Christina Skinner on Central Bank Digital Currency as New Public Money

Christina Skinner is a legal scholar at the Wharton Business School at the University of Pennsylvania and was formerly legal counsel to the Bank of England. Christina is also a returning guest to the podcast, and she rejoins Macro Musings to talk about central bank digital currency and its legal implications for the state, individuals, and the Fed itself. David and Christina also discuss recent developments in CBDC policy rhetoric, the privacy issues surrounding CBDC, the potential interest bearing nature of CBDC, and a lot more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Christina, welcome back to the show.

Christina Skinner: Thanks so much for having me back on, David. It's really a pleasure to be here.

Beckworth: Well, it's always great to get you on the program. You always are full of interesting and fun ideas, and you've written a fascinating paper on central bank digital currency. Now it's a law review article, but you also have a policy brief coming out for us, but your law review paper is titled, *Central Bank Digital Currency as New Public Money,* and your policy brief for it is coming out shortly is titled, *A New Coin of the Realm? Central Bank Digital Currency as New Public Money.* And we'll provide links to those in the show notes, but I'm excited to have you on to talk about these papers, because it's a very timely topic. A lot is happening in this space. As you know, Christina, we just heard a speech from Governor Miki Bowman about central bank digital currency, and she expressed skepticism about central bank digital currency, and one of the key statements she made near the end of her speech is this: "We should ask what current frictions exist or may emerge in the payment system that only a CBDC can solve or that a CBDC can solve most efficiently." And the entire tone of her talk was very much, what are we actually trying to address here?

Beckworth: And so there's a lot of skepticism in that speech. If you look back at Governor Chris Waller, he had two speeches very similarly toned in terms of their skepticism. And if you look at the rest of the Board of Governors, there aren't a lot of advocates on there, lukewarm at best. And it looks like to me at least, some of the enthusiasm for CBDC is waning and we have a GOP Congress. Now I know there's some presidential candidates who are also making this an issue. We won't go into that today, but this does seem to be a timely topic in terms of at least pushback in the United States against CBDC. Any thoughts on those developments?

Developments in CBDC Policy Rhetoric

Skinner: Yeah, I mean, a really interesting context right now to be talking about CBDC, as you say, the issue has had a little bit of renaissance in the past couple of weeks, after having lied sort of policy dormant for a little while. And as you say, some of the Fed governors seem to be skeptical. And Chris Waller has given some speeches in the past sort of saying, "What's the use case here? And we can get into the ins and outs of that later." And yeah, on the whole, it does seem like there is growing skepticism from some quarters. Now, what's interesting to me, though, is that CBDC seems to be a little bit of a whack-a-mole. As soon as it seems like to me that people have sort of set it to the side and decided it's not something for the United States, at least right now, it seems like then at some point a couple of weeks or months down the line, the topic of CBDC rears its head again. And I think the reason for that is sort of two or three-fold.

Skinner: For one, I think starting in 2020, there was quite a bit of momentum that built up behind CBDC globally. So I gave a talk at one central bank in the fall of September 2021, and I was really impressed by some central bank governors saying, "There's urgency to this issue. There's urgency to this issue." And I think for a while, that was very much the tenor of the conversation and it's really hard now to, I think, back a away from the continued study of CBDC. Because now, right, as I was saying, there were so many central banks around the world that are moving, I would almost say, full steam ahead and still seem quite keen to study CBDC.

Skinner: So that puts the Fed in a little bit of a difficult position. I think it's going to have a hard time pulling up stakes altogether given that some of its major counterparts are still considering CBDC, and I know we'll talk about this international monetary piece later. And then I would also point out that at this point, the administration, the executive branch is also pretty gung ho on CBDC. So you've seen statements from President Biden really urging the continued study of CBDC, and even some ambivalence about whether congressional authority is required or not. So I agree with you that it seems like the board is a little reserved about moving ahead with CBDC. But because of the political economy in place, the sort of international dimension, I do think it's going to be hard to put the issue to rest completely, even though, as I know we'll get into during the course of our conversation today, it's really tough to pin down that use case. But there are plenty of political and policy reasons why it's still very intriguing to many, so I think this is going to remain a live issue for quite some time.

Beckworth: So we talked about the board losing interest or being reserved about CBDC. What about the regional banks? Is there more interest there? Because I know some of the regional banks have done projects on CBDCs. And at the end of the day, if the Fed were to make a decision, would it be the board, or would it be the entire Federal Reserve System making that decision?

