CBDCs are the future of global money

NEW YORK – A top motivation for central banks to issue digital currencies, the Atlantic Council reports, is “promoting financial inclusion by providing easy and safer access to money for unbanked and underbanked populations.”

Only 6% of people in high-income OECD countries are unbanked, compared with nearly half in the Global South, according to the World Bank. The United States has nearly 30 bank branches per 100,000 population, compared with four in least developed countries.

Mobile broadband and inexpensive smartphones can provide the poorest countries with quick access to financial services at a fraction of the cost of brick-and-mortar banking. Billions of people now on the margin of the world market can gain access to payment services and micro-credit, promoting local entrepreneurship.

Now in beta-testing in China and at the development stage in the rest of the world, central bank digital currencies (CBDCs) could promote the adoption of local currencies as an alternative to the leading international currencies.

The US dollar’s share in world central bank reserves fell to 58% in 2022 from a high point of 71% in 2000, and the BRICS countries as well as members of the Association of Southeast Asian Nations (ASEAN) are eager to promote their units as alternatives.

Cross-border transactions will be the focus of a new global body, the Central Bank Digital Currency Collaboration Organization (CBDCCO), that will begin operations in January 2024.

Sponsored by the Nobel Sustainability Trust in Zurich (unrelated to the funder of Nobel Prizes), CBDCCO draws on experts from the International Monetary Fund, the Bank for International Settlements (BIS), the International Telecommunication Union (ITU), and other global organizations. It is a successor to the Focus Group on Digital Fiat Currency founded under the auspices of the ITU, directed by former Stanford Professor David Wen.

The chair of the new international body will be Chinese-American entrepreneur Bruno Wu. Previously Wu received the Nobel Sustainability Trust’s first medal for Outstanding Contributions in Sustainability. He is a shareholder of the parent company of Asia Times.

The new Nobel-backed organization is unique in focusing on cross-border transactions, with experts drawn from the US Federal Reserve System, the Bank of Japan, the BRICS New Development Bank, the IMF and the Bill and Melinda Gates Foundation.

By incorporating large numbers of now unbanked individuals into the financial system, CBDCs can create broad demand for local currencies while restricting the use of cash for illegitimate purposes, stabilizing the value of local currencies and making it easier for central banks in developing countries to manage the money supply.

The dependence of poor countries on large amounts of unsupervised cash is a significant source of instability for local currencies.

The main beneficiary of the circulation of large amounts of cash in the world financial system has been the United States. About US$1 trillion, or nearly half of all US currency in circulation, is held overseas, including by individuals who want to evade scrutiny by financial regulators and law enforcement. Foreign ownership of US cash constitutes “an interest-free loan of $1.03 trillion each year,” according to a St Louis Federal Reserve study.

With 260 million users, China’s pilot project for CBDCs is the most advanced among the 11 countries that now offer government-backed digital currencies. Up to 20 more countries will begin pilot projects for digital currencies in 2023, including the European Union. Australia, Russia and Thailand already are in pilot testing; Brazil and India expect to launch pilot projects next year. China’s CBDC project is strictly limited to onshore payments.

With the world’s largest digital payment system, China has been a natural leader in CBDCs. Alipay, a division of Alibaba, is the world’s largest digital payment service with more than 1.3 billion users, followed by WeChat Pay (900 million) and Apple Pay (507 million). Google Pay and PayPal are slightly behind Apple Pay in user count. Alipay’s annual $7 trillion in transactions dwarfs Apple Pay’s $6 trillion.

Despite its comparative advantages in the cash-based economy, the United States has good reason to move ahead with its own CBDC. “The absence of US leadership and standards setting can have geopolitical consequences, especially if China and other countries maintain their first-mover advantage in the development of CBDCs,” the Atlantic Council warns.

Although the US and China are in conflict over numerous issues, cooperation on CBDCs – as reflected in strong American participation in the new CBDCCO – might be an area for collaboration.

US officials have so far downplayed the possibility that CBDCs might lead to less use of the dollar as a reserve instrument. “What is it about a CBDC that would make a non-US company, engaging in international financial transactions, more or less likely to use the dollar?,” Federal Reserve Governor Christopher Waller asked rhetorically in an October 22, 2022, speech.

There is nothing inherent in a digital currency that makes it more attractive for large companies than a conventional checking account at a bank, Waller concluded.

The combination of mobile broadband (of which China is the world’s leading provider), smartphone-based payment and credit systems and CBDCs, however, could have an important if gradual impact on the adoption of local currencies. But that can only happen if new financial technologies foster prosperity in poor countries.

Hypothetically, Malaysians might be able to make payments in Thai baht through CBDCs, as they already can through reciprocal arrangements through credit card issuers. Africans might be able to make payments in RMB if CBDCs are adopted across borders.

That by itself doesn’t threaten the dollar’s reserve status, but it may broaden the use of local currencies whose international role presently is negligible.

Follow David P Goldman on X, formerly known as Twitter, at @davidpgoldman