How unlike cash will CBDCs be?

In this post I discuss several differences between physical cash, and what I imagine retail Central Bank Digital Currencies (CBDCs) might end up looking like. The main differences between CBDCs and cash are accessibility, anonymity, and interest.

Accessibility means “who can use it?”. Pretty much anyone can use cash.

Anonymity describes how much information about the payer and recipient’s identity is needed to make a transaction. Cash doesn’t require the payer or recipient to provide any identity information.

Interest describes how much the number goes up if you leave it sitting in its natural state without lending it to anyone. Physical cash does not have interest.

Accessibility – who can use it?

Here is a version of my favourite flower: the money flower, from the Bank of International Settlements (sometimes described as the central banks’ central bank). I’m a big fan of their research.


I love how in one chart you can see various types of money, differentiated by accessibility (who can use it), form (physical/digital), issuer (who created it), and transmission (whether payments are account based or peer-to-peer).

But I have a quibble with the “Universally accessible” bubble. How can Cash (physical banknotes issued usually by the central bank) be in the same bucket as bank deposits? (Later I will argue that CBDCs will be closer to bank deposits than cash)

Bank deposits are nowhere near as accessible as physical cash. Just ask any 5 year old if they can open a bank account. Ask any homeless person if they can open a bank account. Ask a North Korean (or whatever other country is bad-actor-of-the-day). Ask someone with a name identical to a terrorist. Ask a foreign tourist. And so on and so on.

Clearly, accessibility lies on a dimension – or even a grid, with “technological capability” as the other axis:

Any form of money that is digital or requires any form of identity makes it less accessible than physical cash. Less financially inclusive than cash.

CBDCs will probably not be as accessible as physical cash. But they can come close, if they can be loaded onto tap-to-pay cards such as Octopus cards (Hong Kong), Oyster cards (London) and so on.

A question you can ask is “Can a charitable 5 year old give some CBDC to a homeless person as easily as they can give some cash?”

Anonymity – how much identity information?

When you pay in cash neither the payer or the recipient needs to know anything about the other. And no spying eyes see or monitor the transaction, nor can they block it.

Central banks issue cash, but they can argue that there’s nothing they can really do to prevent cash’s use in the grey and black economies. Can we imagine that central banks will issue completely anonymous digital money? With digital comes the tools to log, monitor, and censor.

We live in a world with increasing focus on anti-money laundering (AML) and countering the financing of terrorism (CFT). This has come hand in hand with an erosion of personal financial privacy and increased state surveillance of all parts of our personal lives.

Will any central banks have the ability and political will to fight for the individual’s right to financial privacy?

It’s hard to know how central banks think, and how they will act. One proxy for the right to privacy of “self vs state” is internet privacy. Here’s a graphic by showing countries ranked for personal internet privacy:


The tension between national security / state surveillance vs personal privacy may impact how CBDCs are designed. This is a fascinating and important area, and one where the Americans and Chinese are probably quite aligned with each other, with perhaps the Europeans leaning slightly more towards the rights of the individual. They remember the Stasi.

At any rate, it is hard to imagine that CBDCs will be as anonymous as cash. It would be a brave central bank who offers a digital form of money that leaves as few traces of identity as physical cash.

Interest – will number go up or down?

Cash sitting in your wallet or under your mattress does not have an interest rate. A £10 note does not become £11 (or £9) however long you leave it. (Here it is important not to confuse interest with price inflation and its consequent reduction of purchasing power where your money now buys you less stuff than it did last year)

Today, central banks typically have two levers to pull to affect the economy. One is what they say, and the other is what they do.

What they say is sometimes called “forward guidance” – economic markets react when central bankers make speeches.

What they do is have direct or indirect control of some form of interest rate that they offer or charge to commercial banks. Commercial banks transmit this interest rate to businesses and households.

In the literature I have read on CBDC research and design, it is usually the inclusion of an interest rate that results in economic benefits (GDP going up, etc).

And typically, the benefits come when negative interest rates are possible. Your £10 of CBDC can become £9 without you spending any money. This allows central banks to transmit deep negative interest rates directly to the pockets of households. Deep negative interest rates, or the threat of it, is designed to increase spending, keeping GDP numbers going up. (For this to work, you also have to make it hard for people to quickly switch to zero-interest physical cash).

It is hard to imagine that central banks will resist the temptation to add interest rates (negative as well as positive) to a retail CBDC. This would make CBDCs more like a commercial bank deposit than cash.


So what’s left? How cash-like will CBDCs be? I have argued that CBDCs are unlikely to resemble cash in terms of accessibility, anonymity, and interest. And they are unlikely to be as financially inclusive as cash.

So we should probably think of them more like safer bank accounts than like physical cash. But I’m not sure “Central Bank Accounts” (CBAs) sound as sexy as CBDCs.

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