Some early thoughts on the potential impact of Central Bank Digital Currencies (CBDCs)

James Sherwin-Smith
5 min readMar 21, 2021

[In response to another superb piece of thought leadership from Tom Noyes – thank you sir for sharing your well structured thoughts with the world – you are a gentleman and a scholar.]

If you haven’t read Tom Noyes’ recent blog on CBDCs, please start there first (see link above). I was responding to his piece and then hit the comment box character limit.

I agree that potentially CBDCs could turn banking upside down. I also do recognise the potential to displace the traditional role of the card networks in certain use cases.

I wonder however how quickly consumers will adopt a CBDC and change behaviours. I do see a political arms race building here so I think you are right to call that out.

We humans struggle to think exponentially, but instead think more linearly, so we under-estimate the impact of new tech in the long run, but perhaps over-estimate the impact of new tech in the short run.

A few things jump out at me immediately – where is the most hassle in payments today where a CBDC might help? So far, I’ve come up with the following list:

  • micropayments, where there is either too much friction or cost that makes organising payments for a cent or lower uneconomic in today’s systems
  • cross border payments, where correspondent banking is just an awful experience and needs to be fixed asap
  • cash transactions, where an offline medium of exchange jars terribly with an increasingly digital world and a collection of consumer experiences that have been set far away from the shackles of the past that limit the innovation and progress of established (and trusted) financial services businesses
  • B2B payments (the largest flows between multinationals are cross border so fall into the correspondent banking trap also) where smart contracts, evidence, provenance and thus richer data are critical to achieve the efficiencies that have so far alluded this sector of the market – probably due to the large average transition size (and related risk profile) which means it’s still (just) economic to have people involved.

There are a few areas that give me pause for through however in terms of how far CBDCs can go

1/ Do CBDCs really change the game in a way that DLT and other token systems so far haven’t?

I remember discussing the same 4 uses cases / problems above with colleagues in terms of what challenges DLT / blockchain could solve for in 2014. I’m still waiting 7 years later. Perhaps that’s a Bitcoin problem. Or just a function of not enough time for the exponential line to grow past the linear. Or maybe it’s a people problem – money for too many is a tangible thing they want to touch – the cash in their wallet or the plastic in their hand – rather than recognise its just a string of 0s and 1s on a hopefully secure and resilient set of servers far away in an unknown corner of their country. Very few have made the complete leap to using their chosen electronic device exclusively, and shed the physical notion of money.

This is what makes studying the SandDollar and other examples of CBDCs “in the wild” such an interesting endeavour. Will a CBDC – ie digital money backed by the Central Bank *in your country* – help people to finally cross that perception vs reality chasm? Will they trust the CBDC of a domestic (or digital, or harder still, foreign) power? Will domestic governments allow such a raid on their sovereignty – or de facto “Yuanification” / “Zuckerberging” of their economy, in juxtaposition to the Dollarisation that has gone on before?

2/ Do central banks really want to take on the role of retail and commercial banks – either deliberately or as an unintended consequence of the growth of a CBDC?

The banking sector protects central banks from being involved in the minutiae of banking – taking deposits and issuing loans to billions of people, and performing fractional reserve banking to grow the money supply, and ultimately speed up the velocity of money – ie they are the Keynesian execution of government or central bank policy. Not to mention handling the associated maturity transformation that comes with taking short money on deposits and lending long, or the compliance tasks necessary to reduce the impact of financial crime. Changing the nature of payments via CBDCs in such a wholesale way would potentially fundamentally change the nature of banking. How much do central banks want to be the only bank in town, and take on their associated responsibilities?

3/ How liberal do we want money to be – particularly when it comes to protecting consumers from harm?

CDBCs effectively support irrevocable transactions – they are digital cash after all – but their widespread adoption would also represent a significant concentration risk and would further highlight the concerns of accelerated digitalisation – financial exclusion of the technically illiterate, and a single system with associated resilience and security concerns that rise up the list when you decide to eschew the benefits of diversification and put your country’s eggs all in the one basket. Offering a choice of payment rails is just smart, and we only have to look at the investment going into account-to-account and decentralised finance systems and the desire for a more open, competitive ecosystems for evidence that the world is moving into having more, not fewer payment solutions.

4/ Most of the world’s wealth is static and held in domestic currency – so how far can a domestic (or foreign) issued and controlled CBDC really reach?

Wealth is not uniformly distributed, across the population, or across asset classes. The wealth of individuals, organisations and nations is largely illiquid. Most of this wealth is denominated, measured and managed in domestic (or a few supra-national) currencies. Most of the stock of money therefore will only change hands, and this quickly enter and exit the payment system once a decade – or perhaps even less frequently.

So while CBDCs may make in-roads into the demand and supply of short money, they are highly unlikely to penetrate the deep, dark recesses of long money. As such, CBDCs may have a role to play in the every day, but monetary policy and the controls exerted by central banks will remain absolute as the one lever that actually moves investment markets and asset allocations.

Tom, I would welcome your feedback or anyone’s else’s for that matter. It’s a fascinating topic and I’m sure there are many other perspectives on this!

I’d love to convene a panel of speakers to discuss this – please email me (James @ FintechAndPayments.Club ) if you’d be up for discussing this on Clubhouse or similar during these pandemic times.

Stay safe, stay well.




James Sherwin-Smith

Engineer by education, Consultant by experience, Entrepreneur at heart. My professional focus is #fintech & #payments, I’m an #avgeek + #cricket fan