Central bank digital currencies and the future of monetary sovereignty

ABSTRACT

Initiatives to develop central bank digital currencies (CBDCs) have accelerated dramatically across the world in the last few years. What is their significance for longstanding scholarly debates about the fate of monetary sovereignty in the digital age? Public officials themselves state that a central reason for these initiatives is to defend monetary sovereignty against threats emanating from the growth of private digital currencies, foreign CBDCs, and the displacement of state issued cash by private digital payments instruments. They (and others) highlight how CBDCs could even strengthen monetary sovereignty by bolstering financial inclusion as well as enhancing the state’s capacity to monitor and control monetary transactions and conduct monetary policy. In these ways, CBDC initiatives cast doubt on arguments that suggest the digital currency revolution necessarily challenges monetary sovereignty. However, critics of that line of argument also need to be cautious because CBDCs are already attracting much political opposition. Even if that opposition is overcome, CBDCs may be implemented in constrained ways or be unsuccessful in meeting their goals for other reasons. In short, CBDCs may hold the potential to defend and even strengthen monetary sovereignty, but it is far from clear whether this potential will be realised.

KEYWORDS:

• Central banks
• currencies
• digital
• monetary sovereignty
• central bank digital currencies
• technology

1. INTRODUCTION

Initiatives to develop central bank digital currencies (CBDCs) have accelerated dramatically across the world in the last few years. This new form of currency enables the general public to hold and transact central bank money in digital form, rather than as physical cash.¹ According to a 2021 survey of 81 central banks (representing jurisdictions with 94 per cent of global economic output), 90 per cent of these institutions were already exploring the issuing of CBDCs and 68 per cent anticipated issuing such a currency for the general public in the near future (Kosse & Mattei, 2022). By August 2023, at least eleven countries have fully launched CBDCs.² Many other countries have been running detailed pilot programmes, including China, whose recent experiments have involved over two hundred million people. Both the US Federal Reserve and the European Central Bank – the issuers of the two leading international reserve currencies – have also held public consultations on the topic.

Although scholars have begun to analyse the CBDC initiatives of specific countries (Aggarwal & Marple, 2020; Campbell-Verduyn et al., 2021; Gruin, 2021; Huang & Mayer, 2022; Rosales, 2019), much less attention has yet been devoted to their wider significance for longstanding scholarly debates about the fate of monetary sovereignty in the digital age. Those debates date back to the 1990s when new kinds of digital money in the form of prepaid ‘smart cards’ emerged alongside the growth of online shopping and payments. At the time, prominent scholars such as Stephen Kobrin (1997, p. 77, 72) argued that this new private ‘electronic cash’ would undermine ‘territorial sovereignty’, even noting ‘at the extreme, if … private currencies dominate, currencies issued by central banks may no longer matter’ (see also Kobrin, 1997, p. 77, 71; Cohen, 2001). Predictions of an impending decline of monetary sovereignty gained further traction with the 2009 invention of Bitcoin, its rapid growth alongside that of other private cryptocurrencies, as well as Facebook’s dramatic 2019 proposal to create its own global currency called Libra.³

On the other side of the debate have been scholars who question whether the implications of the digital currency revolution are so dramatic. Kobrin’s early argument, for example, was challenged by Eric Helleiner (1998, 2003) who argued that it underestimated the ability of states to adapt and respond to the digital currency revolution in ways that defended and perhaps even strengthened their monetary sovereignty. More recently, others have called attention to the ways in which states are starting to use their regulatory powers to constrain the growth of private digital currencies or even ban their use altogether. Indeed, even a powerful firm like Facebook was forced to abandon its digital currency project in 2021 in the face of widespread opposition from regulators.⁴

The growing official interest in CBDCs has received very little attention in this debate to date. To be sure, in his critique of the declining sovereignty narrative, Helleiner (1998, p. 406) noted in passing that states might respond to the digital currency revolution not just with ‘various regulations on the private issuers of this money’ but also through ‘the issuing of these new forms of money themselves’. But the former has subsequently received much more attention than the latter in discussions of the future of monetary sovereignty in the digital age. Now that public authorities across the world are suddenly pursuing the latter option, it deserves much more scrutiny. Specifically, three important questions need to be addressed: (1) To what extent is the defence of monetary sovereignty being invoked by policymakers as a rationale for CBDC initiatives? (2) How effective might CBDCs be in supporting monetary sovereignty? and (3) What are the prospects for CBDC implementation?

