JP Koning: In the CBDC Race, It's Better to Be Last

Nov 2, 2020 at 17:33 UTC.Is America being left behind? China is on the verge of issuing a central bank digital currency while America twiddles its thumbs.

Central bank digital currency is characterized by last-mover advantage, not first-mover advantage.

What is a CBDC?Central banks currently offer digital payments, but only to banks and other financial institutions.

A central bank digital currency, or CBDC, would provide everyone with an opportunity to get access to a digital version of central bank money.

For years, CBDC has remained a theoretical construct of white papers and central bank thought-pieces.

Recently the People's Bank of China began to pilot a CBDC, Sweden is working on a proof of concept, and the Bahamas launched its "Sand dollar" CBDC project.

While commercial banks and payment companies like PayPal are big producers of digital dollars, central banks can manufacture something that these private actors cannot: risk-free legal tender.

This same analogy applies to traveling down the risky road to CBDC.To begin with, we don't know what the effects of issuing a CBDC might have on the traditional banking system.

Some economists worry that it will magnify banking runs during crises as panicking depositors flee banks into 100% safe central bank digital currency.

A CBDC flop could undermine confidence in the most important thing that a central banker like Powell does, monetary policy.