The retail case for CBDCs: public money for the public
By Jorge Zaccaro, Economist Programmer at Minka
More and more central banks are considering issuing their own digital currencies as part of their mandate to maintain monetary and financial stability, as well as in response to the increasing adoption of cryptocurrencies. It may seem at first that central bank digital currencies (CBDCs) are an entirely new concept, but a deeper look reveals that CBDCs are in fact already in circulation, because most central bank money exists in digital form. However, only financial institutions currently have access to central bank digital currency, so to be more specific, wholesale CBDCs already exist. Thus, the real question central banks are pondering is: should we issue our own retail CBDCs?
Public money for the banks. Private money for the public.
Most of the money we use every day exists as digital entries in the ledgers of commercial banks. These banks offer services to the public, but the digital balances they provide are a form of private money issued by the private sector, and not of public money—which is issued by the state. Sir Jon Cunliffe, Deputy Governor for Financial Stability at the Bank of England, defines public money as “money issued by the state to its citizens for everyday use”. However, most members of the public might not be aware of the fundamental difference between cash as “physical ‘public money’ issued by the state”, and deposits as “digital ‘private money’ issued by commercial banks”.
Furthermore, digital deposits differ too depending on who is allowed to hold balances and whose balance sheet is used to record them. Individuals can open accounts at commercial banks, but typically only financial institutions can open accounts at the central bank. This means that deposits held by individuals in commercial banks are digital private money, whereas reserves held by the banks themselves at the central bank are digital public money. But why can’t individuals, as members of the public, hold digital balances in public money? Why can’t they just open an account directly at the central bank and have access to its balance sheet? That is precisely the promise and purpose of retail CBDCs.
Retail vs Wholesale banking
Retail banking is the practice of providing financial services to individual consumers, in contrast to wholesale banking which serves institutional clients dealing with large amounts of money. This naming convention comes from commerce, where retail is the practice of selling goods directly to end consumers, as opposed to selling goods in bulk to other businesses such as retailers themselves. In that sense, central banks currently operate as wholesalers to commercial banks, which then operate as retail banks by serving end customers. Thus, retail CBDCs could imply that central banks would be providing retail central banking services, operating as retailers that serve individuals directly.
This brings us back to the central question: should central banks issue balances that could be used directly by individuals? Should they provide the public with access to their balance sheet? There are various arguments against and in favour of retail central banking that consider the future role of commercial banks, as well as more conventional architectures in which the central bank would only issue digital currency, but commercial banks would still be in charge of providing the interface to end consumers. Regardless of the ultimate configuration, we will argue that there is in fact a reason why the public sector should consider stepping in to provide basic financial infrastructure for the economy.
Public money for the public
We have been using the terms “money”, “public” and “the public” rather lightly, but what do we mean by them exactly? What is money? What is the public? And what is public money? Money is information about what we owe each other, created by promises to pay we make to one another. Public money is information about what the public sector has promised to pay, using instruments such as national banknotes, treasury bills and government bonds. The public aspect of money is determined by who issues it, not by who holds it, so when a private sector company holds cash, it holds public money, but when a public sector institution has deposits in a commercial bank, it’s still private money.
Regarding “the public”, you can think of it as “public opinion”. As Martin Gurri explains, “the public” is not necessarily equivalent to “the people” or “the masses”—it is a collective, yet it’s not a fixed body of individuals. By interleaving the terms “public” and “the public”, while trying to make their dividing line less blurry, we have intended precisely to make this point: public money should be directly accessible to the public. Central banks, as members of the public sector, could provide the infrastructure that directly serves the public, much like other branches of the government building infrastructure projects for education, transportation, and healthcare.
Public infrastructure for the public
Citizens in most countries expect their governments to build public infrastructure and offer services using taxpayer funds. Some of that infrastructure is visible and tangible—such as parks and roads, schools and hospitals, bridges and highways—but some of it is more abstract, more software than hardware, such as institutions, trade agreements and legal frameworks. In both cases, public infrastructure is often crucial for private businesses to operate effectively. But now that the modern economy relies less on bricks and more on bits flowing through the Internet, should we not expect governments also to provide some of that basic infrastructure for online commerce, namely, digital money and payments?
Although most central banks today operate independently from the government, they are still part of the public sector, they are still part of the state. But as pointed out earlier, central banks currently offer public infrastructure only for wholesale money, not for retail money. If the essential role of the central bank is to provide the monetary and financial infrastructure that serves as a stable, level playing field for private sector participants to conduct commerce, such public infrastructure should also be available to the public, not just to commercial banks. Central banks, as a crucial part of the public sector, should thus consider retail CDBCs as a way to continue serving the general public.
But how should the public sector go about building this infrastructure? Should it develop it in-house and open it to the public once it’s completed? Or should they take the route of public-private partnerships to seize the expertise of the private sector and iterate faster in this rapidly changing technical domain? The public sector already hires private firms to develop infrastructure projects, and they could do so for public money and payment rails too. Private firms would certainly have to follow safety guidelines and meet security standards to guarantee the robustness of the platforms, but that is no different than making sure that only the best private construction firms develop the infrastructure of the country.
Infrastructure comes with rules
If central banks decide to go ahead and create their own retail digital currencies, such public infrastructure will certainly come with rules and regulations like any other public good. When we drive a car on the streets or highways, there are traffic rules like speed limits and parking areas that we must follow, lest we get a fine, our vehicle is towed away, or even worse, we lose our driving licence. Similarly, using money and payment rails provided by the central bank would be subject to restrictions determined by monetary and fiscal policy, as well as different law enforcement regulations for consumer protection, much like traffic rules are intended to protect pedestrians and other drivers sharing the same infrastructure.
Having rules at the infrastructure level is not just about restrictions though. Once we can attach rules to money, we can make it programmable. Public infrastructure for programmable money would mean that we could program business logic at the central bank level. Automated payment flows, for example, could be implemented by adding rules and instructions to individual balances to tell them when and where to go. But so could automatic fine collection and negative interest rates, which are less attractive value propositions for the public. Central banks will have to strike the right balance between programmable money for business logic, and programmability for law enforcement or monetary and fiscal policy implementation.
A network for programmable money
Now that we live in an Internet age, the public is organised as a network, yet public money is still predominantly hierarchical. If public money is to really serve the networked public, its mode of organisation must adapt to better match that of the connected world. But if money is a layered system (Bhatia 2021) and is inherently hierarchical (Mehrling 2010), how can public money ever exist as a network? How can it be made of both layers and peer-to-peer connections? The answer is both sociological and technological: money is a social (network) technology, and network money can exist in layers too.
Bitcoin is living proof of the public’s demand for network money, the type of money that is not merely transferred through a computer network but more importantly created by a network in a programmable way. But the ultimate value of programmable money will depend largely on the programs we write for it, on who writes those programs, and what kind of infrastructure they are executed on.
It is now time for central banks to decide whether they will satisfy part of the demand for network money with public money, and provide some of that infrastructure and programs as a public good, or if they will leave this unstoppable revolution in digital money entirely for the private sector to build out in a decentralised way.
Global Banking & Finance Review
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