Introduction

This blog is in three parts. In this, the first part, we reviewed what CBDC is, who is driving this development, what central banks are trying to solve and what the current state of play is. In this second blog we will now discuss the topic from the point of view of the other stakeholders in the ecosystem (notably end customers, merchants and banks). We will see some of the concerns that have legitimately been raised – whether the original goals are achievable at all, and that there is a real danger that this whole development may be a big global “flop”.  In the final blog we will then look at the advantages to all and why it may be worth all of us working together to make this new money a reality.

Motivations of other stakeholders

End users

As we have seen above, it will be hard to convince normal end-users to adopt CBDC: we already have very well functioning money and payments. One can already move money around digitally very well.
Most people don’t even see the difference between a debit and a credit card – how can they be expected to understand the difference between commercial bank money and central bank money ? One could hide the difference (for payment geeks: the CBDC “waterfall” method) – but then what is the point of having a different kind of money at all ?
The consumer angle does not really seem to have been thought through.

For CBDC to be successful it must have at least the same functionality as paper cash (anonymous, simple P2P exchange, good control, safe store of value, immediate), in addition to having significant and clear advantages over existing paper cash (eg protection against loss and theft, a means to pay both physical and online merchants, a more convenient user experience, cheaper/faster remittance payments to send salaries home to the family, connected to innovative FinTech-enabled services). Will CBDC be able to realise this ?

A special case is in countries with less stable currencies, where CBDC may be an attractive way to access the Dollar or the Euro remotely/electronically (if CBDC is accessible cross border). In Argentina, for example, people have been moving away from the Peso (which lost almost all its value in a generation) to crypto. In the words of one commentator: ‘I would rather have a digital asset whose price goes up and down than a currency whose only real trend is down’. With the advent of cross-border CBDC, people in such countries will have access to stable currencies (dollar, euro, etc) and will not have to resort to unstable crypto. However national governments may not like this attrition of the national currency (see goal of monetary anchor above) and will thus likely fight against this[1].

So, in summary, the enthusiasm of the population to adopt CBDC will surely be limited. So how will the governments and central banks aim to convince the populace ? One area not to get answers from is by asking the consumer (the ECB tried this and got very bizarre results). Apple and Sony famously did not ask customers if they wanted an iPod or Walkman. As advertising guru David Ogilvy famously said ‘Consumers don’t think how they feel. They don’t say what they think and they don’t do what they say’.

Maybe the next stakeholder to be examined below may be more helpful …

Merchants

There are many potential incentives for merchants to adopt CBDC:

• Lower cost: cost of acceptance should be lower than cards
• Better liquidity: funds are available immediately, especially in markets where Instant is not yet the norm
• Fewer abandonments: FinTech enabled services will provide a better UX
• Reduced cost of cash handling (since CBDC should reduce paper cash)
• New services, e.g. per-use micropayments
• Better acceptance: if cross-border CBDC is realised and merchants can take payments from customers from all countries
• Businesses improving global treasury management through international harmonisation
• Better protection against theft, fire and disasters – unlike banknotes
• etc

Thus merchants may well be motivated to invest and ensure that CBDC is accepted at their points of sale online and in physical shops. Indeed merchants may end up driving consumer demand. Merchants have shown they can be rather successful at steering consumers (for example, by putting their preferred payments at the top of the list, offering rebates to nudge their clients towards specific instruments, etc), so maybe this will indeed be the driving force for consumer CBDC adoption.

If that does not work, the ECB has already said that they believe CBDC should be legal tender[2] i.e. must be accepted everywhere and thus at every merchant.

Commercial banks

For the normal high street bank, the case for CBDC is not good:

• The central banks will force them into taking on the expensive distribution task: creating and managing wallets, distributing them to their customers, doing KYC to protect against misuse/AML/ATF, answering hotlines with customer queries, etc.
• Commercial banks will not be able to charge more for CBDC than they currently charge for cash (typically nothing in the case of consumers).
• As more of their customers’ money moves into CBDC, commercial banks will have less deposits in their balance sheets, thus impacting their core business of lending. (One estimate has suggested that US banks would have US$4bn less liquidity due to CBDC)
• If CBDC payments take a slice out of the cards business (as is the goal), this may seriously impact commercial banks’ bottom line. (In the US, banks and other card companies earn US$160–US$180bn per year in interest, interchange and other fees through their cards business.)

In the face of these costs, risks and threats, commercial banks are hardly likely to perform the critical role in distributing CBDCs for the central banks with enthusiasm. Thus, mechanisms for intrinsically motivating banks (the ‘carrot’) must urgently be sought. Simply forcing by regulation (the ‘stick’) — has proven not to be efficacious. For example, the European Open Banking regulation, the Revised Payment Services Directive (PSD2) forced banks to open up and expose their crown jewels — their customer data — to competitors and to allow competitors to initiate payments over the banking rails — all for free. This was understandably met with a lack of enthusiasm by banks. They often adhered to the letter of the law (compliance) but not to the spirit of the law (making open banking actually work well for the benefit of all). Only after many years and pointing out that open banking can actually be a huge benefit to banks themselves, did the industry move more voluntarily, and a huge FinTech scene that collaborates with banks emerged. This mistake must not be repeated. Banks should be intrinsically motivated that CBDC is — despite the immediate disadvantages — also in their interests.

On the upside, it is clearly in the commercial banks’ interest to defend their national systems, their national economy against foreign big techs (PayPal, Facebook, etc), Crypto (without central parties, without banks, but now used as the main off-ramp by hackers and scammers) and foreign governments (Dollar, Yuan, etc) seeking to challenge and threaten their core existence. It should thus be urgently in the banks’ interests to support a CBDC which has a banking system and national sovereignty at the heart of its policy agenda.

Another incentive comes from the inordinate cost of cash distribution, which largely falls to the private sector (cash logistics, ATMs, etc — see above). Thus, again commercial banks should welcome an initiative to accelerate the reduction in physical cash and hence reduce costs to commercial banks.

In short, there are several macroeconomic, strategic reasons for banks to support CBDC, even though some microeconomic immediate risks and huge investments over decades are inevitable.

After this critical reflection, we will return in the third and final blog, to why maybe CBDCs should be embarked upon after all.

> Click here to first part

[1] See, for example, Cambodia. Here, the US dollar was increasingly being used instead of the local riel. The local CBDC-like instrument “Bakong” was thus introduced to help strengthen the local riel and reduce dependence on the foreign dollar. Bakong’s many benefits (better remittance, lower fees, more inclusion, better usability, etc) convinced many to eschew foreign currencies, crypto, etc and return to the local monetary anchor. In this case CBDC actually helped to stabilise the local monetary anchor and increase sovereignty of the national currency.

[2] ECB President Lagarde said “we should bear in mind that it is a constitutional feature of cash – as central bank money – to be legal tender … and it would be unprecedented to issue central bank money for retail payments without legal tender status – just because it circulates electronically”