Skinner: Yeah, that's a really interesting point. And once again, [it] raises the sort of unique structure we have with the board and the reserve banks. So for sure, there's interest in some of the reserve banks around CBDC. I mean, we know that there was Project Hamilton at the Federal Reserve Bank of Boston in collaboration with MIT, that was sort of studying, really, the technological feasibility aspects of CBDC. So in other words, if the United States were to decide to create a CBDC, what would be the technological possibilities, the design functions, and so on and so forth. Then we've seen more recently than New York Fed starting something called Project Cedar, I believe, which is focused on wholesale CBDC. So later on, listeners don't worry, we'll flush out all these really technical definitions later, but more so thinking about how wholesale CBDC between banks might be developed and then used as a mechanism for improving interbank payments rails.

Skinner: So I do think you're quite right, that some of the reserve banks have expressed interest, not in retail CBDC, but either as I was saying, this wholesale CBDC, so an interbank payment system and sort of this scoping effort to think about how we would even begin to figure out the technology behind this. And I haven't seen anything from other reserve banks per se, but that's not to say that they haven't been thinking about their own corner of the issue. In terms of if any of these CBDC projects, retail-wholesale payments, monetary instruments, and so on and so forth were to move forward, there's a very big picture and important question here about who would make that decision and where the authority for that would come from. And I think almost certainly, it couldn't come from just an individual reserve bank or a collection of a reserve banks deciding that, "Hey, historically we've been responsible for helping banks improve the efficiency of their payment system, ergo we have the authority to do CBDC.”

Skinner: Technically, there might be something there, but CBDC is such a political hot potato. I think there's really no way you're going to see CBDC move forward, unless there is congressional approval. And you've seen the board saying, "We are not going to move forward with CBDC," which again implies the reserve banks aren't going to either, unless we have congressional approval. Now that's comforting in some sense, because what we want is Congress to authorize CBDC in order for there to be constitutional and democratic legitimacy around something like this. On the other hand, I think there is some ambiguity about whether there's any space for the Fed to move forward with something like a wholesale CBDC. And so that means that a lot of the Fed's decisions and whether it sort of waits for Congress or tries to push the boundaries of its authority is going to depend on who's in power. Who is the Fed chair? Who are the other governors? How influential are they? And so like many things in the Fed's history, what it does often comes down to the personalities in power.

Beckworth: Well, Christina, I'm an economist, but I'm going to go outside my lane and play a political scientist here and say, it seems to me, at least in the near term, the best case scenario would be wholesale CBDC, the best case, because of all the things you've just mentioned. Congress, I mean, we have a GOP controlled House. We have a presidential election coming up. So best case, wholesale in a few years out. I mean, it seems to me there's a lot of hurdles we'd get through before we get there. But let's just say for the sake of argument, we get to the other side of all of these developments and the US says, no. No to CBDC. Again, we'll define these terms in a minute. Probably most of you know what this is, but let's say we get to this place where the US as a whole says no. What would it mean to the global movement for CBDCs, given the Fed’s importance, given the dollar's international reserve currency status? Would the rest of the world just move ahead or would this put a serious dent in the momentum?

The Influence of the US for International CBDC Adoption

Skinner: Two really important questions that I've been thinking about a lot, so let me take the easier one first, but I think in some ways my answer to both of these is going to be similar, or at least bring up some similar themes. So as you said, best case scenario, wholesale CBDC. I think best case scenario, we really take a pause and think about what is the thing that is trying to be created, right? Because I have yet to hear anyone articulate a rationale for something like a wholesale CBDC, alongside an explanation of how a wholesale CBDC is going to be different from the central bank reserves that we currently have. I mean, I'm going to draw on Chris Waller here.

Beckworth: Good point.

Skinner: He's pointed out over and over again that central bank reserves are already electronic. And again, I haven't heard anyone say how those ones and zeros flying across the internet, if they're central bank reserves, that's going to be slower or less efficient than something we call a wholesale CBDC, right? So again, what is the difference between a wholesale CBDC and central bank reserves, the electronic money that is flowing within the financial system already? And if it's a question of upgrading the payments infrastructure, thinking about maybe how we're replacing the current payments rails with blockchain technology, I think, at least, that can be a separate question from the question of what is the monetary instrument that we're using? So there's one thing to talk about the payment system and the infrastructure and how maybe we can make that a little sleeker, but I'm not sure that necessarily implies the need for a new form of money. So I'd like to see more separation between this conversation of what is the unit of account and medium of exchange, really, I guess it's more so the medium of exchange, and what is the infrastructure that we're using to curry payments.

