Ask HN: Why do we need central bank digital currency (CBDC)?

[kamroot]

Many countries', including the United States, central banks are trying to figure out Central Bank Digital Currency (CDBC). This move has accelerated after China introduced its digital currency (e-CNY).

But why do we need a digital currency when most of my transactions (presumably true for most people in a modern economy) is digital? I receive my salary via a bank transfer, make payments in grocery stores via credit cards, deposit checks via my phone by taking pictures of them, and split restaurant bills via Zelle. All that is digital - no cash is involved. Explain to me like I am 5 - What problem does a digital currency solve that is not solved by electronic (digital) transfer mechanisms of existing fiat money?

Links - US Federal Reserve working paper on CDBC https://www.federalreserve.gov/central-bank-digital-currency.htm - European Central Bank on digital currency https://www.ecb.europa.eu/paym/digital_euro/html/index.en.html - Details on Chinese e-CNY https://en.wikipedia.org/wiki/Digital_renminbi

[blihp]

People don't need it, but governments want it very badly. It would provide governments with greater visibility into and control over the money supply and flows. This would be both at the macro (arguably good) and micro (arguably bad) levels.

Just as here on HN we read from time to time about people being locked out of various online services (i.e. Google, Facebook etc.) for doing something a company doesn't like, a CBDC would allow governments the ability to effectively lock people/organizations out of their digital economy.[1] It would also allow for money that expires and can only be used for certain (government approved) purposes. (these both would have been desirable from the government's point of view for COVID stimulus payments, for example)

[1] This can already be done to a degree via the banking system, but a CBDC would provide for much more granular control.

[idiotsecant]

In short, permissioned digital currency is all the bad parts of crypto and none of the good parts, while simultaneously getting rid of all the good parts of cash. There's almost no benefit to the user that something else doesn't do better.

[phendrenad2]

> This can already be done to a degree via the banking system, but a CBDC would provide for much more granular control.

That's vague. Prove it.

[goatsneez]

A CBDC system would radically simplify the current system of intermediaries approving/checking/extracting-fee/etc shifting 0 and 1 from one digital ledger to another [e.g. https://www.bankofcanada.ca/wp-content/uploads/2021/07/sdp20...]. Under CDBC a person has open account only with a single 'independent federal/global bank', making it the only liability to government not a private institution (technically Fed would is private institution, but that is topic on its own).

The abolition of an analogue payment system (cash) is from the first principles a tragic idea regardless of the actual implementation mechanism, despite the few pros one can but forward in this argument. The system with CBDC can make money have an 'expiration date' ! This is not a theoretical construct, but its discussed as a way to 'manage' economy (and private individuals). Inflation, spending, propping up economy is fully in the hands of a government entity and can be matter of coordinating policies and laws. This alone, this principle goes against all the progress of modern times from Babylon. The opportunity for tyranny (not used lightly) under such system is limitless (I will not enumerate it here, Im just outlining an argument on a important and complex issue).

[phendrenad2]

CBDC has nothing to do with abolishing cash. Some tin-foil-hat-wearing conspiracy influencer tied the two together, but they're really wholly unrelated concepts, and it only serves to muddy the waters to try to discuss both when only one was asked about.

[neilwilson]

Normal bank accounts are on the books of the commercial banks. That requires a deposit insurance scheme to make those deposits "money good". Otherwise you end up being an unwitting investor in the bank and subject to losing some or all of your deposit if the bank lends badly.

A digital currency, at least in the terms generally discussed by central banks at the sharp end, moves your bank account to the books of the central bank, so it is always money good without the need for a deposit insurance system. The commercial bank then operates it as agent rather than principal.

There's some other stuff to do with anonymity and quite a lot of hype about distributed ledgers and the like, but largely that is all just marketing BS. The conflict between Money Laundering/Proceeds of Crime tracking requirements and Privacy laws generally stop bearer tokens in their tracks. Bearer Tokens being the direct electronic equivalent of our current folding stuff.

[amadeuspagel]

> Normal bank accounts are on the books of the commercial banks. That requires a deposit insurance scheme to make those deposits "money good". Otherwise you end up being an unwitting investor in the bank and subject to losing some or all of your deposit if the bank lends badly.

