You may have heard the term ‘Central Bank Digital Currencies’. You may even be curious. To be knowledgeable on the topic - you can’t get much better than direct from the horses mouth.

And you don’t get much more direct than a Federal Reserve Governor. Here is what he shared on CBDCs - and it may not be what you expect.

I recently met a nice guy - Christopher Waller, from US Federal Reserve. He’s one of the people who gets a vote on what happens with currency, and interest rates.

The Context of Below

Recently he visited a leading top tier university in Queensland (Queensland University of Technology), and I was fortunate enough to be one of around 50 folks to see him talk. These are my notes from this talk.

Apologies if I jump around a bit, and summarise areas he expanded on, I was writing this as Christopher Waller spoke, and edited now.

My own clarifications or bridging remarks are in italics. Like this.

I will attempt to send a copy to Mr Christopher Waller (do not have his email, but may be able to get it), and if that is possible - and he has time to reply, I will update with any corrections. I will update this sentence to say he is aware of the post, and he has commented - and corrected any serious errors or disagreements in my interpretation.

Please in the interim assume any errors are mine (unintentional), not Mr Wallers.

Do not treat these as quotes - rather my understanding of what he meant by his remarks. So I am paraphrasing. Of course, that means it’s my interpretation of what he said (also not my own views in general, just paraphrasing his presentation in a simplified form).

I try to be fairly neutral in my description. Although I draw some conclusions from what he implied or could be inferred IF CBDCs came into being as discussed.

Your own Cliffs Notes guide to CBDC proposal as it were.

We Live With Digital Currency

Physical currency has been partly replaced by digital currency. Currency is already digital, because to banks your money is just a number - a liability they owe you.

All the digitalisation of money is just spreadsheets now - digital money now is removing all the cash. Slowly.

For Australians - every time you use Paypass or Paywave, that’s digital. Tap and pay is another version. I am unsure of the brand names in each market but tapping a card is to debit, is the key step. No pin, no sign.

Some of you even tap and pay with your phones.

Now the payment gateway for that can be complicated.

Private bank accounts are commercial money - they owe you. It’s not legal tender. We just treat it as the same.

But the banking system provides digital money. It’s just issued by your bank. This is not a problem in a stable system. And the government in Australia guarantee bank deposits up to a limit, so it’s less of a problem, still.

But Reserve Bank / Federal Reserve money at the moment is actual legal tender issued. ie. actual cash.

But in a digital world, we are talking about a switch from a private bank liability to digital reserve or central bank liability.

This becomes significant because in some economic crises, we all want public reserve money, or legal tender. Not private bank money. Because economic crises are crises of trust. And we can lose trust in individual private banks.

This can be seen by some emerging countries - locals hording US physical dollars. As a buffer against their own currency collapsing - or corruption.

How our Existing Digital Bank Money Works

In a current digital world… we use online banking or card to transfer $10 from your bank acct to recipient bank account.

Your bank sends recipient’s bank message.

Both banks move $10 from one Reserve account to another Reserve.

This is ‘settling’ to use the bank term.

Private banks individually control all individual databases of money. In other words its all somewhat decentralised.

The Reserve bank just ensures all the private bank accounts settle.

Notes on what the CBDC Proposal Is

The proposal of a CBDC is disintermediation - as in most disruptive technology.

The disintermediation is removing of the private banks potenitally from the transaction.

Physical currency (cash) is anonymous.

Digital currency needs records and therefore needs identity. Or at least a digital wallet that is anonymous and stores the data.

Blockchain records the identity of parties when transacting assets.

Bitcoin is opposite to central banking. Its built on zero trust. Anyone can have a copy. One person cannot corrupt a database because everyone has a copies. Anyone can change a database or ledger.

Central banking operates conversely on a trust model.

CBDC is not token based as proposed. It’s called ‘direct access CBDC’.

Proposed total central banking is no banks, but direct transfers between two central bank accounts. i.e. you bank with the central bank directly.

Meaning you don’t bank with a retail bank. Rather you would bank with a Central Bank - the one ‘central bank’ for each country.

In other words all retail and commercial banks are gone. At least in their key retail function.