Skinner: So then, the question about this international, I would say conundrum, I think is a really tricky one. And I've said this in talks I've given about the paper over and over again. It seems to me that there is a lot of, and I know a lot of central bankers are listening to this podcast, so I mean this with all due respect, it does seem like there is a lot of FOMO around CBDC. That once a critical mass of central banks started to really reflect on whether we need CBDC, it really felt imperative for most of them to start thinking of this, because of concern for the integrity and the usability of their currency, and also just to make sure that it's sort of keeping up with what everyone is supposed to be doing. So I do think that puts certain pressures on the Fed and will raise certain challenges, if, for example, the Bank of England and the ECB move forward with a CBDC. And again, as I was saying before, both of those central banks do seem much more keen to have a CBDC than the US. Is that going to put the dollar at a disadvantage? And I've tried to really wrap my head around this question, and I think the answer is no, it doesn't matter, I think the answer is, and the reason is as follows.

Skinner: So if you really think about what a global financial system with CBDC would have to be, we would still need most of the core elements that we have today in terms of interoperability. So just like dollars are not interoperable with pounds, we need some kind of FX intermediary in the middle. We need an FX market. We need sort of a correspondent banking system and so on and so forth. You're going to still need that same apparatus in a world in which there were CBDC, right? So a digital dollar is not going to be directly interoperable with a digital pound. So you're still going to need some kind of FX market to exchange that CBDC. You're still going to need intermediaries acting as messaging systems and wallets.

Skinner: So ultimately, I think that whether there's demand deposits nominated in dollars, I don't see any reason why they wouldn't be interoperable with digital pounds. If we're still using the same components of infrastructure, it may well be that FX markets and traders are going to have to figure out the spot market for digital pounds versus digital dollars. But presumably, if these units of account are all interchangeable, it should essentially be the same or very similar as to the system we have now. And if you look at some of the things that the Bank of International Settlements has been describing in the cross-border payment space around this line… I think it's called Project Icebreaker, they're calling it, it does sort of sound like the only way to have international interoperability is to still use what is effectively a lot of private market infrastructures to exchange and then curry these currencies along around the world. So I guess the upshot is that, and I've said this in regard to other things I've written about climate change and so on and so forth, we tend to think about central banking in very global terms because we have a global economy, global financial system. But central banks are ultimately constrained by their own national legal frameworks and their own political economies and cultures. So if it is right for some central banks to create a CBDC, I think that need not necessarily force the hand of others.

Beckworth: Okay, let's move to the actual definition of a CBDC. We've talked about it, and I think a lot of our listeners know, but walk us through, what is unique about a CBDC that we don't already have with our bank accounts or with our physical cash?

The Fundamentals of a CBDC

Skinner: So yeah, important foundational stuff that we'll set down now, if listeners aren't already familiar with it. So the way that I often describe CBDC is, as the title of the paper suggests, a new form of public money. So right now, in the United States and in lots of different economies, there are two forms of money. Simplifying a little bit, but I think it's very intuitive to understand CBDC this way, we've got public money. So that's the money that the state, the government creates. So the kind of public money that everyday people, households have access to right now, that's paper currency, cash and coins. This of course is not electronic. It's currency. Then there's also a form of public money that is available in electronic form, but only to the financial system and to banks, and those are central bank reserves.

Skinner: So those are the two basic kinds of public money that the state creates. And then we've got this category of private money. So you can't really understand money and capitalist society without talking about banks and demand deposits. But demand deposits are of course, electronic and banks create deposits when they make loans. And demand deposits are essentially a contractual liability of a private bank, a private institution, different from public money. And yet these two forms of money, public money, private money, we all know they're fungible, they're completely interchangeable. And most people on a day-to-day basis don't really think about whether it matters how much cash they have on hand versus how many deposits they have in their bank account. So what CBDC adds here into this dichotomy is another version of public money that's electronic and available to households. So it's sort of like central bank reserves in that it's electronic, and it's sort of like cash and currency in that everyday households have access to it.

Skinner: So for this reason, many commentators and central banks have sort of described CBDC as just a digital version of cash, which the project of my paper is trying to push back against. I mean, I understand why it's described to the public in this way, because they're trying to help people understand even on the most basic level what it is. But again, as we move the conversation forward, I think it's incredibly important for people to understand what CBDC actually is, and how it differs from the kind of state issued money that they have access to today; again, cash and other forms of currency. Now, I don't want to move on from this definition of what is CBDC before I point out, again, one benefit billed to CBDC is that it’s electronic. So the demand deposits that we have today are electronic, so [it’s] not completely clear what it's adding in terms of a technological convenience standpoint. And so that's just sort of one thing to bear in mind as we carry on this conversation. And you could probably tell that I'm quite a bit skeptical at every point along the way about the use case for CBDC. But yeah, the point is to have a digital eagle-stamped dollar available to everyday households, that you could hold in a digital wallet and so on and so forth.