> A digital currency, at least in the terms generally discussed by central banks at the sharp end, moves your bank account to the books of the central bank, so it is always money good without the need for a deposit insurance system. The commercial bank then operates it as agent rather than principal.

You can have Fed Accounts[1] without a CBDC.

[1]: https://www.slowboring.com/p/fed-accounts

[landemva]

> That requires a deposit insurance scheme

It doesn't require it, though the existing structure uses this in part to allow banks to take excessive lending risk. It also allows depositors to not care about solvency of the bank.

[syntheweave]

CBDC removes the overheads of banking as it exists, which always had a foundational premise of limited ability to govern and coordinate directly at large scale. Private banks have all kinds of specific responsibilities and requirements to move and store money, and they extract fees from that.

The basic logic(from the perspective of the government) is that this is a further centralizing of economic power, and therefore adds efficiencies of scale.

The downside of that is basically that it closes off any remaining illusions of privacy from the state in one's financial matters. The banks were already cooperating in the existing framework, this just makes it easier. And really, I think I'm OK with this as a clarifying step. In the bad old days you were basically relying on a system that would get things wrong with no recourse: sometimes banks failed and you lost your deposit. If you actually wanted to maintain economic privacy under that system you were at the mercy of the bureaucracy, and if you wanted specifically to evade the law and taxation you would have to set up a semblance of alibi(thus laundering etc.)

The whole sphere of crypto/privacy coins doesn't really enter into this in any direct way, since the premise of those is to suggest economic ideas outside of the model of the nation state, which is actually different from a "for or against" position as is often imagined: it's just a different kind of economic technology for account and settlement, one that prioritizes keeping a consensus secure over installing a speedy arbiter.

[landemva]

Crypto is relevant because a transaction can not be censored, nor my coins arbitrarily seized.

[glitchc]

I think the answer is in your question: All forms of money you currently use online (bank-transfer, Zelle, credit card, etc.) are owned and operated by private entities. None of them are public money like cash is, backed by the central bank.

CBDC is intended to be a digital equivalent of cash, so that people have a public money option for digital purchases. It could mean anything from everyone having an account at the central bank to a card holding value that you can get from someone and tap to your phone to order an Uber.

[jsmith45]

Well it depends. Certainly eveybody having accounts at the central bank is one way to do things. They could also do something more akin to cryptocurrency, rather than traditional accounts. Honestly I half expect that.

There has also been talk of this being an offering of retail banks in the US. In order to be truly cash-like these would be quite different from normal bank accounts. Under this approach these accounts would not be eligible for many normal banking services, because people who the banks would not normally deal with (due to terrible credit, or previous bank fraud) would need to be able to get an account. Currently the banking system actually extends credit to most people with normal accounts, since people expect to be able to the money transferred to them in a reasonable amount of time, rather than needing to wait for a transaction to become non-reversal which can take a really long time.

To be truly cash-like There would need to be a rapid non-reversible transaction mechanism. If transactions could be reversed for things like fraud, then it is not really cash-like, but more like one of the various forms of traditional banking. But of course, this makes it riskier for most consumers, to the point where organizations would be discouraging people from using it if they have any choice. If you have recently tried to do a wire transfer as an individual (perhaps as part of buying a house) both the bank and the receiving party make you jump through hoops, and want you to triple verify the number, and the bank will probably ask you to explain the transaction. Largely all of this is to protect you, as there are plenty of scammers who will send fake account numbers, plus plenty of headaches that can occur if the account numbers are off by even one digit.

And wire transfers are not actually fully non-reversible! Admittedly, banks will be reluctant to even try to reverse them unless: the bank messed up (sent the wrong amount, entered a different number than you told them, etc), the receiving party confirms the reversal (like might happen if an honest person receives a wire meant for someone else, Letting the initiating bank reverse it is safer than sending it back), or you can demonstrate that you did not authorize the transfer in the first place.

And this is not even considering the privacy concerns, since unlike paying by cash, law enforcement will likely be able to trace any transactions done with the CBDC, much like it is possible for them to trace credit card transactions. After all, I strongly doubt any such current will have the privacy protections of something like monero, even if it is crypto based.

