With the current landscape for central bank digital currencies (CBDCs) heating up, most of the countries have accelerated their efforts to issue a CBDC. So far, China has had the most progress in this space, with the Asian nation conducting many test runs by distributing its digital yuan to its citizens via red packets.
Based on a paper published by European policy analysis publication VoxEU, nonetheless, there is no obvious justification for the digital cash substitutes for allocative efficiency. If the central banks stick to their current approach, there is a major probability that CBDCs will turn into ‘gigantic flops,’ according to Peter Bofinger and Thomas Haas (European economists).
These researchers discovered that most CBDC models are ‘narrow’ in their approach, and central banks require to rethink their entire approach to CBDCs in case that they want to come up with serious answers to the dynamic activities of various global payment services. Even from a users’ perspective, there is minimal incentive to switch to a token CBDC that would only offer an imperfect substitute for cash.
Based on the analysis of the economists, while a direct account with a central bank may be appealing as a result of its absolute safety, the deposit insurance schemes protect deposits under 100,000 Euros. Based on that hypothesis, the users holding smaller amounts of CBDCs might not see the appeal in switching from a traditional bank account to a central bank account.
Haas and Bofinger also discovered that an option that may experience some success is a CBDC designed to act as a store of value. Nonetheless, that has got little attention so far.
Based on the users’ perspective, that demand may depend on the interest rate for these types of deposits. Central banks can auction store-of-value deposits which would eventually give them absolute control over their amount. Nevertheless:
“…. while there could be a high demand for such a CBDC, central banks do not seem to be interested in this option, as they fear that this could lead to a strong disintermediation of the banking system.”
But, it should be noted that these findings came with a caveat:
“These findings mainly concern advanced countries with a large share of the population having access to bank accounts. For emerging and developing economies, such CBDC solutions could be a suitable tool to approach the problem of a large share of people without access to bank accounts.”
Will CBDCs thrive or flop? Time will tell.