Beckworth: So the digital currency definition makes a lot of sense if you're focused on the token version of a CBDC, right? Something that would travel along with you digitally. But there's also an account based version of this as well, like a Fed account. Can you walk us through those two distinctions?

Skinner: Yeah. So this is a really important part of the conversation around CBDC. The first is, okay, what is the thing? Why do we need it? And we'll exhaust that a little bit later. But the other question that a lot of policymakers have spent their time on are these design questions. And there are a lot of different nodes along the decision tree about if you're going to create a CBDC, what features will it have? Now the big features involve, in the first instance, would it be token based or would it be account-based? So as you just said, a token-based CBDC presumes that it would function more like cash and that it would be a bearer instrument, right? So when you have a $10 bill and you go to CVS, you just present the $10 bill to pay for your toothpaste or whatever, and no one is asking you about the chain of custody or the provenance and so on and so forth. It's valid and settlement is final, as soon as you give the cashier your $10 bill. So there was some universe of imagination in which a CBDC would work like that. You would have some kind of wallet on your phone or something, and you would have CBDCs in there and you could tap at CVS and that would be that.

Skinner: The other version of that is what's called an account based as you said, or an inter-mediated CBDC. Those words basically mean the same thing, because they mean that rather than sort of you just having custody of the CBDC and using it like a bearer instrument, you're going to have your CBDCs recorded in an account and held by some kind of intermediary, probably another bank. So the way that I've thought about it is, we've got banks and they're going to be offering their own demand deposits to customers, but they'll also offer a service where you can hold Fed issued CBDC in an account at the bank, and you would transact using your bank as an intermediary in that way.

Skinner: Now, I will say that although this is ... Everything about the design questions of course have trade-offs and cost and benefits and potential unintended consequences, the token-based CBDC, at least in the United States, seems to be pretty well off the table, because of accompanying national security, anti-money laundering concerns. So in the Fed's white paper and in other conversations that have been made public, the Fed has indicated it would be very reluctant to embrace a token-based model, just because it would be so hard to implement the requisite anti-money laundering checks. Now, of course, we have the same problem with cash today, but the issue is that there are some physical limitations around how much illicit finance can be funded through suitcases of cash. So that puts some kind of natural breaker. Whereas if you've got a CBDC, an electronic version of money, of course the risk of illicit finance if that were to be a bearer instrument is quite high. And we're having these same sorts of conversations on the crypto space right now for that reason.

Beckworth: So let's talk about some of the other design issues besides token versus non-token form. There's a number of them. There's privacy concerns, will it be interest bearing or not? And then finally, can it be engineered? Can the coin be engineered for social purposes or for fiscal policy purposes? So let's start with that first one, privacy. What are the privacy issues surrounding a CBDC?

Privacy Issues Surrounding CBDC

Skinner: Yeah, so the privacy issues are really important for many people. And I think when you're looking at sort of news coverage of CBDC or some of the concerns that have been articulated in Congress or from other sort of politicians, you hear this repeated concern about, well what about privacy? How can we be sure that if there's a CBDC that's issued by the Fed, that consumers' privacy will continue to be respected to the extent that it is today? And this sort of relates to the token-based versus account-based question. Because one of the reasons to have a token-based coin would be that it would offer cash-like privacy. Whereas if you have the account-based system, then you're going to have the same level of privacy as you have in your bank account today, which is not very much because we know that there are very little, if any, fourth amendment privacy protections that attach to a bank account. And again, the reasons for that relate to the state's prerogative in combating illicit financing. So if we have a world in which there's more CBDC and less cash, the question is how are we going to think through privacy? And so central banks are still working this out.