[landemva]

> like cash is, backed by the central bank.

In USA, dollars are not backed by central bank. Dollars are backed by the federal government.

[snarf21]

The short answer is we don't. The main issue we have now is that all the transfer mechanism are private and rent seeking. Most of the world has instant peer-to-peer digital transfer of money that is immediately in your bank. The FedNow is one upcoming program to end around the private interests.

People also seem to forget that banks do serve several key purposes (in addition to their anti-consumer and rent-seeking behaviors) that I don't think any central bank wants to be in the business of dealing with.

[zonethundery]

I don't think the US needs a CBDC. Availability at the retail level will suck deposits out of the commercial banking system. The Fed has some FOMO but I anticipate any CBDC to be more of a settlement tool than something like e-cny.

[Sytten]

For me that would be an effective way to target government money to people that really need it. Another comment pointed the expiring money, specialized money, etc as a distopia future but this is only if we let it become that IMHO.

There is also a utopia side to that coin where money like UBI can be easily distributed to all but can only be used to buy necessities like food, shelters, etc but cannot be used to buy stocks and prop up a bubble in the stock market like a lot of the stimulus checks were during the pandemic. One could also easily target programmable money toward low income people without needing to wait a tax statement or having to double check at the end of the year.

Programmable money is a really powerful concept and I do think it is inevitable that we will come to it at some point since it lowers of the cost of implenting economic policies and increases the speed at which they are deployed. But we do need to make sure enough laws are on the book to prevent authoritarian use. In a stable and alive democracy that should not be too much of an issue, but elsewhere...

[spaceman_2020]

India fixed this problem with “direct benefit transfer” straight to bank accounts. And this was before the current UPI system had really taken off.

Really, if a country of 1.4 billion people where beneficiaries can number more than the populations of most countries, I don’t see why you would need CBDCs at all.

[idiotsecant]

programmable money is a good thing. Permissioned programmable money is a bad thing.

[seibelj]

Government can track all money and its flows better. Can give directly to citizens without needing banks as middlemen. Can give money that “expires” - must be spent quickly to goose the economy and disappears if someone tries to save it. Can completely lock a person out of the economic system if the government doesn’t like them.

[rufasterisco]

The Economist just did an article about China's e-CNY. Not a straightforward answer to your question, but hopefully you'll extract some insight.

https://www.economist.com/finance-and-economics/2022/09/05/t...

https://web.archive.org/web/20220909015725/https://www.econo...

[spaceman_2020]

India's UPI system manages tens of billions of transactions without CBDCs. Pretty much proof that any potential benefits of CBDCs can already be achieved with existing systems.

[kamroot]

This is the piece that complicates my thinking about CDBC and digital transfer systems. What UPI does is seamless and instant transfer of Indian Rupees between parties and it is widely adopted. So why would India need, or benefit from additional CDBC? I can see how CDBC's instant transfer scheme would benefit the US which does not have digital transfer systems that are both instant and close to zero-cost.

[sebastianconcpt]

Like you are five: The main driver inevitably boils down to governments wanting you cashless and using instead a currency that provides absolute observability (hence potential for further control) of your economic activity. The political class cannot resist the temptation to use that to mine resources and obedience out of everyone.

That's why China implemented it first as the chinese communist party keeps the country under relative economic freedom with absolute population behavioral control.

Corollary?

Our societies in this other side of the world aren't supposed to be vulnerable to such totalitarian measures, but are suffering a sort of contagion of that very same driver, but implemented slowly and in a more covert way. Got accelerated and more overt lately and it will be more towards the self-evident status.

[rr888]

One goal of e-CNY is to be an alternative to USD payment systems like SWIFT which the Western governments hve used to enforced sanctions.

China has a problem with the regular currency has a lot of restrictions on it. People can't just trade CNY for USD or something else because there are controls to prevent this. China wants e-CNY to be a platform for Chinese trade also third parties outside the USD umbrella, eg Brazil with Nigeria or Venezuela trading with Iran. I dont honestly know how that is possible to do both CNY with restrictions and e-CNY which is open, but its definitely important to China and much of the world. https://www.scmp.com/economy/global-economy/article/3191393/...

