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A Farewell to Cash

While proponents of central bank digital currencies argue that the technology would boost financial inclusion and efficiency, critics warn that it poses financial, political, and environmental risks. But these concerns are overblown, especially when also weighed against CBDCs’ potential to strengthen monetary policy.

NEW YORK – The European Central Bank and the US Federal Reserve have each said that they do not intend to abolish physical cash if and when a central bank digital currency (CBDC) is introduced. Recent policy briefs by the ECB and the Bretton Woods Committee argue against paying interest (positive or negative) on CBDCs. Policymakers should reconsider both stances. There are good reasons not only to support the early introduction of CBDCs, but also to pay interest on them and abolish cash.

The United States is a CBDC laggard. According to the Atlantic Council’s CBDC tracker, CBDCs have already been fully launched in 11 currency areas, all of them developing and emerging-market economies, and 100 other countries are exploring the idea. These currency areas have embraced two common arguments in favor of a CBDC: that it can boost financial inclusion and improve the efficiency of payments and settlements.

Of course, CBDCs also have their critics. One argument against them is that commercial banks could be sidelined as households and firms substitute CBDC holdings for commercial bank deposits. This risk grows if a CBDC pays interest (like bank deposits do). Another concern is that the central bank, as the CBDC issuer, might obtain sensitive information about CBDC holders’ finances and private spending decisions. And yet another concern is that CBDCs running on a proof-of-work blockchain consensus mechanism would be extraordinarily energy-intensive.