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The Trilemma of Central Bank Digital Currencies

Countries from China to Sweden have a variety of rationales for seeking to modernize their payments technologies. Ultimately, however, central banks weighing whether to launch a digital currency must recognize that if they do, they can have confidentiality of transactions or financial stability, but not both.

PARIS – Central banks around the world continue to contemplate issuing their own digital currencies (CBDCs). Some have already taken steps in this direction. The People’s Bank of China launched a trial of its e-CNY in Shenzhen in 2020 and has since extended its use to other cities. The Sveriges Riksbank is testing its e-krona for commercial and retail payments. Even the relatively staid US Federal Reserve Board has issued a paper weighing CBDC pros and cons.

Evidently, central banks are scrambling to board the CBDC train before it leaves the station. But what motivates this mad dash?

One argument is that, by providing digital access to anyone with a cellphone or smartcard, a CBDC will extend modern payments technology to the masses. But the experience of countries like India suggests that there are more straightforward ways of achieving this goal.