Central Bank Digital Currencies (CBDCs) are fast becoming the way to go for many countries trying to digitalize their currencies and better control the digital economy.

China, considered to be the front runner in the race so far, has only success stories to share about the progress of its CBDC, the Digital Yuan.

However, researchers have weighed in into the CBDC topic, saying that the digital currencies countries are preparing will fail.

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According to these researchers, the entire business of creating a substitute for digital cash is at risk of failing because it lacks an “obvious justification.”

Explaining why CBDCs would fail

Peter Bofinger, writing for the European policy analysis publication VoxEU and Thomas Hass of the Economics department at University of Wuerzburg in Germany, argues that one reason these CBDCs are going to fail is that Central Banks are focusing on CBDCs as a medium of exchange.

Both writers state that CBDCs should rather be supranational digital currencies that act as a store of value in the international system instead of a mere medium of exchange.

According to Peter and Thomas, with the design Central Banks are coming up with for a CBDC, it will be difficult for central banks to launch a CBDC without interfering with the market.

“They have to show that the objectives which they pursue with CBDCs are currently not satisfactorily met by the private providers,” write Bofinger and Hass. “And even if public goods like financial stability or stability of the payment system are not optimally met, it is not obvious that CBDC is the adequate solution.”

The researchers also query why a citizen would want to switch from a private bank or payment system to a nationally run one when they already have insurance on their deposits?

They say Central Banks with their CBDCs can’t offer more products than a private bank competing for customers.

The type of CBDC that would thrive

Peter and Thomas state that no Central Bank have started any conversation around a CBDC that would thrive.

They say it would be a CBDC not meant for facilitating payments but for storing value.

“The demand for a store-of-value CBDC would come from firms and large investors with bank deposits of more than €100,000, which would be bailed-in in the case of a bank restructuring,” they write. “From the user perspective, this demand would depend on the interest rate for such deposits. Central banks could auction store-of-value deposits which would give them a perfect control over their amount.”

Both researchers also propose that CBDCs must be supranational with multicurrency operability and openness to payment objects that are not system-specific. They say this is because CBDCs being researched are too small in scope in an international economy, with PayPal dictating global payment tone.

The authors warn that if Central Banks stick to their current approach, the risk is high that CBDCs will become a gigantic flop.