Regulation and CBDC (commercial bank digital currency)

You can't throw a yap stone these days without hitting a pundit talking about CBDC. And while the talk is everywhere, the currency is nowhere (no, a CBDC issued by a surveillance state with capital controls, is not really a CBDC).

So here I am, adding my two cents for what it's worth (nothing, actually, since we started rounding in Canada, but I digress).

The key question that central banks are contemplating? Is it worth it. Is the status quo - prone to crisis as it is - so unbearable that an entire rethink of the monetary system is required? Is it worth the risk of dis-intermediating banks and potentially impacting credit allocation in the economy? While fretting about how to ensure inclusion, safety, and soundness?

Some proponents of CBDC will say that it is necessary to fix a fatal flaw. A flaw that allows private banks to own the retail payments space while bank notes inch closer to anachronimity.

But ultimately, it is the citizens of a country for whom the intended benefits of CBDC must accrue...and citizens probably don't care about retail CBDC. Most probably don't even differentiate between their deposit account and the banknotes they can freely withdraw. They ultimately have confidence in the central bank and government to regulate the existing banking system effectively, and to provide the illusion that commercial and central bank money are one and the same (see deposit insurance).

A wise bumper sticker once said that "Technology is the answer. Now what is the question?" Well, when it comes to the question of how retail payments should evolve, perhaps regulation - not CBDC - is the answer.

For example, fractional reserve banking could be essentially eliminated by adjusting capital and reserve requirements. Central banks could return to their role in determining sectoral credit allocation limits. Settlement accounts could be given to retail payment service providers on the central bank's balance sheet (to allow settlement in central bank money). Deposit insurance could be increased. Stronger consumer protection laws could be introduced by government. Regulation around open banking, privacy, and money laundering could be strengthened, and the list goes on. The central bank and government could potentially achieve all of the potential benefits of a CBDC...without introducing a CBDC.

So perhaps central banks should just re-brand CBDC to regulated 'Commercial Bank Digital Currency'. Which we've had for over a century. And for which government continues to evolve its regulatory framework.

So is regulation of commercial bank digital currency the answer? It's a good question.