This paper addresses these questions, advancing three arguments. First, we show how the ‘monetary sovereignty’ rationale for CBDCs is, in fact, very prominent in official circles. When supporting CBDCs as a defence of monetary sovereignty in the digital age, public authorities cite threats coming not just from the growth of private digital currencies, but also from the prospect of foreign CBDCs and from the displacement of government-issued cash by private digital payments instruments. Second, although CBDCs will have limited impacts in some countries, they have the potential to do more than just defend monetary sovereignty in many contexts. Indeed, we highlight how policymakers (and other analysts) have identified a number of ways in which CBDCs can even strengthen monetary sovereignty, namely by bolstering financial inclusion as well as by enhancing the state’s capacity to monitor and control monetary transactions (including cross-border ones) and conduct monetary policy.

These first two arguments suggest that CBDC initiatives pose a serious challenge to scholarship which portrays the digital currency revolution as eroding monetary sovereignty. However, it would be premature to conclude that this potential of CBDCs to defend or strengthen monetary sovereignty will necessarily be realised. As a third and final argument, we caution that the prospects for CBDCs implementation are still quite uncertain. In many countries, CBDCs are already attracting much political opposition. Even if that opposition is overcome, CBDCs may be implemented in constrained ways or be unsuccessful in meeting their goals for other reasons. As a result, we conclude that it would be premature to reach any definitive conclusions about the full significance of CBDCs for debates about the fate of monetary sovereignty in the digital age.

To develop these arguments, we have consulted a wide range of sources. In addressing the first question, we adopted a qualitative process tracing methodology that involved analysis of publicly available official texts relating to CBDCs (only a small portion of which are cited in this paper itself). These were found in policy papers, other official documents, speeches, and media from around the world, and most were those of central bank officials (who have dominated official debates on this topic). Our analysis of the second question drew partly on these same sources, but also on a broad survey of wider literature about CBDCs from non-official sources, both scholarly and more policy-oriented (once again, only some of which is cited). These official and non-official sources provide extensive evidence on how policymakers perceive digital money, the problems it raises, and how they believe CBDCs might address those problems. The final question is a more speculative one that we address in a more interpretative way that also drew on these sources.

2. THE DEFENCE OF MONETARY SOVEREIGNTY AS A RATIONALE FOR CBDCS?

To what extent is the defence of monetary sovereignty being invoked by policymakers as a rationale for CBDC initiatives? When reading official rationales for their new work on CBDCs, it is striking how often policymakers themselves invoke this issue, including central bankers whose focus is usually on more narrow economic topics. As Bank of Canada official Skylar Brooks (2021, p. 1) puts it, the ‘monetary sovereignty rationale' for CBDCs is very prominent in official discourse. Brooks (2021, p. 1, 3) himself emphasises how officials have seen CBDCs as a mechanism that ‘could help safeguard monetary sovereignty against emerging threats’. He highlights that ‘the main perceived threat to monetary sovereignty today is currency substitution, which occurs when domestic residents shift from using the official currency to an alternative denominated in a different unit of account’.

Currency substitution threatens what Brooks (2021, p. 1) calls ‘the privileged role of domestic currency’ within a country’s monetary system. In its purest form, this conception of monetary sovereignty refers to a situation where the principle of ‘One Country/One Currency’ exists within the territory of the state, with the official currency exclusively serving the three main functions of money domestically: medium of exchange, store of value, and unit of account (Cohen, 2001, p. 206).⁵ ‘Territorial currencies’ of this kind are a relatively recent creation, emerging for the first time only in the nineteenth century. Enabled by the infrastructural power of new nation-states and the application of industrial technologies to currency production, their initial construction was driven by multiple goals relating to fiscal consolidation, macroeconomic control, the building of integrated markets and even the cultivation of collective identities. The resulting monetary sovereignty was, however, rarely absolute and often faced challenges from currencies issued by private or foreign authorities (Helleiner, 2003). In this sense, the novelty of contemporary threats to monetary sovereignty should not be exaggerated. Many of the same goals that drove the building of territorial currencies also continue to be cited by public authorities who defend monetary sovereignty in the contemporary age.

What specific threats are policymakers invoking to explain their growing interest in CBDCs? The risk of currency substitution stemming from the growth of private digital currencies is one. But the focus is not on Bitcoin because its unstable value and high transaction costs as a means of payment limit the threat it poses (Engert & Fung, 2017; G7, 2019, p. 7). Instead, the much more important justification for the official interest in CBDCs has been Facebook’s announcement of its Libra proposal in mid-2019.

