The successful launch of a CBDC in an economy with an existing sophisticated payments infrastructure is going to require a compelling reason if consumers are to overcome their reluctance and use it.
For all the pilot programmes on digital currencies conducted by central banks, all the sandboxes run by fintech companies and all the thousands of words devoted to describing the benefits of a new CBDC ecosystem, there is little evidence of the killer incentive that will produce the ‘I must have one of those’ moments among consumers.
Public resistance to digital currencies
CBDC proponents will argue that consumers often do not know that they really need or want something until they actually own it. Had Henry Ford conducted extensive research prior to launching the Model T, he would have been told it was not required because people already had horses. Innovators in mobile technology were told that there was no real need for a retail version of portable military radios because of the existence of an extensive and handy network of public landline telephones.
In much the same way, many of today’s financially literate consumers armed with a bank account, a contactless debit card, a credit card and physical cash are scratching their heads about exactly what currently unmet vital need is going to be served by a CBDC.
While many perceive no real advantages to CBDC, a significant number of people in many countries go even further and consider them to be a potential threat. The most salient finding from the Bank of England consultation paper on the subject was that large numbers of UK citizens fear the implications of CBDC as a threat to personal privacy. In other research conducted around the world, there is clear and strong consumer resistance to CBDC.
Countering claims of state surveillance
At one end of the spectrum, there is irritation that the state will be able to keep an eye on where consumers buy their groceries. At the other, there is real fear that CBDC will become a repressive instrument of state power. One may argue that this is illogical given that consumers already voluntarily surrender vast amounts of personal data to private companies. Private financial institutions already – in theory – have real-time access to personal transaction data and citizens are obliged to supply reams of information to governments for everything from driving licences to paying their taxes.
Be that as it may, there is deep suspicion in many quarters that the government will garner comprehensive data from CBDC use and deploy it for malign purposes. Interestingly, this fear is not just confined to citizens of countries with a historic or current record of misuse of data by government officials.
The combination of no highly novel use cases for CBDC, coupled with profound suspicions of the uses government will make with the resultant data – and most citizens make little or no distinction between central banks and governments – is not a great context for the launch of a new fiat instrument intended for mass adoption. As things stand, retail product design and mass communication are not core central bank skills. Hence most current CBDC models envisage account and customer management will be subcontracted to the private sector, although it, to date, has manifested little enthusiasm.
To this end, commercial banks and other financial sector entrepreneurs may find they have a strong vested interest in deploying their extensive experience in these fields to assist central banks. A convincing customer proposition from the private sector will assuage a majority of consumer fears about subsequent data use. The lodestone of a compelling reason for adoption may be found in smart contract applications, offline peer-to-peer capabilities, open finance application programming interfaces, loyalty points, dedicated usages, in financial inclusion facilities or in something, as yet, completely unthought of.
The compelling innovation behind the clunky, expensive and frequently unreliable early mobile telephone was the concept of personal portable telephony, at the time revolutionary. Without totally displacing the landline, this evolved into the smartphone centred digital ecosystem we see today, creating whole new businesses, applications and usages along the way. If CBDC is to flourish alongside cash, it will need a killer app all of its own.
Philip Middleton is Chairman of the Digital Monetary Institute at OMFIF.