Skinner: For the most part, they don't feel comfortable having a completely token-based system, which again would be a bearer instrument and offer maximal privacy. But then there's this intermediate step which is to say, "Well, if you have your CBDC in a bank account, how can we assure the public by designing the CBDC, such that we can persuade them that we're not sort of imposing this constant surveillance or tracking or monitoring?" And so again, that's sort of this question about the cryptography and the technology, and how are you going to get close to cash-like privacy but not offer complete cash-like privacy within the design of a CBDC? And I don't think we really know the answer to that yet, which is again, probably a big reason why you haven't actually seen a pilot of a CBDC in the United States. So those are the privacy questions-

Beckworth: Let me ask you a question about the privacy concern if I may. And let me push back a little bit against this. Isn't it the case already that the federal government can take a look at our, at least, bank spending and see what we're doing? I mean, not a lot of people use cash. I mean, there are segments of society that does, some of it for good reasons, some of it for criminal reasons. But for most people they do most of their transactions in banking. Is that a fair statement? Most of their transactions, month to month, are done through bank accounts? And can’t the federal government already see what we're doing if they really want to? I mean, I guess, how concerned should I be about privacy given where we are already as a nation?

Skinner: Yeah. No, that's a very accurate and valid point. And I guess I'll use the opportunity of this question to just clarify something even bigger about this conversation. I think many of the risks or the diminution of rights that I'm talking about with CBDC… a lot if not all of the issues could already be accomplished within the monetary system that we have today. It's just a question of degree. So it's a question of whether CBDC makes it easier for the state to trample on certain rights – and I'll flush this out in regards to the privacy issue in a moment – or if the very existence of a CBDC creates the incentives for abuse in times of emergency and things like that. So is it going to be this tantalizing way to suspend economic liberties in the way that we've seen states suspend civil liberties in times of emergency? So I think it's too far to say that CBDC equals the state spying on you in the United States right now. But I guess the point is, never say never.

Beckworth: Sure.

Skinner: Because we've seen the suspension of civil and economic liberties in periods of history before. And is CBDC just going to make it easier for this state to violate your privacy? Now again, I would emphasize, if you have a bank account, and most people do and most people are doing their everyday economic life through bank accounts, if you give the government some reason to think that you are engaged in suspicious activity, namely illicit financing or sanctions evasion or tax evasion, yes. As I was saying before, you have basically no right to privacy in the contents of your bank account under the Bank Secrecy Act.

Skinner: The question though, I suppose, is whether we think that there are more checks or barriers from the state sort of examining your financial transactions, because they either have to cross a dollar threshold or you have to have triggered the bank, a private institution's suspicion. Literally, they're called suspicious activity reports, right? And do we think those protections are less if the Fed or Treasury is making that analysis in the first instance? I am not sure we can give a blanket answer to that question because again, I think it's going to depend on the moment in time that we are in and the people who are in power. And so it's just a question of a gradient shift, I suppose, with the privacy issue.

Skinner: And of course, it's also something cultural, right, around the world. And this goes back to your point earlier about the international dimension and dynamics. In some societies, there is great social apprehension around violation of privacy rights. And so the public at large is going to be wanting to be even more precautionary about the potential tools that the state might have to violate privacy. Whereas in other societies that might be less of a salient concern, which is another reason why I think you're going to see, and I think it's okay to see, quite a diverging approach around the world, in terms of CBDC and this privacy issue.

Beckworth: Well, just to be clear, this is a very salient issue for me myself. When I looked to Canada a year or two ago when they shut down the bank accounts of these truckers, I believe, who were protesting, I found that very troubling. And what CBDC could do is really make it much easier, a matter of degrees, as you suggested, and then that's why we want to think through these issues. So privacy is a big deal, at least in my view, and many others who are concerned about it. Okay, let's go on to interest bearing. Would it be interest bearing?

The Potential Interest Bearing Nature of CBDC and the Issues Surrounding It

Skinner: So this is another really interesting and important design question for central banks to figure out, and this really relates to, well, a couple of things. It relates to sort of how you incentivize uptake of a CBDC, how you conduct monetary policy potentially, and also the impact that the creation of a CBDC would have on the banking sector, the degree of so-called disintermediation we would see. So I mean the basic question is, do you pay interest on a CBDC or not, and how do you use that tool? How do you make those adjustments? What is the point of doing it? So I think the most likely scenario is that a CBDC, at least in the United States, would pay interest, because you have this predisposition we've just been talking about to be quite skeptical of a CBDC. And the Fed and Treasury are presumably going to want people to use CBDC, right? That's the point of creating it. They're going to have to incentivize people to prefer a CBDC over their demand deposits, which of course, for the most part, are paying interest. So, you're going to see probably some level of interest that is quite competitive with the banking sector, at least to incentivize this initial uptake.