Policymakers have depicted Libra as a more serious threat to their monetary sovereignty partly because it was designed to be a ‘stablecoin’ whose value was fixed to a basket of leading national currencies and backed by a reserve of assets such as US Treasury bills.⁶ They have also highlighted how the potential attractiveness of Libra as a medium of exchange was augmented by the global presence of its issuer. As Benoît Cœuré of the European Central Bank (ECB) told a conference in September 2019, ‘Facebook’s large installed customer base suggests that Libra could be the first private initiative to have a truly global footprint from day one’ (Cœuré, 2019). Faced with that prospect, prominent politicians, such as the French finance minister Bruno Le Maire, quickly warned that the ‘monetary sovereignty’ of states was now ‘at risk’ (Le Maire, 2019a). Le Maire also expressed clearly the way in which CBDCs were seen by officials as the key mechanism to defend monetary sovereignty in this context: ‘we should consider the creation of central banks’ own digital currencies … we want financial innovation to respect the sovereignty of states. Neither political nor monetary sovereignty can be shared with private interests’ (Le Maire, 2019b).

In November 2019, the Bank for International Settlements (BIS) established a special unit to support central bankers’ work on CBDCs for the first time, headed by Cœuré. Throughout 2020, it also worked with the Federal Reserve, ECB, Bank of Canada, Bank of Japan, the Bank of England, the Swiss National Bank and Sveriges Riksbank to produce a joint report on CBDCs in October which warned of the risks to ‘monetary sovereignty’ from stablecoins such as Libra (Group of Central Banks, 2020, p. 8; for the history of this group see Carmichael, 2020). Other central banks also accelerated their work on CBDCs at this time, including the People’s Bank of China. In early July, the director of its research bureau, Wang Xin, noted that his institution was paying ‘high attention’ to the Libra proposal because of its potential threat to China’s sovereignty (quoted in Tang, 2019; see also Chorzempa, 2021, pp. 196–97). Since then, Chinese officials, such as Mu Changchun, director-general of the People’s Bank of China’s Digital Currency Institute, have continued to emphasise that their CBDC project is designed partly ‘to protect or safeguard monetary sovereignty’ (quoted in Hall, 2021).

Fears about Libra and other potential stablecoins were also widespread among officials in other ‘emerging economies’. Many of these countries already grappled with currency substitution vis-à-vis the US dollar and they worried about a further undermining of their monetary sovereignty from these easily available stablecoins. The former governor of the Reserve Bank of India, Duvvuri Subbarao, summed up these fears well in early 2022 when discussing the growing interest in CBDCs among officials in these countries. He noted that ‘their biggest worry is that private cryptocurrencies will impair their own monetary sovereignty by displacing fiat money’. Subbarao noted that he was particularly concerned about stablecoins issued by large technology companies which ‘had the potential to pull transactions away from the domestic banking network and into their own ecosystems’. In his view, ‘the substitution of domestic currencies by transnational digital currencies is no longer just possible. It is probable’ (Subbarao, 2022).

The growth of private digital currencies is not the only threat to monetary sovereignty that has been invoked as a rationale for the new official interest in CBDCs. Policymakers have also noted their concern that their currencies might be displaced domestically by foreign CBDCs. This threat is more speculative than real so far, since the CBDCs that are fully in operation so far are in countries without much influence in the world monetary system. But if a country with more influence issued a CBDC, it might pose more of a threat, particularly if its digital currency quickly gained a first-mover advantage via network effects (e.g., Arauz, 2022; He, 2021, pp. 36–37; G30, 2020, p. 16). This threat has been invoked by policymakers in various jurisdictions. For example, justifying its ‘contingency planning’ for a CBDC to defend ‘monetary sovereignty’, the Bank of Canada (2020) warned of the possibility that local citizens might find foreign CBDCs attractive in the event that Canada had not yet created one. Prefacing its public consultations on CBDCs in October 2020, the ECB also highlighted the threat to the ‘monetary and financial dimensions’ of European ‘sovereignty’ stemming from ‘currency substitution’ in a context where ‘many foreign central banks are assessing the possibility of issuing their own CBDC, which could potentially also be made available to European citizens’ (ECB, 2020, pp. 11–12; see also Panetta, 2021a).

