the U.S. government as digital legal
tender, which would imply a public backstop or a systemically important financial institution designation from
the Financial Stability Oversight Council, which would be
unlikely, some enjoy the full faith and credit of the U.S.
regulated banking system. All of them, some good and
others stable-in-name-only, are designed as a native form
of cryptographic internet money for Thomas Friedman’s
hot, flat, and crowded world.
SETTLEMENT FINALITY

By this measure, despite the regulatory and policy reticence of the United States and other countries in acknowledging the breakthrough innovation presented by
blockchain for how people send, spend, save, and secure
money, the United States is not losing the digital currency
space race. It may be winning it. The one distinction, however, is that China’s e-CNY enjoys digital legal tender status and all the potentially insidious powers this confers to
the government. While policymakers in the United States
and around the world continue to grapple with regulating risk-prone and fast-moving cryptocurrency markets,
an emerging world of safe always-on internet money is
here under the banner payment stablecoin. As private sector digital currency innovations increasingly enjoy legal
and regulatory clarity, along with mass adoption with 75
percent of the world’s payment networks planning on increasing acceptance, they will be understood as completing unfinished work in the banking system, rather than
competing with it. The real competition therefore is not
a CBDC or not-to-CBDC question, but rather who builds
internet-scale financial markets infrastructure and whose
value systems are imbued in code and conduct.