Skinner: So one question that follows from that is, well, what is going to be the impact on financial structure? If you are attracting deposits away from the banking sector and into CBDC accounts, what does that do for the funding structure of banks? Are you going to increase the cost of capital for funding, because now they have less access to demand deposits? And how is that going to affect banks' ability and appetite to engage in credit intermediation? So that's what is meant by, are you going to disintermediate the banking sector by sort of sucking out a big source of banks’ funding, and drawing it into the CBDC universe.

Skinner: Another way to frame that is, is the Fed, by adjusting interest rates on CBDC when it raises interest rates – again, we've just come through this really interesting period of talking about interest rate risk – what is that going to do for the pressure on banks to raise the interest rate they pay on deposits? And again, what is that going to implicate for their cost of capital and for their funding structure? And then, another way to think about, separate from this disintermediation question, I think policymakers are quite intrigued by CBDC and the possibility of being able to adjust interest rates on CBDC, to do some more sort of creative monetary policy maneuvering. Will it be easier, more politically palatable to engage in negative interest rates if we can effectuate that through CBDC.

Skinner: So that's the interest rate piece of CBDC or how and to what extent CBDC would be interest-bearing. Then there's a separate category of, I call them sort of policy tool decisions, about if there are going to be parameters around how much CBDC a person can hold. Who gets access to it? Is it everyone? Is it some groups? Are there going to be flow-based limits on how much you can use? And I think all of these design possibilities are really intriguing to policymakers. And I'm sure you can see why, right? I mean we're in a world of a constrained monetary policy space. Is this something that could give the Fed more agility, more nuance? But the flip side of that, which I'm trying to consider in this paper is from an individual economic rights perspective, that's maybe quite unsettling to people who are used to having an inalienable property right in their money to think, well, the money I have today could be capped or could be adjusted much more readily, in a way that we're not really used to thinking about money as a store of value.

Beckworth: And that speaks to this last point, and that is that the CBDC could be used for social engineering purposes. If there's a certain part of society that needs more funding, you could directly get funds to them. It also could be used in fiscal policy. You could do helicopter drops. People talked about that a lot in 2020/2021. If we all had CBDC or Fed accounts, it'd be much easier to directly get checks to people. So it could be used for that. And as you said, it could affect the value of your dollar assets, which might bother a lot of people. But I'm going to go back to this point about an interest-bearing version of a CBDC. I think it's huge.

Beckworth: You touched on the bank disintermediation point. I mean, to put it bluntly, it could really undermine the banking industry as we know it. It would potentially change the nature of banking. And I know it may be a slow process, but if you had any kind of similar banking turmoil like we just saw, you could imagine a scenario where there's this mass exodus out of banks onto the Fed's balance sheet, which leads to a second concern I would have with it. And that is, if the Fed had to pay interest to these, let's call them Fed accounts, keep it real simple, because if everyone can run to the Fed and park their funds there, there could be a lot more fiscal costs with running the Fed.

Beckworth: We're seeing that right now. The Fed is paying interest on reserves, interest on reverse repos. And if you open that up, and think about currency in circulation, that's a sizable portion of the Fed's liabilities, and currently they pay 0% interest on that. A CBDC, a retail version, would potentially replace that in the limit, maybe not overnight, but you could imagine, that currency is like a golden egg for the Fed. They make money off of currency. There's a huge demand for it. So you could imagine that the fiscal cost of running the Fed going up dramatically. There'd be a lot more times where the Fed would not send remittances back to Treasury. Maybe in some cases, Treasury would have to recapitalize the Fed. So I think there's just a whole hornets' nest you might open up and create a whole number of problems we haven't thought about, if we start paying interest on retail CBDC accounts.

Skinner: I agree with you 100%, and we could probably do a part two of this podcast and spend all of it talking about the implications for the Fed's balance sheet. And I'll elaborate on some of these in a second, but I think the extent to which the CBDC would enlarge the balance sheet and the really sort of power and authority of the Fed is one, if not the principal reason alongside these privacy concerns about why CBDC is so inadvisable. So first of all, a couple of cans of worms or controversial issues a CBDC would invite with respect to the Fed's balance sheet, and you touched on some of them, paying interest on reserves has been challenging and controversial enough in regard to paying interest on bank reserves. Can you imagine magnifying the size of that dilemma when it comes to having to think through paying interest on household CBDC, "reserves"? That would be such a conundrum for the Fed to wade through, especially during difficult economic periods, similar to the one that we've been seeing now.

