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After the Bell: Central banks and the crypto dilemma — the ABCs of CBDCs

After the Bell: Central banks and the crypto dilemma — the ABCs of CBDCs
Tim Cohen
By Tim Cohen
15 Jan 2025
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I think the relationship between central banks and crypto follows the well-known five stages of grief: denial, anger, bargaining, depression and acceptance.

What do central banks want with crypto currencies? This is a more fundamental and critical question than many imagine. If you think about it, there is no bigger threat to the writ of central banks than crypto, which in concept, at least, presents itself as an alternative to central bank money-issuing monopolies. Instead of the central bank printing currency, here is a dastardly, subterranean private group doing the same thing. The cheek of it! 

From a structural perspective, it is kinda funny. Central banks are, by definition, rulers of the roosts occupying the castle crenelations on the top of the financial system. They are accustomed to having no competition; they are not even responsible in most cases, in a direct sense, to the government of the day, democratic or otherwise. 

The notion that anyone — however minor and pipsqueak — could detract in the least from that hallowed status is just incredible. The core of what central banks do is to issue currency, and not only that, but to issue currency exclusively in a geographic area. But here’s some weird upstart who neither wears a suit and tie, nor attends the IMF conference in Washington, and who doesn’t actually exist (as far as we know), doing essentially the same thing. 

I think the relationship between central banks and crypto follows the well-known five stages of grief: denial, anger, bargaining, depression and acceptance. At first, central banks thought crypto was something to be ignored or, to put it another way, denied. The thinking was that it would just go away of its own accord when the mists lifted and the value collapsed. So long as there weren’t too many people hurt, it would be, from a financial perspective, a non-event.

Outright hostility


As crypto got traction, the attitude changed to outright hostility — the anger stage. Several governments around the world, with the support of their central banks, have banned not just the purchase of cryptocurrencies, but their sale, use, or possession. The most notable is China, where all crypto transactions are illegal — something imposed not by the government but significantly by the People’s Bank of China in 2021. Algeria, Bangladesh, Egypt, Nepal and Morocco, among others, have all banned crypto. No authoritarian regime likes its sovereignty threatened.

Then somewhere along the line, there was a change of heart and the bargaining stage began. Rather than trying to suppress crypto, central banks considered the idea of trying to smother crypto with love instead of hate. As the size of crypto holdings started to become significant, it became more apparent that trying to fight this rising tide was likely to come up short. Banks started taking the “if you can’t beat ’em, why not join ’em?” approach, acknowledging some of the great advantages of the system.

Hence, a new idea emerged: a bank-authorised crypto called Central Bank Digital Currency, or CBDC for short. One of the big concerns for central banks is not only the creation of money, but its flow. And one thing nobody could deny about crypto is that it flows like baby oil at a P Diddy “Freak Off” party. 

And there are a whole bunch of other advantages of crypto, particularly in combination with the blockchain system, to central banks. Think of the payment system advantages: more accurate monitoring, friction-free cross-border payments, data collection and even advanced anti-money laundering. 

And there is a negative side to all this, too. If central banks do not get involved and issue their own CBDC, there is a chance they will be conceding the ground to bad players. In extreme cases, there might even be financial stability risks. Central banks could be disintermediated. Frightening!

So now, one imagines after a little bout of depression, we have come to the bargaining stage. Many central banks have in effect issued digital versions of their own currency. Nigeria has issued the eNaira and Russia has issued a digital rouble. Nations with weak currencies are clearly keen to be seen as being on the cutting edge here in the hope that some of the credibility of crypto will rub off on them, which is in itself an amazing about-face. Caribbean nations have been particularly keen: The Bank of Jamaica has introduced the Jam-Dex, and Bahamas (bless them) have introduced the “Sand dollar”, mimicking the shell of the same name that was once used as currency. Even India and China are piloting new systems. 

Digital version of fiat


But what are these really? I suspect they will just be digital versions of the existing currency on top of a distributed ledger of some sort. They will be the digital version of fiat. They will have the huge advantage of not requiring the actual distribution of physical cash. But huge volumes of cash — the majority — already move without any physical exchange of actual money, particularly at the wholesale level.

The big question is whether central banks will allow their digital currencies to differ in price from the currency they oversee, and the answer to that, as far as I can see, is absolutely not. What this means is that CBDCs miss the point. The precise aim of crypto customers is to be free of the ability of central banks to undermine the currency on the instruction of the government of the day. Hello, Zimbabwe. And Türkiye. And Venezuela. And many others.   

There are two things that have really changed the context in recent times: one is inflation, which has made the argument of crypto bros more compelling. And then, of course, there is US president-elect Donald Trump’s embrace of crypto, which suggests the world’s biggest economy will see Bitcoin, at least, become a much more integral part of the financial system.

Overall, I do think CBDCs have a future, just probably not as big a future as central banks might hope. DM

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