Bank Deposits are CBDCs
It surprisingly failed to make headlines, but last week Chair Powell announced the introduction of a US dollar central bank digital currency (CBDC).
Here's the formal announcement: "We took powerful actions with Treasury and the FDIC, which demonstrate that all depositors' savings are safe."
Got that?
Ok, fine. He didn't actually say "CBDC." But that's what he meant (even if he didn't mean to).
Because CBDCs are best defined as digital money that is a liability of a central bank.
Your bank deposits are digital, right?
And Powell just told us they are now liabilities of the US central bank.
Ipso facto, presto chango: Bank deposits are CBDCs!
Risky money business
Of course, Powell's personal guarantee of bank deposits is not yet law, so the US CBDC is an informal one.
But formal ones appear to be coming: You can see here just how popular the idea has become, with central banks around the world actively working on it.
It's a funny time to be pursuing such a thing. We've just witnessed how dependent our banking system is on the deposits it holds for us — and how quickly we can take those deposits elsewhere: SVB lost $40 billion of deposits on the Thursday before it was seized and the $100 billion of outgoing wires queued up for Friday is what prompted regulators to shut the doors.
But at least those deposits were mostly leaving for other commercial banks.
If leaving for the central bank was an option (via a CBDC), those deposits would have left the commercial banking sector entirely.
That would be expensive: A recent McKinsey report estimated that global banks would lose $2.1 trillion in annual revenue if retail CBDCs gained broad adoption.
That's nearly one-third of the $6.5 trillion of revenue banks recorded in 2022.
Seeing as we have a banking crisis once every decade or so, it's hard to imagine the system would survive losing a third of its revenue.
And yet, central banks around the world are contemplating just that.
What could they be thinking?
Ask ten central bankers and you might get ten different answers:
Hong Kong: financial innovation.
China: eliminate cash so they know what everyone's doing.
Russia: replace SWIFT.
Brazil: financial inclusion.
Japan: promote international use of the yen.
UK & EU: maintain monetary sovereignty.
Indonesia: combat crypto.
US: all of the above?
For most central banks, the allure of CBDCs is likely some mix of these.
But if they had to pick just one, it would be monetary sovereignty: Central banks fear losing control of the currencies we choose to use.
Slippery money slopes
People don't use cash much anymore: A Bank of England study on CBDCs noted that the use of cash for payments has fallen from 55% of transactions to 15% over the past decade.
Central bankers take that personally because cash is central bank money.
Bank deposits are a close substitute, but even that is starting to give way to fintech money (PayPal, Venmo, stablecoins) that's one further step removed from central banks.
To a central banker, that looks like a slippery slope: If people start paying for everything with their phones, who's to say the phones have to use the local currency?
Christine Lagarde, president of the ECB, expressed this sense of unease last week: "If we are not involved with experimenting, with innovating, in terms of digital, central bank money, we risk losing the role of [monetary] anchor that we have played for many, many decades."
CBDCs are a way to keep us anchored to central banks — by getting us to use central bank money again.
Keeping up with the Joneses
Maintaining monetary sovereignty is more of a concern for countries that don't happen to issue the world's reserve currency, which is why CBDCs are proving more popular with central bankers outside the US.
For the Fed, it seems like the biggest risk is just generally falling behind.
In China, you can exchange CBDCs between phones, without internet access. (And even without any battery charge, somehow.)
Hong Kong is exploring the possibility of using a CBDC in DeFi.
And CBDCs may already be eroding the dollar's dominant role in cross-border transactions.
Still, it's hard to imagine the US going full CBDC: The risk of draining deposits from commercial banks seems too great — not to mention the privacy concerns that have already raised political hackles.
Some sort of public-private partnership seems more likely and more consistent with US history.
Maybe tokenized bank deposits would be a happy medium?
Or maybe give fintechs like Circle a Fed master account and see what they do with it?
The Fed certainly doesn't want to give you a master account, which is what a full-fledged retail CBDC would amount to — they have no interest in managing your car loan.
But they don't want to fall hopelessly behind, either, so I expect they'll increasingly be brainstorming some hybrid options.
In the meantime, we'll just have to make do with the clunky, de facto CBDC that Powell gifted us last week.
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