When Tech Meets Money: the Central-Bank Digital Currency

By | May 22, 2019

Courtesy of Marcelo M. Prates

Not long ago, money was simple, central banks were all but invisible, and banks seemed like an inevitable nuisance.

Money consisted of the coins and notes carried in wallets, or the checkbook in the desk drawer. Central banks were poorly understood institutions, entrusted with the mystical power to print money. And banks were associated with the agony of waiting in line to cash a check or having awkward conversations with the loan officer when credit was needed.

While this world had been slowly dying for some time, the Global Financial Crisis sounded its death knell. Money now takes many forms, from plastic cards and reward points, to smartphone apps and cryptocurrencies. Central banks have become identified as banks’ closest allies, rescuing them from failure when things go wrong. And banks emerged as complex and unstable institutions that privatize profits and socialize losses, to the despair of taxpayers. Something had to be done.

More than ten years after Lehman Brothers’ spectacular collapse, little has been accomplished though. Banks have become fewer and larger, their missteps abound, and “too big to fail” remains unresolved. The most visible response to the Global Financial Crisis came from legislators, who passed copious legislation and promised the end of bailouts. Take the Dodd-Frank Act. It started with 848 pages, and the resulting rules and regulations have spawned over 15,000 pages—and counting![1]

This complex patchwork of rules provides plenty of reason to doubt that regulators alone will be able to prevent the next financial crisis. But all is not lost. A central-bank digital currency, or CBDC, under the exclusive control of the central bank and made directly available to anyone, would restore the simplicity of money, keep the banking system in check, and free taxpayers from ever having to bail out another bank again.

CBDC: building the model

I adopt here a specific concept of CBDC: a sovereign currency in digital format, controlled solely by the central bank and made directly available to the public, with no involvement of banks. The concept implies the end of both cash and bank deposits, as deposits of the official digital currency would be kept with the central bank.

While this model of CBDC may appear radical, it would be the most effective way to reduce banks’ unsettling monetary dominance. If the central bank were to just start issuing cash digitally, little would change. Yes, physical currency would disappear, but things would be the same otherwise, as banks would remain the primary providers of money to the public, in the form of bank deposits.

Today, money—in the sense of a generally accepted instrument to make payments and settle debt—is represented not by the cash central banks issue, but by balances held in bank accounts. For every $100 circulating in the United States, only $10 is in cash (used mostly for low-value payments). The other $90 come from bank deposits, with balances moving from one bank account to another to settle payments—even when the payment is initiated by credit card, PayPal or Apple Pay.[2]

More than that, the law favors bank deposits by imposing reporting requirements on cash transactions above certain thresholds to combat money laundering and terrorist financing. In the United States, any business receiving more than $10,000 in cash must file Form 8300 with the Internal Revenue Service and identify the payer.[3]

So, money is already digital. In the vast majority of transactions, bank deposits are the preferred means of payment—both by the public and by law. This situation puts banks in a privileged position: without them, the flow of money dries up and the economy falters.

Therefore, for a CBDC to be transformative, the central bank would have to not only issue the sovereign money digitally, but also establish a direct relationship with persons and corporations, receiving their deposits and processing payments among them. And this kind of “central bank for all” could exist in a competitive or non-competitive arrangement with banks.[4]

A competitive arrangement, whereby the central bank and the banks competed for deposits, could end up reducing rather than increasing financial stability. If market participants could transfer their money freely and quickly between banks and the central bank, bank runs could become more frequent and all but inevitable.[5]

That is why I favor a non-competitive arrangement, with a marked division of labor between the central bank, which would be responsible for issuing money and holding deposits, and the banks and other financial intermediaries, which would be in charge of allocating credit.[6]

And central banks would not necessarily have to develop a cryptocurrency or use blockchain or another kind of distributed ledger technology to implement the CBDC. Central banks are already active participants in complex networks that use existing technology to process a mass of digital transactions daily, many in real-time. We refer to this as the payments system, where all non-cash payments and transfers are centrally settled.

The estimated number of non-cash payments processed within the payments system in the United States amounted to 144.1 billion transactions in 2015, with a total value of $177.85 trillion. This means that close to 400 million non-cash payments were processed daily in 2015, or more than 4,600 per second.[7]

CBDC: a path to financial stability

Assuming that technology will not be a barrier, what would be the main incentive for central banks to adopt a digital currency as I envisage it? Financial stability is the straight answer. Because, if banks continue to be the primary providers of money, in the form of bank deposits, they will remain not only “too big” but “too important to fail.”[8]

No regulator or politician is prepared to let a big bank go down and then inform thousands, perhaps millions, of persons and corporations that they will not be able to make everyday purchases or meet payroll the following day. As the monetary system is now organized, not having access to banks means not being able to use money.

When a bank is closed, its clients lose access to their deposit balances and cannot make payments or transfer funds. Worse, without a bank teller or an ATM available, these clients cannot withdraw cash either. Even unbanked persons or small businesses using cash in their daily transactions will eventually suffer from the sudden shortage of cash.

