The Banking Executive Magazine - November 2022 Issue

Evidently, central banks are scram- bling to board the CBDC train before it leaves the station. But what moti- vates this mad dash? One argument is that, by provid- ing digital access to anyone with a cellphone or smartcard, a CBDC will extend modern payments technology to the masses. But the experience of countries like India suggests that there are more straightforward ways of achieving this goal. India was able to address the prob- lem of “unbanked” by requiring commercial banks to offer no-frills savings accounts with no minimum- balance requirements. “The Prime Minister’s People’s Wealth Scheme” similarly tasks public banks with of- fering zero-balance, low-cost ac- counts to underbanked rural residents. As of last year, some 400 million “people’s accounts” had been opened. India has also created an efficient, low-cost electronic-payments infra- structure, the United Payments Inter- face. UPI is a real-time payments system operated by the National Payments Corporation, a govern- ment-sponsored nonprofit. Banks, e- money companies, and tech firms have introduced UPI-enabled mo- bile-payment apps that allow users to send money between bank accounts. But, while some 300 banks partici- pate in the system, the government remains anxious to roll out a CBDC. Perhaps the motivation is policymak- ers’ belief that a CBDC will benefit the IT sector. From the perspective of financial inclusion and ease of pay- ment, however, the unit will be re- dundant. Cross-border payments are not so cheap or simple. Moreover, govern- ments are increasingly uncomfort- able with their dependence on the dollar as the dominant vehicle for such transactions, given recourse by the United States to financial sanc- tions. The hope is that CBDCs might provide a digital alternative. Strictly speaking, there is no obstacle to exchanging different countries’ CBDCs and using them for interna- tional payments. Multiple CBDCs can run on a single blockchain. With help from the Bank for International Settlements, central banks have ex- perimented with platforms, known as mBridges, on which CBDCs can be traded. But, though we possess the technical knowhow, there are formidable po- litical obstacles to widespread adop- tion of these arrangements. Can you imagine China and the US agreeing on how to govern a platform on which their CBDCs are exchanged? Can you imagine agreement by 120 central banks? Yet another motivation for the stam- pede to CBDCs is the inchoate belief that financial and even geopolitical primacy will turn on which central banks are quickest to issue one. This view is encouraged by economic Central Bank Digital Currencies ISSUE 167 NOVEMBER 2022 the BANKING EXECUTIVE 43 “By providing digital access to anyone with a cellphone or smartcard, a CBDC will extend modern payments technology to the masses.”