[hocuspocus]

Naively, they could allow e-CNY to be exchanged for CNY but not the other way around, or am I missing something?

[lucozade]

Practically, it will make little or no difference to you.

Currently, central banks manage money supply by managing currency transfers to commercial banks and via managing the amount of cash in circulation. The commercial bank transfers are (almost) all digital. Cash, obviously, isn't.

There is reasonable reason to assume that cash will become less and less prevalent as digital payment flows become more ingrained. So central banks are looking at mechanisms to replace/supplement their retail money supply mechanism ie cash, with one that makes more sense for a more digital economy.

So, many central banks have been exploring digit fiat currencies, how they could be implemented, implications etc.

[yonaguska]

> Practically, it will make little or no difference to you.

So when the fed reserve decides inflation is too high because they printed too much money and kept interest rates low- instead of trying to "soften the labor market"/drive unemployment up and more people into poverty - with a digital currency, they can simply zap your money away. No need for financial "austerity" for the poor's to endure. What could go wrong?

This doesn't get to the social credit scores we see in use in China, and how a solely digital currency lends power to that system. We are already doing it to the market with ESG scores, wait til you have an ESG score for your personal life.

But I'm just a guy that thinks that the federal reserve just needs to be abolished. It's just a clever mechanism to ensure that monetary system doesn't let the wealth spread out too much. It's all done through cycles of recessions and booms, where they take wealth from the pockets of poor people and hand it to the ultra wealthy to consolidate more assets.

[RonaldOlzheim]

Explain to me like I am 5 - What problem does a digital currency solve that is not solved by electronic (digital) transfer mechanisms of existing fiat money?

Examples: 1: Stable cash flow (why they want a stable coin --> to monotitor for policy) 2: future projections of the economy (finance needs backing --> data is key) 3: credit scores of people 4: long term investments 5: organisations need finance in good and bad times, otherwise it is survival of the fittest but that is not what society is about.

[StanislavPetrov]

Without a CDBC the government and the central bank have a harder time tracking everything you do and controlling/authorizing/preventing how you spend your own hard-earned money.

[eternalban]

Related:

https://emmer.house.gov/2022/1/emmer-introduces-legislation-...

“Not only would this CBDC model centralize Americans’ financial information, leaving it vulnerable to attack, but it could also be used as a surveillance tool that Americans should never tolerate from their own government.”

[tadfisher]

I don't understand how CBDC would do either. I was under the impression that a CBDC would be an instant interbank transfer mechanism, so it would be replacing ACH, not bank accounts or cash. If that's correct, then a CBDC would give the government exactly the same visibility into money flow and financial information as it currently has, given that the Fed runs ACH and the central banking system.

[brewmarche]

An idea: Smart contracts for derivatives. Nowadays a lot of OTC derivatives are collateralised between parties. Collateral payments depend on each party’s valuation which might differ and may come late. You could program the valuation and transfer of the collateral.

Whether a regular person can get an CBDC wallet is another (orthogonal) question. It’s equivalent to whether regular people can open an account at the central bank, even without CBDC.

[pid-1]

> But why do we need a digital currency when most of my transactions (presumably true for most people in a modern economy) is digital?

Your transactions seem to be digital, but there are actually many complex systems and institutions involved to guarantee they're backed by real stuff that's actually worth something.

Digital currencies are all about removing this complexity.

[phendrenad2]

CBDC will never catch on. It's worse than the existing system for everyone involved. This is just clueless bureaucrats trying to show how cool they are. Not to mention corporations trying to extract more money from the government by providing CBDC services.

[nitwit005]

If everything was fine, businesses wouldn't often demand cash.

The cost of using a credit card is fees, and similarly splitting your bill with Paypal or Zelle means you are paying those firms. It would obviously be a boon to get rid of all those transaction costs somehow.