If the structure of money and banking is not changed, financial crises will remain inevitable. And not even the best rules and the most talented regulators will be able to solve a problem that is structural and relates to the very nature of money and banking as they exist today.

Under the CBDC, this much-needed structural change can finally happen. Money—again in the narrow sense of a generally accepted instrument to make payments denominated in the official currency—is restricted to one type, the digital currency issued and controlled by the central bank. And banks become just another financial intermediary, connecting borrowers with savers, without any power over money creation and circulation.

A CBDC is an improvement over today’s monetary and banking system for three main reasons. First, the current institutional arrangement perpetuates distortions, as even inefficient or reckless banks can count on explicit and implicit government subsidies, like deposit insurance, lender of last resort and bailouts. These public guarantees lead to hefty price tags when things go wrong, as the Global Financial Crisis demonstrated.

In the first year after the collapse of Lehman Brothers, “the scale of intervention to support the banks in the UK, US and the euro-area [totaled] over $14 trillion or almost a quarter of global GDP.”[9] An update after the worst period of the crisis shows far more impressive numbers: “[t]he amounts of support that the British and US governments put behind their country’s banking systems [were] estimated at £3 trillion and $23 trillion respectively.”[10]

Second, relying on regulation to foster financial stability is overly optimistic. Rules and regulators cannot solve a structural problem that is rooted in the institutional design of the monetary and banking system. Besides, the work of regulators can be imperfect. The general failure, for example, of the Securities and Exchange Commission to effectively regulate and supervise the American securities market for most of the 2000s ended up contributing to the 2008 financial debacle.[11]

Finally, the presence of “too-big-to-fail” institutions in the financial sector goes against the essence of a prosperous capitalist system. As Daron Acemoglu, of the Massachusetts Institute of Technology, and James Robinson, of the University of Chicago, extensively argue in their book Why Nations Fail, “creative destruction” is crucial for stimulating economic progress, increasing living standards, and facilitating political participation—or, in their words, for the development of inclusive economic and political institutions.

When the government is constantly offering guarantees, even if implicit, that some private, profit-seeking institutions will not be allowed to fail, the government is impeding the continuous self-correction that is vital for constructing a more inclusive and legitimate capitalist society.

CBDC: winners and losers

The CBDC as proposed here may be the best way—perhaps the only way—to end the “too big to fail” problem and promote long-lasting financial stability. But at what cost?

Under the CBDC, the central bank would be a clear winner given the unprecedented monetary powers granted to it. Some may argue this is too much power to entrust to independent government agencies, but I disagree. As the central bank would become the sole creator and manager of the digital currency, it would be easier to set programmatic rules for the central bank to follow, making it more accountable.

More than that, the central bank would no longer need to act as lender of last resort or financial regulator and supervisor, given that banks would be allowed to fail. Under the CBDC, the central bank would be responsible solely for monetary policy and management.

The CBDC would not prevent the central bank from abusing its monetary powers though—as when the central bank violates the limitation on financing the government by monetizing the debt. But this possibility has always existed for central banks capable of issuing money, no matter its format (physical or digital).[12]

Commercial banks, on the other hand, would be the biggest losers. Under the CBDC, banks would lose a cheap and stable funding source—deposits from the public—a change that could constrain credit creation and hamper economic growth. The model of banking would have to be rethought to solve this conflict between stability and growth.

But once the transition was over and banks adjusted their business model, even they could derive benefits from the reform. Financial intermediation would become a much less regulated activity, allowing banks to operate under less scrutiny and, in turn, to reduce regulatory costs—which soared after the Global Financial Crisis.

At the end of 2018, Citigroup, for example, had 30,000, or 15%, of its more than 200,000 employees working in compliance and risk management—the percentage was just over 4% at the end of 2008. JPMorgan Chase also employs some 43,000 people in similar jobs.[13]

For persons and corporations, the results would be mixed. Gains would be significant yet more abstract. If the transactions between the public and the central bank ran smoothly, using money and making payments should be as easy and simple as using a debit card or a smartphone app today. Against this backdrop, the CBDC could facilitate financial inclusion by offering every person a safe and reliable way to receive, keep and use money.

As only the central bank would be managing the money supply and payments processing, troubles with a bank or any other financial intermediary would not disrupt payments or freeze markets. Even if a bank failed and its creditors were affected—like the creditors of any bankrupt corporation—financial markets would continue to function as usual.

On the negative side, the CBDC could lead to the end of anonymous payments and create new privacy concerns. With direct access to all monetary transactions, the government would have complete transparency into citizens’ payment history and the potential to censor certain activities or individuals. Strong statutory rules and the active participation of courts through judicial review would be crucial to keep the central bank and the government in check.