Skinner: I guess you could make the argument that if the Fed is paying interest on bank reserves, it should also be paying interest on household money. That's sort of an equality issue. But I think it’s far better for the Fed just not to pay interest on any of these reserves. Like I said, we could have a separate podcast, and I know you have had podcasts on this issue. Okay, so interest on reserves, hornets' nest, we don't really want to double down on that approach by adding in this complication of a CBDC. Then there's this question of accounts and who gets access to the Fed's balance sheet and all of the benefits that that confers.

Skinner: Now we know that the question of who gets access to Fed master accounts has been also another huge hornets' nest when it comes to certain kinds of payments, non-bank companies, stablecoin issuers, so on and so forth. The Fed is really trying to wade its way through this question of, outside of member banks, who is getting access to the Fed's accounts? So it's going to be really tricky if we start to think about CBDC, and whether the Fed is going to have to draw lines around which segments of the population get access to different levels or varieties of CBDC, and in turn, what that implies for what the Fed is obligated to provide, service-wise, to these household accounts.

Skinner: So there's the account issue. There's the interest issue. And then I just think there's the question of, again, just the asset purchases and the liabilities in the extent to which CBDC would increase the liabilities of the central bank, therefore creating more headroom for the Fed to buy more assets. And then that invites more sort of politically charged questions about what the Fed is going to buy, and how big should the balance sheet go, this perennial issue. And I think you can't avoid any of these questions, if we start imagining a world with CBDC.

Beckworth: Yeah, and this is one of the key points you raised in your article, but later… and we'll focus on it then, but this would really undermine the Fed's independence. It would become a very politicized institution if all of this was going on. It'd be hard not for the Fed to be walking on eggshells in front of Congress. It's just, there'd be so many different ways for the Fed to be seen as politicized. Okay, so we've been touching on some of the issues of the design. We've also, along the way, touched on some of the arguments for CBDC. I don't want to spend too much time on them, but we've kind of alluded to them. The argument would be a more efficient payment system, cross border, domestic. There'd be more financial inclusion. Some would argue it would maintain reserve currency status. We've already touched on that. It's not compelling that that's the case, better macro policy, so the CBDC could be programmed to accomplish helicopter drops, something else. Are there any other arguments for CBDC we haven't touched on that you want to bring up? Or you think we covered them?

Other Arguments in Favor of CBDC

Skinner: Yeah, I mean I think we covered them on our meandering path, so far, more or less. I mean, again, just to sort of summarize and be really concrete, I think the biggest rationales or sort of reasons why proponents favor CBDC and the counterarguments are efficiency and sort of modernizing the payment system. Again, I think there are better ways to do that by thinking about streamlining AML a little bit more and focusing on the strengths of our correspondent banking sector. There's the financial stability piece as you said, but there are arguments on both sides.

Skinner: I think one thing we didn't talk about is one of the reasons why a lot of central bankers favor CBDC, is they're concerned about the potential financial stability ramifications of the rise of stablecoins, and what that is going to do is sort of replicate this sort of free banking chaotic era. That's sort of the imagery that's often brought up. But again, if we have a world in which there's going to be some degree of disintermediation of the banking sector, some potential phenomenon where there's a flight to digital dollar safety outside of the banking sector during periods of turmoil, well that's a financial stability risk too. So how do those two things cut? It's hard to know.

Skinner: Protecting the dollar status, we talked about this a little bit. What we didn't talk about is this is often brought up in the conversation of, "Well, what about China?" China has a fully launched ECNY and is that going to rival the dollar? You hear a lot of this conversation in Congress sometimes. I think most people have by now gotten comfortable with the notion that reserve currency status has everything to do with trust in a country, the rule of law, well-functioning institutions, which again suggests that the dollar is likely to remain the incumbent in the world reserve currency and is not likely to be threatened by a digital currency in China.

Skinner: Then financial inclusion, we did touch on this too. The only point I would make is that financial inclusion is one of the big reasons that people often advocate for a CBDC. But it's another area where I think if you press a little bit, it's hard to really pin down how CBDC would help. And I think we can all agree that financial inclusion is a hugely important goal for society to wrestle with. But when you look at the data about how many people have bank accounts already, and Miki Bowman was really great in pointing this out, it's like 95% of people. The remaining 5% or so of those who don't have bank accounts are unlikely to adopt a bank account in a world of CBDC, because for many of these people, the barriers or the lack of appetite for a bank account, really has entirely to do with sort of trust in the government. And so CBDC seems to cut in the opposite direction. So I think there have been a lot of reasons put forward in CBDC, but so far, at least in my mind, none of them really carry the day.