Discussions of foreign CBDCs sometimes see a slippage from the threat currency substitution poses to monetary sovereignty into wider risks to sovereignty in terms of security and autonomy. The top ECB official driving its CBDC project, Fabio Panetta (2022c), has issued the following warning: ‘the widespread adoption of a foreign CBDC would increase the risk of financial transactions being based on technologies managed and supervised elsewhere, with limited oversight by domestic authorities. A system of this kind may not have sufficient safeguards against external threats, including cyber threats. It could put the confidential data of people, businesses and states at greater risk of being misused. And it could make the information needed to counter criminal activities harder to trace’. In the European policy context, this argument links the ECB’s monetary governance to wider concerns about ‘digital sovereignty’ faced with the power of major technology firms. The head of Britain’s signals intelligence agency, Jeremy Fleming, has also warned about security risks associated with the use of China’s CBDC in 2021. As he put it, a foreign CBDC could give ‘a hostile state the ability to surveil transactions’ and the capacity ‘to be able to exercise control over what is conducted on those digital currencies’ (quoted in Khalaf & Warrell, 2021). These examples show how a loosened concept of monetary sovereignty may be used by policymakers to present CBDCs as also helping address wider issues.

In some places, officials have cited one further threat to their monetary sovereignty as a justification for the development of a CBDC: the growing displacement of state-issued cash in day-to-day transactions by private digital payments instruments (such as e-transfers, mobile digital payments and credit, debit and prepaid cards), even when the latter continue to be denominated in the official currency. The potential problem is that public uncertainty about the solvency of the many private firms offering financial services could undermine the unity of money across a state’s territory. The ECB’s Panetta cited this point prominently when highlighting the need for a digital euro:

confidence in private money – bank deposits, credit cards and e-payment solutions – rests on the ability to convert it, at par, into central bank money … . Without central bank money to provide an undisputed monetary anchor, people would have to monitor the soundness of private issuers in order to assess the value of each form of private money, undermining the ‘singleness’ of the currency … . The primary policy objective of a digital euro would be to pre-empt such a situation. (Panetta, 2021b; see also Bank of England, 2021a)

Panetta (2022b) linked this rationale for a CBDC to the idea of monetary sovereignty, arguing that ‘a strong anchor is needed to protect the singleness of money, monetary sovereignty and the integrity of the financial system’. He has also placed the idea in the context of the deep history of the relationship between sovereign authorities and money: ‘for many centuries, from ancient Greece to the Roman Empire and Charlemagne, the sovereign has always offered money to citizens – sovereign money, which is the ultimate reserve of value for citizens. We’re doing the same’ (Panetta, 2021a). This rationale also recalls how territorial currencies help to construct territorially integrated markets in the nineteenth century by eliminating currency-related domestic transaction costs (Helleiner, 2003, pp. 63–66), a benefit that present-day central bankers seek to maintain and consolidate.

3. HOW EFFECTIVE MIGHT CBDCS BE IN SUPPORTING MONETARY SOVEREIGNTY?

If an important rationale for CBDC initiatives around the world has been the defence of monetary sovereignty, how well might this new form of money serve that goal? It is important to note, right away, that the results of the recent implementation of CBDCs in some countries have been disappointing. As Eswar Prasad (2021, pp. 347–49) notes, the task of implementing a CBDC successfully can be very challenging in contexts where state capacity is weak or where distrust in monetary authorities undermines their wide adoption. The pioneering case of The Bahamas, for example, has seen only very limited adoption of the new currency amongst the population, a result that Paul Blustein (2022) also attributes to public wariness of cryptocurrencies in general. The same has been true of other cases such as Nigeria, the first African issuer of a CBDC (Osae-Brown et al., 2022). In countries that already grapple with currency substitution and low monetary sovereignty because of a weak capacity of, and trust in, the state, it is unlikely that the official currency will gain new ground domestically merely because a digital version of it has been created.

In other contexts, however, the potential of CBDCs to support monetary sovereignty is considerable. This potential relates not just to CBDCs’ defensive role of fending off the three kinds of threats noted in the previous section but also to how it may enable public authorities to strengthen monetary sovereignty in a number of ways that have been identified by officials (and others) and that provide a further rationale for some authorities to be pursuing their creation.

To begin with, CBDCs present an opportunity to bolster the state’s sovereignty over monetary transactions in its territory through what policymakers call ‘financial inclusion’. This effort to bring more people into the formal economy serves to increase the share of economic activity that is legible to the state – and hence controllable and taxable. Policymakers highlight the costs to low-income groups of being excluded from or unwilling to use the formal financial system. CBDCs are seen as a way to address this problem by providing a universally accessible digital payment method that does not have user fees or require a bank account. Specific design features of CBDCs are being developed to serve this purpose, such as ‘offline functionality’ (e.g., smart cards that do not rely on mobile connectivity), offering a range of different ways to access and transact with CBDC and promoting its use through non-bank agents (BIS, 2022, p. 100). For instance, users could buy CBDC or cash it out at convenience stores or vending machines in much the same way they currently purchase phone credit or transit passes.