Despite some pitfalls, the CBDC presents an alternative model of monetary and financial organization that is worth considering. How soon could a CBDC be adopted then? Maybe not so soon, as the technological, social, economic, political, and legal hurdles for full implementation are many. But it only takes a crisis for radical ideas to be implemented. And a crisis will inevitably come.


Marcelo M. Prates is a lawyer at the Central Bank of Brazil and a double graduate of Duke University School of Law (LL.M. 2015, S.J.D. 2018). The views and opinions expressed here are his and do not reflect the position or policy of any of the institutions with which he is affiliated. For comments, please contact marcelo.prates@bcb.gov.br.


[1] See Levitin, A. (2016). Safe banking: Finance and democracy. The University of Chicago Law Review, 83, pp. 383-385

[2] The share of bank deposits in total money (in the sense of means of payment, including also cash) “is even higher in other major countries, at 91 percent in the euro area, 93 percent in Japan and no less than 97 percent in the United Kingdom.” King, M. (2016). The end of alchemy: Money, banking and the future of the global economy. New York, NY: W.W. Norton & Company, p. 62.

[3] See 31 U.S.C. §§ 5313-5316, 5331 (2012), and, at the regulatory level, 31 C.F.R. § 1010.330 (2017), which also stipulates that “[c]urrency in excess of $10,000 received by a person for the account of another must be reported.” Similarly, sending to or receiving from a foreign country “currency or other monetary instruments in an aggregate amount exceeding $10,000 at one time” also creates the legal obligation of reporting, according to 31 C.F.R. § 1010.340 (2017).

[4] “Central banking for all” is, in fact, the tile of a report in which the authors propose that the Federal Reserve should offer “FedAccounts” to everyone. See Ricks, M., Crawford, J., & Menand, L. (2018, June). Central banking for all: A public option for bank accounts, The Great Democracy Initiative. Retrieved from https://greatdemocracyinitiative.org/document/central-banking-for-all/.

[5] Arguing that a CBDC competing with bank deposits could increase the risk of bank runs, see, for instance, Kumhof, M. & Noone, C. (2018, May). Central bank digital currencies – Design principles and balance sheet implications (Bank of England, Staff Working Paper No. 725), pp. 14-17, 29-35. Retrieved from https://www.bankofengland.co.uk/working-paper/2018/central-bank-digital-currencies—design-principles-and-balance-sheet-implications; Löber, K. & Houben, A. (2018, March). Central bank digital currencies (Joint report submitted by the Committee on Payments and Market Infrastructures and the Markets Committee). Basel, Switzerland: Bank for International Settlements, pp. 16-17. Retrieved from https://www.bis.org/cpmi/publ/d174.pdf. In contrast, arguing that the risk of runs from bank deposits to the sovereign digital money would be manageable depending on the model of CBDC adopted, see Meaning, J., Dyson, B., Barker, J., & Clayton, E. (2018, May). Broadening narrow money: Monetary policy with a central bank digital currency (Bank of England Staff Working Paper No. 724), p. 14. Retrieved from https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/broadening-narrow-money-monetary-policy-with-a-central-bank-digital-currency.pdf.

[6] Division of labor that was also at the core of the Chicago Plan, as underscored by the prominent American economist Irving Fisher. See Fisher, I. (1936). 100% money and the public debt. Economic Forum, Spring number (April-June), p. 413.

[7] Data from Board of Governors of the Federal Reserve System. (2017, June). The Federal Reserve Payments Study 2016. Washington, DC: Author, p. 3. Retrieved from https://www.frbservices.org/news/research.html.

[8] To use the language of Mervyn King, former governor of the Bank of England. See King, M. (2010, October 25). Banking: From Bagehot to Basel, and back again. The Second Bagehot Lecture at the Buttonwood Gathering, New York, NY, p. 9. Retrieved from http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2010/speech455.pdf.

[9] Alessandri, P. & Haldane, A. G. (2009, November 6). Banking on the state (Bank of England, Speech No. 409), p. 2. Retrieved from http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2009/speech409.pdf.

[10] Kay, J. A. (2015). Other people’s money: The real business of finance. New York, NY: PublicAffairs, p. 192.

[11] On the regulatory failure of the SEC before the 2008 crisis in the US, see, for instance, Johnson, S. & Kwak, J. (2010). 13 bankers: The Wall Street takeover and the next financial meltdown. New York, NY: Pantheon Books, pp. 149-150.

[12] In any case, as Paul Tucker puts it, the “no monetary financing” rule is crucial for the legitimacy of central banks, since the rule is what prevents them from becoming more powerful than they should be, by independently deciding whether or not to fund the government. See Tucker, P. (2018). Unelected power: The quest for legitimacy in central banking and the regulatory state. Princeton, NJ: Princeton University Press., p. 290.

[13] Rise of the no men. The past decade has brought a compliance boom in banking (2019, May 2). The Economist. Retrieved from https://www.economist.com/finance-and-economics/2019/05/02/the-past-decade-has-brought-a-compliance-boom-in-banking.

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