Our AI writing assistant, WriteUp, can assist you in easily writing any text. Click here to experience its capabilities.
The Trilemma of Central Bank Digital Currencies
Summary
Central banks from around the world are considering issuing their own digital currencies (CBDCs) as a way to modernize payments technologies. However, a trilemma exists for central banks when it comes to CBDCs: they can have confidentiality of transactions or financial stability, but not both. Different countries have different motivations for issuing CBDCs, including extending modern payments technology to the masses and creating an alternative to the US dollar for international payments. There are political obstacles to widespread adoption of CBDCs, and China has taken steps to restrict the confidentiality of transactions using its e-CNY. In the end, CBDCs will only create another trilemma for central banks.
Q&As
What motivates central banks to issue their own digital currencies?
Central banks are motivated to issue their own digital currencies in order to extend modern payments technology to the masses, provide a digital alternative for cross-border payments, and potentially benefit the IT sector.
What are the potential benefits of a central bank digital currency?
Potential benefits of a central bank digital currency include financial inclusion, ease of payment, and the potential to supplant the dollar as the dominant vehicle for international transactions.
What are the political obstacles to a widespread adoption of central bank digital currencies?
Political obstacles to a widespread adoption of central bank digital currencies include the difficulty of getting agreement from multiple central banks on how to govern a platform on which their CBDCs are exchanged.
Is it possible to have confidentiality of transactions and financial stability with a central bank digital currency?
No, it is not possible to have both confidentiality of transactions and financial stability with a central bank digital currency.
How is the People’s Bank of China addressing the potential for individuals to use the e-CNY to evade capital controls?
The People’s Bank of China is addressing the potential for individuals to use the e-CNY to evade capital controls by requiring extensive information from users when downloading a digital wallet capable of unlimited transactions, and only requiring the user’s cellphone number when downloading a limited wallet capable of small retail transactions.
AI Comments
đź‘Ť This article by Barry Eichengreen provides a clear insight into the trilemma of Central Bank Digital Currencies and the various motivations behind it.
đź‘Ž This article by Barry Eichengreen fails to provide any concrete solutions to the trilemma of Central Bank Digital Currencies.
AI Discussion
Me: It's about the implications of Central Bank Digital Currencies (CBDCs). It explains how countries from China to Sweden are considering launching their own CBDCs, but the article argues that central banks must recognize that if they do, they can only have two of the three goals of confidentiality, financial stability, and digital currency.
Friend: That's really interesting. What are some of the motivations for central banks to launch CBDCs?
Me: The article talks about how CBDCs could extend modern payments technology to the masses, and provide an alternative to the US dollar in international payments. There's also an idea that the first country to launch a CBDC could have a competitive edge in the global economy. But there are also some political and technical obstacles to widespread adoption.
Action items
- Research the different motivations for central banks to issue their own digital currencies.
- Explore the technical know-how and political obstacles to widespread adoption of CBDCs.
- Consider the implications of the trilemma of central bank digital currencies for financial stability and confidentiality of transactions.
Technical terms
- Trilemma
- A situation in which it is impossible to achieve all three of three desired outcomes.
- CBDC
- Central Bank Digital Currency, a digital currency issued by a central bank.
- e-CNY
- The digital currency issued by the People’s Bank of China.
- e-krona
- The digital currency issued by the Sveriges Riksbank.
- mBridges
- A platform on which different CBDCs can be exchanged.
- People’s Wealth Scheme
- A program in India that tasks public banks with offering zero-balance, low-cost accounts to underbanked rural residents.
- United Payments Interface
- An efficient, low-cost electronic-payments infrastructure in India.