(Banks may have a few words to say about that).

There is in the pure form - ‘one bank for all people’.

Or as Lord of the Rings would say, ‘one bank to rule them all’. But also one bank to blame for everything from interest rate rises, to cybercrime, to foreclosures and to social housing.

This, to say the least would be radical. Let’s unpack this more.

What This Means and Why

The question marks are because these are claimed benefits. It is not clear these would eventuate when compared with ‘regular’ retail and commercial banking. i.e. as the banking system now functions in the West, and especially the U.S..

Penetration? - Finance people want to increase banking penetration. They see CBDCs as a way to do this.

However, unbanked people (those external to the banking system) won’t join a central bank account, instead of a retail bank.

So this may not work.

In the US it is ~5% ‘unbanked’. Only 1 in 4 of those may want a bank account anyway.

Innovation? - some folks believe central bank currency will increase innovation. However, opposite is the case, fintech innovation is already exploding.

We can’t regulate the innovation we have!

Speed? Payments can be faster with CBDC. But banks are already on ‘top of this’ and working on it. The means for instant global payment are already largely there.

Main claimed benefit though, is CBDC can reduce the friction on cross border.

However, the friction is due to AML (money-laundering) and anti-terrorism etc.

So speed increases may not be the case as regulators put in the ‘slow down’ to prevent terror-funding and laundering. A central bank may not remove this, so the problem remains.

So the speed ‘claim’ may not be improved by CBDC.

Reserve Currency - Stablecoins are a possible threat to reserve currencies like the USD. And some folks see stable coins as a threat to reserve currency like USD.

CBDC can possibly overcome this many people argue.

Or it could weaken the Greenback? (just a provocation)

China Did It? - China already has a CBDC.

Some US politicians see this as a threat to the US dollar hegemony.

But the CBDC in China is just a checking account at the Chinese reserve. It is not a Chinese bitcoin. Its not an anonymised bearer instrument.

This is very important point Christopher makes - as a lot of the debate claims the Chinese have made a government ‘bitcoin’ - and that is not strictly the case in the way claimed.

A Big Downside - Risk & Duplication

Direct access to cybersecurity system of Federal reserve banks creates massive risk of theft and illegal access. And is unlikely to be supported on that basis.

Centralised pots of money are always risky.

Why should the Fed become a direct competitor of the banking system?

The banks already do this - and it works. We have digital money already.

I will end here as these are Christopher Waller’s key points as I jotted down - it wasn’t what I expected - he fairly outlined the case for and against CBDC. And didn’t sing its praises as a panacea.

It is worth remembering very few politicians ever understand technology and its implications.

So they make bad policies. Because they rarely ‘get it’.

A lot of political discussion is misinformed.

So a CBDC as proposed is disintermediation. i.e. removal of banks.

Is that a valid step? Is it worth the risk of centralising all money? And the risks to resilience, anti-fragility (Nassim Taleb et al), and liberty? Anonymity of cash - which Mr Waller mentioned - is a very big point also.

Thoughts? Please share freely.

Possible Implications for Cities

These are entirely some of my observations. Not Mr Wallers. IF (a big ‘IF’) a total CBDC got done this could mean:

Lower levels of banking and finance employment (more central means less bank locations meaning less staff duplication), and possibly the exit of the banking and finance from secondary city markets.

Instead banking would centre in cities like London, Sydney or Washington DC or key ‘Reserve’ cities. However, even in those cities, those functions would need far less staff.

Leeading to lower salaries, and less prestige in the banking function as a job, as it becomes a primarily fucntional not retail role. Cities could lose the ‘towering spires’ of finance and the jobs they create outside a few big centres.

Also banking would become increasingly transactional. And so value-add services would vanish. And thus without ‘cream’, bankers would be lower status and the finance role would become less important in cities, leading to changes in who occupies the ‘best’ real estate.

So it could over a period have a profound impact on city real estate.

Those are just some of my thoughts on the effects of centralisation.

They may or may not be correct.

In any case, please add your own (reasonable and moderate) thoughts on any aspect of CBDCs…

Photo by Parrish Freeman on Unsplash

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Central Bank Digital Currencies 101 …