[jqpabc123]

Explain to me like I am 5

Out of sight, out of mind. You don't see it but private transaction processors (Visa and Mastercard) consume up to 3% of the transaction amount. Over the course of a year, this amounts to $50 billion removed from the economy. The merchant pays this --- and passes the cost along to you in terms of higher prices.

The money transfer system that deposits your check is old and slow and involves human labor. Unless you pay additional fees (banks love fees), it takes at least 24 hours for the deposit to be made and the system only operates during "banker hours" --- 8-5 on weekdays; no weekends, holidays or nights.

A CDBC will be fully electronic/automated with instant results and operate 24/7/365 at insignificant cost. Basically, it will speed up and put billions of dollars back into the economy.

Despite all the doomsday misinformation, no one has suggested replacing cash or checks. And no, crypto is no substitute for what a CBDC will do.

[hocuspocus]

> Out of sight, out of mind. You don't see it but Visa and Mastercard consume up to 3% of the transaction amount. Over the course of a year, this amounts to $50 billion removed from the economy. The merchant pays this --- and passes the cost along to you in terms of higher prices.

Visa and MC get only a fraction of the PSP fees. You can regulate this space and bring the fees down (like the EU did). But fundamentally, an electronic payment system isn't as simple as moving money from one bank account to another in an immutable way: that is extremely cheap already and further gains from using CDBCs would be marginal at best.

> The money transfer system that deposits your check is old and slow and involves human labor. Unless you pay additional fees (banks love fees), it takes at least 24 hours for the deposit to be made and the system only operates during "banker hours" --- 8-5 on weekdays; no weekends, holidays or nights.

> A CDBC will be fully electronic/automated with instant results and operate 24/7/365 at insignificant cost. Basically, it will speed up and put billions of dollars back into the economy.

No need for a CBDC to fix that. You just need to bring your banking infrastructure to the 21st century.

[adolph]

> A CDBC will be fully electronic/automated with instant results and operate 24/7/365 at insignificant cost.

Why would CDBC cost less if it is an improvement in value over the previous systems of credit cards, checks, and cash? From the TANSTAAFL perspective, debit, checks and cash aren't free, the cost is explicit in account maintenance fees or hidden inside the difference in interest rates between what the bank gets and what the account holder gets, plus the capital costs born by the receiver in facilities to handle pieces of paper. Since the fees are the same regardless of transaction volume, credit card has an advantage for consumers in that it is pay as you go and eliminates the personal facilities for check and cash handling.

CBDC transactions would not be costless, the question is how much, and form: flat fee, percentage, other socialization/cross subsidy. The question of how much will be driven by the cost of the service plus the transactors' perceived value of service over other mechanisms.

Likewise CBDC would not be truly instant but would have certain latency. On the payor side, for consumers the latency is an advantage--receive goods and service now, pay at the end of the settlement period or later if you pay for that service with interest charges. Why would a consumer choose CBDC if it doesn't include the loan to float between the transaction date-time and settlement date-time?

I'm not certain what the doomsday claims are, but there are tradeoffs to centralization. For example, getting de-banked becomes a heightened threat if there is no alternative. As an example, I'd offer the status of vendors psychoactive substances legal at the state but not federal level or those offering politically unfavorable goods and services [0]. Similar to the state of unbanked people everywhere, the increased reliance on more liquid payment forms brings increased risk of criminal predation since other market participants have de-risked though reduced cash holdings.

0. https://en.wikipedia.org/wiki/Operation_Choke_Point

[adolph]

Fees

> removed from the economy

This is untrue. Bank fees are not placed into landfills, figurative, literal or otherwise. At best you can say that dispositive decision making power for the money is changed from the transaction participants to the transaction facilitators. One might say that the leaders of banking orgs spend it on the frivolous, like large boats. The boatwright’s children might differ as otherwise they’d be beggars.

[amadeuspagel]

What I don't really understand here is in what sense you're suggesting a new currency. It seems that you're suggesting that the central bank replace Visa and Mastercard. But those don't have their own currency either.