Anneke Kosse and Ilaria Mattei (2022, p. 6) highlight how central banks in ‘emerging market and developing economies’ report their work on CBDCs is, in fact, ‘above all, driven by financial inclusion-related motivations’. Financial inclusion has also been a major goal behind the consideration of CBDCs in places such as the Caribbean, Nigeria, China and Ghana (Auer et al., 2022). In some cases, the objective has been to reach out to not just low-income groups but also more spatially remote populations. For example, this was an important motive for creating a CBDC in The Bahamas because its archipelagic territory ‘[makes] it unprofitable for commercial banks to have ATMs or physical branches on remote, sparsely populated islands’ (Dorst, 2021, p. 32; see also Boar & Wehrli, 2021; Prasad, 2021, p. 200; Blustein, 2022).

This geographic aspect of financial inclusion has also been cited by central banks in high income countries. For example, the Bank of Canada is interested in how a CBDC might address the problem of ‘limited access to transaction accounts in very remote parts of the country’ (Auer et al., 2022, p. 13). There have also been concerns expressed about how declining cash use risks excluding from the monetary and financial system those low-income people who have relied heavily on it and may have limited or no access to a bank account. For example, in discussing the case for a CBDC, the Bank of England noted that ‘private sector innovation and provision of new forms of money and payments could leave some groups in society at risk of financial exclusion’ (Bank of England, 2021b, p. 14). The US Federal Reserve (2022, p. 16, 8) also notes the argument that a CBDC could be ‘particularly helpful for lower-income households’, highlighting how more than five per cent of American households ‘remain unbanked’.⁷

The financial inclusion motivation for creating CBDCs has an interesting historical parallel from the time of the first industrial revolution. Before the industrial age, public authorities found it both technically challenging and expensive to produce large quantities of low denomination coins and notes. As a result, low denomination payments around the world were often made with unofficial and unreliable forms of money, such as counterfeits, privately issued tokens and various commodities (e.g., cowries). In the late eighteenth and early nineteenth centuries, however, the invention of industrial manufacturing finally made it economically and technologically possible to manufacture low denomination coins on a mass scale that were high quality and difficult to counterfeit. Similar to today, private entrepreneurs initially pioneered the production of these new ‘industrial’ coins. But states quickly appropriated this technological revolution to produce official currency and one of their key motivations was to provide more reliable money for the poor. These efforts to promote ‘financial inclusion’ with industrially-produced coins had the effect of consolidating monetary sovereignty by increasing citizens’ use of the official currency and by driving unofficial forms of low denomination money out of circulation (Helleiner, 2003, chap. 2). By enabling a further extension of the reach of official currency, CBDCs can help to strengthen monetary sovereignty to an even greater extent in the digital age.

CBDCs can also enhance the state’s ability to monitor and control monetary transactions more generally. Because CBDC transactions leave an electronic trace, unlike cash, officials have noted that they could strengthen efforts to track illicit financial activity, such as money laundering and terrorist finance (e.g., Group of Central Banks, 2020, p. 9). CBDCs might also allow cross-border movements of money more generally to be more effectively regulated. In addition to leaving an electronic trace, CBDCs can be programmed in ways that physical cash cannot; that is, currency can be issued with pre-specified conditions imposed on its use.⁸ As the BIS (2023, p. 91) notes, one of those conditions could be compliance with official capital controls (see Huang & Mayer, 2022, p. 338; Hughes, 2022, p. 16).

Chinese central bank officials have also raised the prospect of inter-CBDC cooperation to bolster compliance with ‘capital management’ regulations in each country (Hall, 2021). Similarly, the ECB (2020, p. 22) has recommended limiting foreign holdings of its future CBDC to prevent digital ‘euroisation’ abroad, particularly in countries ‘with weak currencies and fragile economic fundamentals’. In 2021, the G7 (2021, p. 11) also endorsed work on the development of cooperative ‘safeguards’, including restrictions on non-residents’ access to CBDCs, to prevent situations ‘where overseas access to a jurisdiction’s CBDC could leave other countries vulnerable to currency substitution or other spillovers’. These ideas highlight how CBDCs may enable stronger cooperation between states to uphold monetary sovereignty between them as well as collectively. Their goals include preventing capital flight and maintaining international financial stability and extend to security concerns around money laundering and terrorism financing.

