CBDC: building an intuitive understanding of its implementation

Central bank digital currency and its implementation are now at the forefront of discussions and planning at central banks around the world.

The topic has gained serious attention recently in part due to the efforts of the private sector to create its own global digital currency. But these private sector efforts are finding difficulty gaining critical traction because they are missing the silver bullet which remains within the purview of central banks - the ability to issue and manage the country's fiat money supply and ultimate unit of settlement.

After all, it was central banks and governments that created the IMF, World Bank, international gold standard, and indirectly, special drawing rights. The complications of cross border settlement and global digital currencies are not new topics, and central banks have the scars to prove it.

The conversation that has been long overdue, though, is how we should think about the intertwined and non-intuitive concept that monetary history has left us with. That is - the inherent obfuscation of central bank money within a commercial banking system. The idea that the numbers in our chequing account are actually commercial bank liabilities. That we can, on demand, ask for these liabilities to be converted into central bank money. But not too much per day. And if everyone asked for this liability to be converted to central bank money at the same time, banks would effectively become insolvent, and the banking system would collapse. We have built a house of cards with super glue, and given our own citizens the solvent that can dissolve the very nature of the structure itself.

In a recent OMFIF article, a senior central banker was quoted as saying "We are about to have one of those discussions about what money is that comes around every 100 years or so". And like other movements that seem to come out of nowhere and consume the human consciousness - the discussion of CBDC is paradoxically right on time, and long overdue.

This blog series will present some personal thoughts around central bank money and the possibilities, and consequences, that lay ahead of its digitalization.