The Banking Executive Magazine - November 2022 Issue

Cryptocurrency and political tensions between the US and China, and by China’s rapid move toward CBDC issuance, which is seen as threatening dollar domi- nance. But this argument assumes that CBDCs will be used across borders and that they will supplant the inter- national interbank market as the ve- hicle for international transactions. But, given the political obstacles im- peding a common trading platform for different CBDCs, this is unlikely to be the case. Ultimately, central banks face a “trilemma” when contemplating CBDC issuance. They can have only two of three things: a digital cur- rency, confidentiality of transactions, and financial stability. European cen- tral banks, when issuing a CBDC, will have to respect the EU General Data Protection Regulation, the strictest data privacy law in the world. If they issue digital currencies through authorized intermediaries, their users will enjoy confidentiality. But the authorities will then have limited ability to track transactions using their CBDCs. People using currency in transactions already enjoy anonymity, of course, but one can imagine other transac- tions involving bank transfers being executed using CBDCs instead. Cen- tral bankers and others worry that commercial banks will be disinter- mediated – that transactions com- pleted by bank transfers will shift to CBDCs. With confidentiality of trans- actions, this could allow financial risks and imbalances to build up out of sight of regulators. This is why the European Central Bank is wisely moving only slowly in the direction of CBDC issuance. The People’s Bank of China is not re- quired to offer confidentiality. When downloading a digital wallet capable of unlimited transactions, it requires extensive information from the user. When downloading a limited wallet capable of small retail transactions, it requires only the user’s cellphone number, and promises, for what it’s worth, not to track his or her transac- tions. We shall see. These measures should prevent individuals from using the e- CNY to evade China’s capital con- trols, spirit large amounts of money out of the country, and otherwise act in ways that threaten financial stabil- ity. As for whether people will trust China’s CBDC, given these condi- tions, only time will tell. International finance, as scholars of exchange-economics know, is fraught with trilemmas. Instead of averting them, CBDCs only create another. the BANKING EXECUTIVE 44 ISSUE 167 NOVEMBER 2022