Big techs are expanding their footprint in retail payments. Stablecoins are knocking on the door, seeking regulatory approval. Decentralised finance (DeFi) platforms are challenging traditional financial intermediation. They all come with different regulatory questions, which need fast and consistent answers.Below the fold I discuss the idea of CBDCs
Banks are worried about the implications of CBDCs for customer deposits. Central banks are mindful of these concerns and are working on answers. They see banks as part of future CBDC systems. But make no mistake: global stablecoins, DeFi platforms and big tech firms will challenge banks' models regardless.
Stablecoins may develop as closed ecosystems or "walled gardens", creating fragmentation. With DeFi protocols, any concerns about the assets underlying stablecoins could see contagion spread through a system. And the growing footprint of big techs in finance raises market power and privacy issues, and challenges current regulatory approaches.
Cœuré sets out three goals for a CBDC:
We have to ask ourselves why consumers would want a CBDC and what would they want it to do? The recent European Central Bank (ECB) public consultation showed that they value privacy, security and broad usability. In order to meet consumers' expectations, CBDCs need to be made to work most conveniently. Payment data must be protected. Digital functions that are not available with cash can be developed, such as programmability or viable micro-payments.The central bank that is arguably furthest along in developing a CBDC is the People's Bank of China (PBoC). Claire Jones, in Ant split says more about money than Ma, points out that their goals for a CBDC are different:
Then CBDCs should meet public policy objectives. Central banks exist to safeguard monetary and financial stability for the public good. CBDCs are a tool to pursue this through enhancing safety and neutrality in digital payments, financial inclusion and access, innovation and openness. Important questions remain. How can CBDC systems interoperate, and should offshore use be discouraged?
Technology opens up design choices. System design will be complex. It involves a hands-on operational and oversight role for central banks and public-private partnerships to develop the core features of the CBDC instrument and its underlying system. These features are: ease of use, low cost, convertibility, instant settlement, continuous availability and a high degree of security, resilience, flexibility and safety. Complex trade-offs will be addressed by central banks including how to balance scale, speed and open access with security; and how to balance offline functionality with complexity and security.
That the CCP wants access to data on people’s spending habits is not exactly a shock. Indeed, as we have long argued ... the crackdown on Ant is less about muzzling Jack Ma than it is about maintaining control over money as we transition to an almost entirely digital system of payments and settlements, and credit creation.Jones concludes:
The attack on Ant is but one of spike of a multipronged plan to maintain Beijing’s near monopoly not only in the creation of currency, but the provision of credit and the clearing of the entire economy. That plan includes a crypto ban and the launch a central bank digital currency, the design of which will create a centralised ledger granting the People’s Bank of China access to each and every single transaction done using it.
We don’t have all the answers. But the ideal is to aspire to a system that relies on trust, not on data or surveillance to manage people. It also needs to find a way to keep the corrupting forces within centralised systems in check — tools that allow anyone to opt out at a moment’s notice could be one option for doing so. Yet technological advances are going in the opposite direction, focussing on ever more gated and complex systems, that are powered by personal data, foregoing concerns over privacy in the process. The only alternatives, meanwhile, are focused on energy-intensive bureaucratic systems such as blockchain.But with total knowledge and total control comes total responsibility, as JP Konig points out in Are Central Bankers Ready for Payments Theater?. Konig imagines the scene:
If that continues, then systems that truly empower and protect individuals will never exist. And we should, eventually, prepare for versions of what we’ve seen today in China the world over.
It’s 2026, and Federal Reserve Chair Jerome Powell has just sat down in front of the U.S. Senate Banking Committee. Powell has spent the last few days preparing to be grilled by lawmakers about why the Fed recently raised interest rates.Senators can't ask these questions about physical cash. They can ask these questions of banks and credit card companies, requiring them to obey KYC/AML (Know Your Customer/Anti Money-Laundering) laws. But these are private actors, the central bank is the government.
But the questioning quickly takes a different tack.
“Why is FedSend being used by dangerous white supremacists for funding?” asks Sen. Elizabeth Warren of Massachusetts. She’s referring to the Fed’s central bank digital currency, FedSend, unveiled in 2024. “What sorts of controls do you have in place to prevent this?”
The next question comes from Sen. Mike Crapo of Idaho., who wants to know why FedSend is being used as a payment method on porn websites hosting BDSM and underage porn.
Another senator asks: “FedSend has become the most popular means of payment for fraudsters running tech support and IRS scams. How do you plan to protect seniors?”
After a CBDC has been built, it will have to be governed. The central bank will have to write out its terms of service, or TOS – a payments constitution that describes who can use it and how.In the past, the tasks of enforcing the rules, determining in detail what the rules were, mediating disputes about the rules and about individual transactions were delegated to payment processors, the banks and credit card companies. So when things went right, they paid the cost of these functions. And when things went wrong, they paid the legal and PR price. Konig uses this example:
This TOS will become ground zero for all sorts of political disputes. Are central bankers like Jerome Powell ready to enter the messy politics of governing a retail payments system?
It decides to go with a very simple TOS, something like: “FedSend cannot be used for illegal activities,” and that’s it. Even this bare-bones payments constitution will open the Fed to attack. Fed officials will now have to arbitrate the line between legal and illegal, and that’s much trickier than it sounds.
OnlyFans’s recent ban of explicit porn (which was rescinded after a few days) illustrates how divisive payments governance can be. We still don’t know why OnlyFans decided to hack off one of its own legs, but it may have had something to do with the rules of the underlying payments systems on which the site relies. The media fallout was a huge PR disaster for all involved, including Mastercard. If FedSend was part of the picture, it, too, would have been dragged into the controversy.Konig poses a choice for the central bank. It can brand the mechanism as a Central Bank Digital Currency, taking on the roles and responsibilities of current payment processors. Or it can delegate these roles, as at present, to non-governmental entities such as banks and credit card processors. He writes:
But at this point FedSend would be like all of the other Fed products that are offered wholly through banking intermediaries, like FedACH or FedWire. The banks repackage them, or white label them, as they see fit and set the price.The point would be that the central bank would own a database of all transactions. That's clearly what the PBoC wants. But owning that database, and thus having the power to refuse or delete transactions, would in practice mean accepting the responsibilites the central bank tried to delegate. Konig thinks this is a choice, but in a democratic society I don't think it is.
At which point the Fed has become just another dumb pipe, one with no control over the final product. It’s not really a CBDC anymore. It’s just another bank product. What’s the point?