Central bank digital currencies (CBDCs) have become a prominent topic of discussion in academia, geopolitics, the crypto community, and public discourse. While there is a consensus among national leaders and financial institutions on the benefits of CBDCs, little has been said about where they are best suited and where their adoption may be inappropriate.
To ensure that CBDCs have a positive impact on the global economy, it is crucial for global leaders to understand their advantages and limitations. CBDCs can assist central bankers in implementing more effective capital controls, stimulus plans, and monetary policies at the wholesale level. Within this context, CBDCs can help smooth market downturns, minimize recessions, and foster economic growth, which are essential for stable national and regional economies.
However, implementing CBDCs at the retail level to directly serve individuals and corporations is a complex task that central banks are not equipped to handle. It is important to find the right “product-industry fit” for CBDCs, just as startups consider the product-market fit. Wholesale CBDCs, along with the blockchain technology they rely on, can enhance the work of central bankers due to their security, transparency, and streamlined issuance. Central bankers have the expertise to leverage these benefits within their scope of work.
However, CBDCs should not be seen as a replacement for specialized expertise, and their implementation should not be extended to industries or economic sectors solely based on their technological capabilities. CBDCs only add value when accompanied by professionals who possess the necessary expertise to leverage their benefits.
While CBDCs have utility in wholesale applications, using them to bypass and replace the entire commercial banking industry is a complex endeavor with numerous challenges. Central bankers should not take action simply because it is feasible. Retail CBDCs grant central banks the ability to bypass commercial banks and act as direct issuers, but they lack the nuanced wisdom and rigorous experience required to do so effectively. Innovation should refine specialization, not replace it.
Commercial banks have deep expertise in credit evaluation, loan disbursement, account management, and other financial services. They have developed models and algorithms over centuries to serve retail and corporate clients. Issuing currency and assessing loan applications require dedicated institutions independent of monetary policy decisions.
However, commercial banking will not be left behind. They have access to on-chain tools such as stablecoins and deposit tokens, which enhance efficiency, transparency, and security for retail and corporate clients. Commercial banks can use wholesale CBDCs as collateral to issue stablecoins and deposit tokens. They can also streamline cross-border transfers, establish trade corridors, and enhance security and privacy through Know Your Customer procedures.
Commercial banks are best positioned to continue managing deposit accounts based on central bank collateral and monetary policy in the digital era. The global adoption of CBDCs can create a new financial paradigm where central banks implement superior monetary policy at the wholesale level, while commercial banks excel at the retail level with stablecoins and deposit tokens.
Overall, CBDCs have the potential to bring significant benefits to the global economy, but their implementation should be carefully considered within the appropriate contexts. Central banks and commercial banks can work together to leverage the advantages of CBDCs and enhance the efficiency and effectiveness of monetary systems.