Finally, officials have also noted that CBDCs could improve their capacity to conduct effective monetary policy (or what officials sometimes refer to as ‘monetary policy sovereignty’).⁹ For example, interest-bearing CBDCs would enable a central bank to influence economic conditions much more directly and quickly because its interest rate changes would immediately impact the holders of the money and also force banks to match the new rates more rapidly (Bank of England, 2021a, p. 73; Panetta, 2022a). Indeed, if an interest-bearing CBDC drew deposits away from private banks on a large scale, their role in money creation would be dramatically curtailed while that of central banks would be enhanced. That capacity would be strengthened even further if cash disappeared from the economy entirely, a development that might also enable central banks to implement negative interest rate policies more effectively.¹⁰

Even if CBDCs are not interest-bearing, they could still improve monetary management. For example, the 2020 joint report of the BIS and many central banks noted that CBDCs could be used ‘to stimulate aggregate demand through direct transfers to the public (so-called “helicopter drops”), possibly combined with “programmable monetary policy” (eg transfers with an “expiry date” or conditional on being spent on certain goods’ (Group of Central Banks, 2020, p. 8). The potential benefits of CBDCs for facilitating direct transfers to the public were brought home for some central bankers by the pandemic experience which highlighted many practical difficulties associated with getting relief payments efficiently to intended recipients (Brainard, 2021; Federal Reserve, 2022, p. 14; Group of Central Banks, 2020, p. 6; Panetta, 2022a). Chinese CBDC trials have also already included programmable features in which currency was issued with expiry dates if not spent (Auer et al., 2022, p. 20). These features recall proposals from the 1930s to increase the velocity of money by encouraging spending through ‘stamped scrip’ (which would lose its value over time unless stamps were purchased to retain its validity as money). Local stamped script experiments by municipalities and private firms were cumbersome to implement with physical cash (Helleiner, 2003, pp. 158–61), but CBDCs provide a technological means to apply the idea efficiently, including at a national level.

Julian Gruin (2021, p. 496) shows that Chinese Communist Party (CCP) authorities are attracted to the broader ways in which a CBDC can be used to shape citizens’ economic behaviour because it constitutes ‘a new data collection system that in turn enables other algorithmic technologies to be deployed to actively reshape market dynamics’. In Gruin’s (2021, p. 594, 596) words, China’s CBDC project is ‘linked to the CCP’s broader project of social engineering’ and ‘is laying the initial institutional foundations for another core dimension of neostatist authoritarian capitalism: prediction of actors’ incentives and attributes within the market, and intervention in those markets to influence market conditions and consequent behaviors’. Kaushik Jayaram and Poenisch (2022) also note CBDCs might enable this kind of shaping of markets by the state, arguing that ‘consumer behaviour could be controlled and nudged in directions according to state policy’. These ideas about how CBDCs might be used represent much more ambitious and interventionist conceptions of monetary policy and social control.

4. WHAT ARE THE PROSPECTS FOR CBDC IMPLEMENTATION?

It is thus clear that CBDCs have the potential to defend and even strengthen monetary sovereignty amidst the digital currency revolution. But will that potential be realised? To answer that question, we need to turn to the politics of CBDC implementation. Although central banks across the world have been developing blueprints for CBDCs, they face many political obstacles that will influence how or even whether CBDC are implemented in many countries.

One such obstacle is the fear that CBDCs would cause economic harm by drawing deposits away from commercial banks.¹¹ As a direct claim on the central bank, CBDCs would be safer than private bank deposits. If CBDCs were interest-bearing, they would become even more attractive. But if people moved savings from bank deposits to CBDCs on a large scale, the private banking system would be weakened in ways that could reduce the supply of investment needed to drive economic growth and undermine its role in driving financial innovation. In times of crisis, CBDCs could also exacerbate financial instability by facilitating bank runs.

To avoid these adverse impacts, many central banks have highlighted that CBDCs would need to be introduced carefully and with strict limits on their role (Group of Central Banks, 2020, p. 10). For example, no G7 central bank has endorsed the idea that CBDCs should be interest-bearing. Policymakers have also discussed the need for strict ceilings on CBDC deposits and most are focused on the ‘two-tier’ model of CBDCs which poses less of a threat to the centrality of banks in the domestic financial system. More generally, many central banks have gone out of their way to emphasise that cash will not be abolished and that ‘monetary policy will not be the primary motivation for issuing CBDC’ (Group of Central Banks, 2020, p. 8; see also Panetta, 2021a, 2022a). These various limits on the role of CBDCs mean that any eventual introduction of them is likely to be less consequential than it could be. Central banks are ultimately likely to prioritise stability over the risks involved in more ambitious CBDC possibilities that expand monetary sovereignty in new ways.

