Along with Financial Times Alphaville reporters, skeptics of blockchain and CBDC abound in central banks and among the long term denizens of investment banks. They can foretell the future. If someone had ever tried to talk to them about the internet back in the late nineties, they would have dismissed them with a curt wave of their hand. Of the protectors of the realm are the IT departments as well. Their well earned stripes and their positions come from having toiled in IT Operations over the years. They defend the processes that they have setup over the years, including the so called Business Continuity Plans (BCP). Of course all of these BCPs were upended in a week in March 2020 in the US. On premises hardware, proscriptions against using home computers, working from home and other shibboleths were quickly abandoned.
The Bank of International settlements did a survey of central banks and published it in January 2019, “Proceeding with caution – a survey on central bank digital currency”. The title reflects the conservatism of central banks and the prevailing mood, two years ago, when everyone had a lot of time on their hands to reconsider and reflect on change. Banks were making a lot of money, the central banks were finally coming out of the long shadow of the 2008 crisis; which commercial banks had inflicted with financial engineering run amok. The central banks had plenty to do with promoting this irrational exuberance. Of course, in many capitals of finance and central banks this resulted in a reflexive withdrawal into familiar tropes like austerity. The economies that did well were the ones with loose economic policy. When economic death is on the way, austerity should have died a natural death, however this vampire is still alive. Moreover, the looser policies unleashed by the pandemic bought up the assets held by the 1%, similar to the scene in 2008.
The sentiment started to shift on Central Bank Digital Currency even before the pandemic hit. The title of the survey changed from “Proceeding With Caution” to “Impending Arrival”. A January 2020 release of the BIS survey showed 80% of the banks that were surveyed are working on a CBDC, this is a change from 70% in the initial survey. After the pandemic hit, a flurry of papers from BIS, as a follow-on to the “Impending Arrival” paper seem to show even greater interest by central banks on the topic. There was also much discussion on the details of the design of CBDC, which indicates a sea-change in the attitude towards CBDC. The European Central Bank came out with a paper showing that they are interested, the Federal Reserve is actively researching CBDCs and are partnering with MIT. This article looks at changes in sentiment at the three central banks mentioned in the title and a closer look at the specific objections as well as the real reason for a change of heart.
To start with, the Bank of Korea (BOK) published a paper in January 2019 that argued against Central Bank Digital Currency. A monetary general equilibrium model was run that looked at the effect on commercial bank deposits in competition with a CBDC in direct interest bearing account with the central bank. The conclusion was that a CBDC would increase the likelihood of a bank panic; thereby threatening the money supply and hence the monetary stability of the nation. Hence, creating such a CBDC would be dangerous. Even though the sting of the run on reserves could be offset by lending of CBDC by the Central bank in its role as the lender of last resort to commercial banks. The analysis makes many assumptions, including the incentivization for individuals shifting to CBDC with remuneration comparable to a regular deposit account.
The Bank of Japan (BOJ) paper in February 2019 followed the same script; bad effects on monetary policy through the possibility of bank runs plus a bizarre twist that privacy in CBDCs would somehow compromise the network effects in commercial payments systems. CBDCs would drain data from private operators reducing the efficiency and innovation in payment systems. This is part of the argument against the creation of CBDC by the Bank of Japan.
The Australian case is even more striking. In a paper released in October 2020, The Reserve Bank of Australia (RBA) concluded that the public policy case for issuing a general purpose CBDC in Australia is still to be made. Cash is still widely available and accepted as a means of payment. Households and businesses are also well served by a modern, efficient and resilient payment system.
In November the RBA put out a press release saying that they will explore the potential use and implications of a wholesale form of tokenised central bank digital currency (CBDC) using distributed ledger technology (DLT). By the first quarter of 2021 the PoC will explore atomic settlement of the lifecycle of a syndicated loan on Ethereum. The POC will be used to explore the implications of atomic delivery-versus-payment dlt based settlement as well as other potential programmability and automation features of tokenised CBDC and financial assets.
Both BOJ and BOK have also announced a roadmap for POCs and MVPs that are to be completed sometime in early 2021.
What made these banks reverse course on CBDCs? We can only guess. In the case of BOJ, rumor has it that a new senior member of the Bank favors innovation, this might have changed their strategy. In BOK too, the same holds, Australian thinking had to have been influenced by the Chinese CBDC the Digital Currency Electronic Payment system, now in late MVP stage. The largest such effort so far.
Notwithstanding the economic and technical analysis of the situation; an idea whose time has come is unstoppable. In the Chinese case, technical strategy is set in the form of directives from the highest level to be self-reliant and create solutions that benefit everyone. Recognition that a digital form of cash is the safest and necessary for the remaking of digital markets in the form of a integrated payment rail is dawning on Central Bankers; they are acting accordingly.