CBDC Risks Becoming a Gigantic Flop

If Central Bank Digital Currencies (CBDCs) do not solve a real problem, then they will fail. In a recent paper by Peter Bofinger and Thomas Haas, Professor for Monetary Policy and International Economics and Research Associate and Chair for Monetary Policy and International Economics respectively at the University of Wurzbürg, they throw doubt on whether central banks have found a compelling need for CBDCs.

The paper touches on opportunities to create a solution for payment service providers, such as Diem, to hold collateral, to address inefficiencies created by payment duopolies or to help the unbanked with digital payments. The paper does not suggest whether these represent a sufficiently compelling need.

Evaluation questions

This article looks at the work being done on CBDCs through the prism of two lenses: 

1. What is the market failure that would justify central banks entering business areas so far operated by commercial banks and private retail payment system providers?

2. Are the options discussed so far by central banks attractive enough for CBDCs to compete successfully with the products offered by private providers?

The CBDCs being considered at the moment are as either new payment or settlement objects from the central bank and/or new payment infrastructure or systems operated by the central bank. If a token is being offered, then the solution is a new retail payment system which does not necessarily need a deposit held at the central bank.

The authors evaluate CBDCs using microeconomics and ask a further two questions:

  • Allocative efficiency: are the objectives of the CBDC already met by the private sector?

  • Attractiveness for users: whether the CBDC is working within existing systems or running on parallel but separate systems, does it compete with the existing solutions sufficiently well to attract users?


The authors apply these measures to a series of scenarios:

  • A retail CDDC based on accounts. The authors suggest that there is no market failure being addressed here. The public is well served.

In addition, if the CBDCs limits are not greater than the deposit insurance schemes in place to protect deposits at commercial banks, why are they needed? How will a central bank provide the account services offered by the private sector?

  • Token-based CBDCs. Anti Money Laundering regulations would set such rigid quantitative limits, the authors suggest it would make these an imperfect substitute for cash.

  • Store of value CBDCs. The paper introduces the concept of CBDCs being designed purely to store value. Again, why is this needed for sums of money less than the deposit guarantee? What interest rate would be set? Does this risk the disintermediation of the banks?

The paper does see this though, as having real value for large payment service providers, such as Diem, to hold collateral.

  • Standalone payment system, eg. e-krona. This can only be used for payments to other CBDC accounts. The lack of interoperability is a significant limitation. If only a domestic system, this limits its value.

Final thoughts

The paper suggests that CBDCs should not be designed to be a substitute for cash, but as a digital alternative for global payment systems. If this is to tackle a monopoly or duopoly of a global retail payment system, the solution will need to be supranational, as PayPal is.

It sees the key advantage of CBDCs as their absolute safety. What the paper does not explain is the relevance of this for retail payments.

In countries where there is a large unbanked population, it does see CBDCs as a means to give people access to digital payments.