CBDC: How Lagarde stole my Grandma's trick

My grandma was obsessed with Monopoly and PayDay board games. And she was great at it. She would “magically” win every single game by strategically tricking my sister and me with the same question: “How many old Francs is it?”. And that was even after we switched to Euros – which means two “currency generations” after the old Franc! She would always use her confusion as an excuse not to give the right amount of money to the bank.

I couldn’t help but thinking of her when I watched the speech of Christine Lagarde from the European Central Bank (ECB) on the Central Bank Digital Currency (CBDC). If I had had the chance to ask her some questions during the press conference, I bet she would have told me: “How many old Franc is a CBDC?”.

But let’s go in order.

Is CBDC realistic?

Are your thinking that the CBDC is an unrealistic scenario that will never cross the chasm¹?
If so, I’m sorry to say: CBDC will happen!

When Facebook made the announcement about the launch of Libra, all the Central banks literally panicked. They could not seriously let a social media platform take ownership of issuing money, risk their financial stability² and make people dependent on the efficiency of a private infrastructure. It wouldn’t have really been operationally resilient, would it?

CBDC is already happening

Last April marked another milestone towards the CBDC adoption. The People’s Bank of China casually announced that they were testing a digital version of its currency in some pilot cities, increasing yet again the focus on this topic.
There are serious use cases for a CDBC in retail banking (that is banking services for people like you and me, as opposed to banking services for corporates or SMEs).

The most interesting ones are, in my opinion, cross- border payments (and their lack of efficiency), and the move towards a cashless society. In this highly digitalised world, why on earth does it take seconds to send a picture of a muffin to my sister in the United States, while sending her virtual money to buy this muffin takes days, or even weeks if that’s a cheque?!

But…(or “alas, the CBDC is still in the Jail corner”)

I do concede that there are still a few challenges to overcome for a CBDC mass adoption, like:

• Finding a balance on the anonymity of the transaction – CDBC should be anonymous like cash and yet it can’t become the new rail for money laundering or other illicit uses of money.
• Finding the right distribution channel – does every single person need to open an account with a central bank to access CBDC when it is not required for cash?
• Limiting the impact on the deposits hold by banks – banks could lose both deposits and assets in equal amounts if households exchange all their deposits for CBDC (Not sure of what this means? Check the box 4 on page 37 of this report from the Bank of England)

Said that, there is nothing that the smart minds at RedCompass aren’t able to solve! We are already buckling up to help our client face this new reality. It will require some implementation change but it also create even more opportunities than what we can possibly foresee today. In maximum 5 years, you will think of me when you drink your first ever Starbucks coffee bought with CDBC 😉