A CBDC would bring market discipline to the banking sector. Traditional banks would be forced to focus on picking profitable loans, and they would close most of their network of retail branches. Likewise, the credit-card oligopoly that hijacks our credit-less payment system would melt like snow in the sun. In its place, we would get a fluid payment system operated by a network of competitors offering access to your CBDC account. In today’s economy, households would receive 3% on deposits that are safely shielded from bank runs.

A CBDC is not imminent, though. Central bankers are scared to slaughter the cash cow of the traditional banks, under the pretext that doing so will lead to the collapse of the banking sector. The private bank lobby will strongly oppose digital innovation and seek to maintain its dominant position at the cost of the stability of the financial system.

Still, we may see CBDCs introduced sooner than anticipated. If one major economy takes the plunge, others will be forced to follow suit or risk seeing their currencies be eclipsed. That is why the Canadian central bank has already signaled its readiness to introduce a CBDC if the US decides to launch its own. If China tries to dominate international transactions with its digital renminbi, other central banks certainly will be prompted to follow suit.

Whoever takes the first major step in disrupting the banking sector, it cannot come soon enough. We already have the tools to end bank runs and ensure financial stability. All we need is the will to use them.

Jan Eeckhout is Professor of Economics at Universitat Pompeu Fabra and author of The Profit Paradox: How Thriving Firms Threaten the Future of Work (Princeton University Press, 2021).

Copyright: Project Syndicate, 2023.

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