[jesuscript]

We are about to enter a new age of social welfare as Gen X and Millenials enter old age. We don’t expect anyone to start dying quickly. Boomers are here too. Start doling out the coupons digitally to subsidize life. Instead of printing money constantly, devalue the coupons (social security) and set rates for what life actually cost (e.g get everyone used to accepting 1 unit for food, 1 unit being whatever the government decides). Otherwise we have to keep manipulating a real world global economy with debt printing. If we do it, China does it, and the global economy gets whacky. It’s much better if China and America and India can just get their people to start looking at 1 dollar/euro of digitally money as worth 1 piece of … food.

But I hear you saying, “no, the cake is definitely $10”. Uh, no? No it’s not.

And that’s how we can pay for everyone, by convincing everyone to stop charging each other for everything. Take care of your elders for free Westerners, like every other country.

This is roughly China’s plan. They want to directly send money to people that need it. It stops graft and the black market, but the inevitable end game is that it’s state welfare, which is the easiest currency to manipulate (vs debt markets). You all wanted capitalism to die, it will, and it’s because no one is going to die. Welfare is the dystopia no one ever told you about, not the hedonistic capitalism wolf we’ve all been crying about.

[idiotsecant]

So...price fixing? That definitely hasn't worked so well in the past.

[hmmmcurious1]

Ease of taxation

[RonaldOlzheim]

== I explain it in four economic levels, why it is critical and my personal view: == Example:

Micro: 1:Let´s say you need a small investment. Right now you need to apply for a finance structure at a bank or group of people with numbers about your projection. We have public insights right now, ´data-driven´ was the holy grail.

Meso: 2: What if you don´t have insights of the economy when crypto takes over? How is a local football club going to finance a new building? The wealth gap is increasing and clubs like that ore not self-suffienct.

Macro: 3: What happens is that the economy slows down at the economy due to indifference at the beginning of the supply chain. Many big online companies make money through adds, but if people don´t buy items to sell, then they don´t need to buy much adds, which means online companies make less money.

Meta: 4: Long-term investments are critical for any economy. You can´t hire people if you are not sure about future economic prospects. The central bank want to create stable economic growth. If they don´t know the numbers, they cant´t help. Small companies and big companies are in favour of a certain external stability, without that doing business projecting would be gambling. We don´t need that. ==

Why it is critical:

The big issue that needs prevention is that economics impact each other in a domino effect. Economies have movement up and down, the thing is that have accepted and dealt with the benefits over time much from a western perseptive and now that the global economy like america and china are more equall the impact of a downturn in china would impact america much more.

example: If war happens in another country in the world, we almost directly experience effect in other countries.

Classical economics and keynesian economics both argue about what is smart: More goverment or less goverment.

Goverment is in my eyes more a ethical motivator for the society. Goverments already impact economy through climate policy. I think that role of advocate of justice of society through economic policy could be right. That depands on the design of the decion making unit. === WHy: Tax in general is difficult, now with crypto it is going to be more difficult.

How: I think it is important that we should argue the cashflows of goverment in general.

What: I think all organisations should focus on being self-suffienct and let the goverment help those organisations with doing that for justice in society.

When & where: Less = more / more = less is my economic few. --> if something works self-suffient, try doing less = making time and capital available --> if somehting does not work = spend capital and time to make it self-suffient.

== I mean for example:

why are foodbanks not working together more effective? Why don´t we have more laws to help prevent food waste? Why don´t companies and locals sponsor foodbanks? Why are people volunteers without benefits?

I´m more worried about the people who suffer the most in economic downturns. == My point is that we can design the economy we would like to live in, we do that by developing crypto with it´s benefits, now we need to think about the impacts of the perspective from central banking. ==

[lakomen]

... mining is killing the planet, it's a big contributor. No we don't need more reasons to waste energy.

[glennvtx]

Mining isn't killing the planet either, mining is securing a ledger. These technologies are for the first time in human history, divorcing the power of the purse from governments, who have only ever abused it. It is the human rights issue of our age, rendering things like inflation and financial censorship impossible without resorting to threats of violence. They provide an open, public ledger enabling new forms of ownership in a trust-less, transparent system, we can use to organize solutions previously mired in human bureaucracy.

[hocuspocus]

CBDCs aren't cryptocurrencies.

[samkon]

Mining has nothing to do with CBDCs