One additional complication exists for the United States, as the issuer of the world’s dominant international currency. If US authorities wanted the country’s CBDC to promote the dollar’s global role, its digital dollar would need to enable very large holdings and transactions. But a CBDC with those features risks posing significant challenges to domestic banks if it drew considerable deposits away from them. Chris Hughes (2022, p. 27) explains the dilemma this poses for US policymakers: ‘Congress and the Fed would be forced to choose between a CBDC designed to compete in international capital markets and one which causes minimum disruption to domestic banking arrangements. It cannot have both’. The former choice might appeal to US policymakers who see a digital dollar as a means to compete with Chinese initiatives to promote a digital version of the renminbi internationally (and thus preserve and enhance America’s unparalleled power to monitor and control international financial transactions). But it is likely to be opposed by US banks, despite their usual preference to back the global role of the dollar. If lobbying or other considerations led US authorities to impose tight limits on digital dollar holdings and transactions, a US CBDC would pose much less of a threat to the monetary sovereignty of other countries. This, in turn, would reduce a key prompt for other countries to follow suit.

Another factor inhibiting the introduction of CBDCs in many countries is the fact they have attracted strong political opposition. Opponents can be found not just in the private banking community but also among technology and cryptocurrency firms (who are threatened by the potential competition). There is also considerable opposition among the wider public in many countries who are concerned about how CBDCs would potentially give central banks enormous power and access to unprecedented amounts of information about citizens’ economic life. In the words of Florida governor Ron DeSantis (who has introduced legislation to ban the use of any CBDC), this kind of money would ‘promote government-sanctioned surveillance’.¹² CBDC advocates have tried to reduce private sector opposition by proposing two-tier structures that maintain financial firms’ intermediary role between central banks and the public. To address privacy concerns, they have also proposed various technological solutions to bolster confidentiality of transactions, while noting the greater danger of personal data coming under private control.¹³ It remains to be seen, however, whether they will be able to overcome the growing opposition they face.

Their task is made more difficult by the fact that domestic support for CBDCs is usually less politically prominent and vocal than the opposition. The potential gains from CBDCs are more diffuse and difficult to understand than the potential costs, particularly in countries that already rely heavily on various digital services for storing value and making payments. Indeed, under the two-tier model that most central banks are contemplating, average citizens will not experience much change in their daily lives. Opponents can also argue that many of the promised benefits of CBDCs can be gained through easier means, such as improved private digital services or stricter regulation of them.

These kinds of opposition are much less significant in an authoritarian state such as China where officials have more autonomy to pursue their goals, including vis-à-vis the country’s large FinTech firms (Langley & Leyshon, 2023). In places such as the low-income and Caribbean countries, where CBDCs have already been introduced, these sources of opposition have also been less influential and public authorities have perceived some direct benefits from the initiative, particularly with respect to financial inclusion goals. As noted above, however, CBDC initiatives have been far from successful in many of these cases, partly because of the issues related to state capacity and trust. Even in the Chinese case where state capacity is high, extensive CBDC trials have generated disappointing results in which ‘usage has been low, highly inactive’ (Reuters, 2022). One reason may be distrust in the issuing authority. But another likely reason is simply the convenience of, and familiarity with, existing digital payment systems. As Prasad (2023) notes, in a country such as China, ‘there simply isn’t demand for central bank money for retail payments’ because private payments companies have already ‘made low-cost digital pay­ments eas­ily and widely avail­able’.

If other countries introduced CBDCs, they might experience similar results, including for reasons related to trust. Western monetary officials confidently argue that corporate issuers of currency ‘can hardly be seen as repositories of public trust’ (Mersch, 2019; see also Le Maire, 2019b), while a CBDC would be backed by a public institution with ‘the full weight of public trust behind it’ (Bank of Canada, 2020). But the issue may not look so straightforward from the standpoint of all citizens, particularly in an inflationary era when central banks’ competency is being questioned or they are being targeted by populist criticisms as elite institutions. Indeed, distrust in central banks and public authorities has motivated the supporters of private cryptocurrencies who presented these forms of money as more trustworthy precisely because they were not linked to state sovereignty or authority (Swartz, 2018). Trust in CBDCs might also be quickly undermined if some of the ambitious uses of them were pursued, such as negative interest rates or programmable features (Prasad, 2021, p. 223).

