The impact of Covid-19 on the development of central bank digital currencies
![](https://www.cityam.com/wp-content/uploads/2020/07/dollar.jpg?w=742)
The global pandemic that is COVID-19 has produced a range of unexpected consequences in terms of demand and supply.
From the early days of the outbreak and the shortages of toilet paper and hand sanitiser, through the demand for yeast as locked down families turned to home baking, to the excess of oil that turned WTI prices negative and the even the rumoured glut of strawberries following the cancellation of Wimbledon, some unlikely commodities have found their way into the Coronavirus-obsessed headlines.
However, before the pandemic, few would have predicted a dramatic fall in the demand for cash. Historically, in times of uncertainty, people are more inclined to hoard cash, triggering runs on the banks and a reversion to a cash economy. COVID-19 has had the opposite effect. Admittedly, the use of cash was already in decline in the developed world, with credit cards and electronic transfers far exceeding the use of bank notes and coin that moved around the system.
In developing countries too, the growth of mobile payments and remittances being transferred back home electronically from many countries’ diasporas had reduced the hegemony of cash. Even so, the Coronavirus has radically changed the perception of cash. Suddenly, cash has become a health concern in its own right, adding to the risk of transmitting the virus within communities.
Whilst there will always be an irreducible core of people who are reliant on cash to function, many who stand to be disadvantaged by the move away from cash have been given little choice. Whether by vendors refusal to take cash or by the need to purchase remotely when confined by lockdowns, groups such as the elderly and the infirm have been forced to move away from cash.
At the same time, there has been a huge increase in payments to citizens from state-based sources. Whether in the form or grants or loans, furlough payments or unemployment benefits, the number of people looking to their governments to assist them financially to get through the pandemic has increased significantly.
At the moment, these payment flows are routed via the payment and settlement systems to the commercial banking system for distribution. However, the prospect of connecting directly with the public has not gone unremarked by national treasuries and central banks.
Unsurprisingly, the eschewing of cash has not prompted a rise in the use of cryptocurrencies. After all, those who have traditionally used cash in preference to card and electronic based payments are unlikely to be adopters of cryptocurrencies. Even with stablecoins, users still require the creation of specialised e-wallets and at least an understanding of their settlement processes.
Besides, central banks, which have been at best indifferent and more often openly hostile to the rise of private cryptocurrencies, are unlikely to use them to channel the huge amount of state financing to those citizens in need of money.
The same is not true for central bank digital currencies (CBDCs). Thanks mostly to taxation but also to state benefit systems and other financial interactions between the state and its citizens and enterprises, governments already have routes to make and receive payments between them. A CBDC would make the system more efficient and allow central banks to maintain their monopoly on issuing money, whilst at the same time reducing the cost of processing payments through the traditional commercial payment systems.
It would also address the two continuing concerns about private cryptocurrencies: money laundering and tax evasion. In fact, it could assist cash strapped state treasuries in combatting non-payment of taxes, thereby augmenting their revenues.
It would also remove the intermediation role performed by stablecoins, in that the strength of the fiat currencies backing stablecoins would be embedded into the CBDC itself because it would be issued by the lender of last resort. Of course, without a basket of fiat currencies behind it, a CBDC operated by a single central bank would be as vulnerable to fluctuations as its fiat equivalent.
This is where some would point to the need for a “supranational” CBDC, perhaps operated by the World Bank, the IMF, or some other global agency. Indeed, there are tentative signs of some aid agencies looking at various forms of digital value transfer to help deliver assistance quickly to where it is needed.
That is for the future. For now at least, the efforts of central banks in developing CBDCs are predominantly domestically-focused. This is not to say that central banks are viewing CBDCs as a means of replacing commercial banking. Rather, the direction of travel seems to provide a state sponsored social utility as part a nation’s infrastructure.
This would allow those excluded from the commercial banking system, whether they are the elderly, the disabled or those on low incomes, to have access to a state sponsored and backed, democratised unitary digital currency. It would still be open for those who want the extra benefits offered by a commercial banking system, such as interest-bearing accounts, cross border payments, loans, etc. to use the multiplicity of enterprises in the traditional banking system.
The development of CBDCs in this way might even be seen as the natural next evolutionary step in the development of money. From barter to precious metals, to base metal coinage, to bank notes, each iteration of national currencies has been propelled by a crisis, be it war, economic depression, or a speculative bubble. Perhaps COVID-19 will serve as the latest crisis to serve as a catalyst for the next transition to national digital currencies.
![](https://cityam.go-vip.net/wp-content/uploads/2020/07/claude.jpg)
Claude Brown is a partner at international law firm Reed Smith in London, and co-heads the Firm’s European Fintech practice.