In short, it remains unclear how widespread and successful the implementation of CBDCs will be in the coming years. The claims of some analysts that their introduction is ‘inevitable’ (Prasad, 2023) overlook how CBDCs are attracting powerful and vocal opponents in many countries. Even when adopted, CBDCs may often turn out to be less consequential for monetary sovereignty than anticipated. In some cases, the reasons for this will relate to issues of state capacity and trust, or the attractiveness of existing digital payments systems. In others, disappointing results may result from the politics of their implementation; that is, efforts to minimise domestic opposition may result in versions of CBDCs whose potential to defend and strengthen monetary sovereignty is highly constrained. The embrace of more ambitious versions may require quite distinctive political conditions, such as the existence of an authoritarian state or the high-profile failure of existing private digital payments services.

5. CONCLUSION

What is the significance of CBDCs for longstanding scholarly debates about the fate of monetary sovereignty in the digital age? As we have shown, public officials themselves prominently highlight how CBDC initiatives are designed to defend monetary sovereignty against the threats emanating from private digital currencies (especially stablecoins), foreign CBDCs, and/or private digital payments instruments. Although CBDCs will have limited results in some contexts, officials (and other analysts) highlight how this monetary instrument could also strengthen monetary sovereignty in many countries by facilitating financial inclusion, enhancing the state’s ability to monitor and control monetary transactions (including cross-border financial movements), and improving its capacity to conduct monetary policy. CBDCs, thus, pose an important challenge to arguments that the digital currency revolution is undermining monetary sovereignty. Its consequences may be much less dramatic, and perhaps even the opposite.

As a final point, however, we have emphasised that, while CBDCs do have the potential to help defend or strengthen monetary sovereignty, this scenario is a possible one only. In many countries, important political barriers stand in the way of their implementation. Even when implemented, new CBDCs may be less consequential than anticipated for a number of reasons, including deliberate constraints imposed on their design to address opponents’ concerns. For all these reasons, it is too early to know the full significance of the new interest in CBDCs for debates about the future of monetary sovereignty in the digital age. We hope, however, that this paper helps to identify the key issues involved and encourages scholars interested in those debates to devote more attention to the contemporary political struggles surrounding this monetary innovation. The outcomes of these struggles will have implications far beyond the technical and economic issues that are the subject of most analyses of this topic.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author(s).

Additional information

Funding

Colin Chia's work was supported by a Social Sciences and Humanities Research Council of Canada Postdoctoral Fellowship.

Notes

1 Some definitions of CBDCs include deposits that commercial banks have long held in electronic form at their country’s central bank as reserves. In this paper, we focus on new ‘retail’ CBDCs, following the US Federal Reserve’s (2022, p. 1) definition of CBDCs as ‘a digital liability of a central bank that is widely available to the general public’.

2 These countries are The Bahamas, Jamaica, Nigeria and the eight countries using the Eastern Caribbean dollar. See https://www.atlanticcouncil.org/cbdctracker/

3 For recent analyses linking these developments to declining monetary sovereignty, see Sturn (2022) and Martino (2023).

4 For recent analyses of the content and dynamics of regulatory politics vis-à-vis private digital money in various jurisdictions, see Chey (2022), Marple (2021) and Campbell-Verduyn (2018).

5 Oher conceptions of monetary sovereignty exist, but we focus on this ‘territorial currency’ one which has been crucial to scholarly debates and official discussions about the implications of the digital currency revolution. Later in the paper, we also refer briefly to the more policy-oriented concept of ‘monetary policy sovereignty’.

6 A stablecoin is ‘a cryptocurrency that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets’ (BIS, 2022, p. 114).

7 See also Treasury Secretary Janet Yellen’s views (Silverman, 2021) as well as those of senators such as Elizabeth Warren (Guida, 2021).

8 See also Bank of England (2021b), Federal Reserve (2022, p. 14) and Usher et al. (2021).

9 See for example ECB (2020, p. 22).

10 As noted by the Group of Central Banks (2020, p. 8), people might still try to avoid negative rates by turning to foreign currency or private cryptocurrencies.

11 For an overview of the debates on these issues, see Bindseil (2019).

12 Quoted in Armstrong (2023). For other examples of this kind of opposition see Arnold and Fleming (2023), Peebles (2021), Guida (2021), Schreckinger (2023), Sutton (2022) and Tasker (2022).

13 For technological solutions, see Carstens (2021, p. 111), Fanti et al. (2022), BIS (2022, pp. 95–96), Group of Central Banks (2021, p. 8). For arguments about private control, see for example ECB (2020, p. 7).