Beckworth: Okay, so let's get to the argument your paper is making in response to all these calls for a CBDC, all of these arguments for a CBDC. And your key argument is that, if we were to adopt a CBDC in some form, it would dramatically alter the bundle of rights that we have embedded in money today and the monetary institutions we have. So unpack that force. What does that mean?

How Would CBDC Alter Monetary Rights?

Skinner: Yeah, right, exactly. So I have this analogy that I use for trying to think through CBDC in a bit more of a discerning fashion. So rather than just using this sort of economic analogy that a CBDC is just like a digital dollar, I'm trying to generate some public debate around, what is the thing actually that you would be holding? What kind of rights does it confer on the individual holder of a CBDC, and how those rights compare with the kind of public money we know and use today? And to do that, I try and sort of disaggregate money in this, as I call it, bundle of rights. It's a phrase that property scholars often use, and I think it's actually really helpful in the context of thinking through a novel form of money like CBDC.

Skinner: I talk about three sticks in my bundle of monetary rights here. I talk about monetary sovereignty, which is, which entity in society, is it the state or is it the people, has a right of issuance, a right to issue money? Where is the default or the set point there? I talk about monetary property. We spoke about this a little bit, but how secure is your right to the value that's sitting behind your dollar right now? Is it malleable? Is it inalienable? And then I talk about monetary privacy, both in the sense that we were talking about before, in terms of how much information can the state gather about what you're buying or your payments patterns and so forth. Also, in terms of who is capturing the value that's thrown off in your payments pattern? So that's a little bit different from the surveillance aspect of privacy. And it has more to do with, in a digital age, what are the economics of information or economics of privacy, and who gets to capture that value? Is it the state or is it people? So I can quickly sort of unpack each one of those one of rights and give you the upshot.

Skinner: So monetary sovereignty, as I was saying, that's really about the right of issuance. Does the state, the government have a monopoly on the ability to issue money or something close to a monopoly on the right to issue money, or is it people? And the reason I started thinking about monetary sovereignty in particular, is because I found it interesting that I kept… or I would often hear assertions that CBDC follows from the notion of monetary sovereignty. So if you agree that states are sovereign over their monetary regime, then you must agree that they should be able to create CBDC. But when I thought about this and I did more research on it, what I realized was missing from the conversation is that, there are really two conceptions of monetary sovereignty.

Skinner: One is a conception grounded in international law, international monetary law, which basically suggests that states, vis-a-vis other states, are sovereign over their monetary regime. So one state can't interfere in the monetary policy, that decision about how or what to create currency, of another, right? Sort of analogous to territorial sovereignty. And of course in the context of CBDC, that's true, which is to say that the United States can't tell the United Kingdom to create a CBDC and vice versa. And every state is going to do what it wants to do with CBDC. So that's all fine and good, but we can't use that really thick notion of monetary sovereignty to then justify the state's creation of CBDC on a domestic level. Because, actually, when people are talking about monetary sovereignty domestically, what they're talking about aren't sort of states relative to one another, but they're talking about the dispersion of power over money between the state, the government, and the people.

Skinner: So if you look at the sort of intellectual history here, what you learn is that for much of human history, essentially it was the state that controlled the right to say what money is and to create money, because of course that would give the Prince or the Pope or whomever a considerable amount of power in society. And again, so for much of this Western legal and monetary thought, it was this, I'll say prince, for lack of a better word for sovereign; it was the prince that had this exclusive prerogative to issue money. And it made sense because we wanted the prince to have total control. Now, when this country was founded, the framers went with a very different version of monetary sovereignty. And intentionally so, they went with a version of monetary sovereignty that had developed in the Middle Ages, but had theretofore been quite heterodox, called popular monetary sovereignty. And that theory was developed by a person named Nicole Oresme. Now, as you might imagine, popular monetary sovereignty was a direct reaction to some of the abuses that we had seen from the Middle Ages through the early 18th Century, using the right of issuing and controlling money as a tool of tyranny.

Skinner: So what we saw at the founding was that the framers intentionally wanted to make sure that the prince, which in our case, the closest thing would be the President, would not have very much power over money at all. And definitely, the government would not have a monopoly over issuing money. So you can see a couple of features in the US Constitution that safeguard this. So individual states cannot issue paper money. So I mean states as in the 50 states, fewer than that at the time. We also saw quite a bit of skepticism about the federal government and paper money in all of these founding era discussions.

Skinner: So the constitution didn't actually go so far as to prohibit the federal government from issuing paper money, but it only gave it the express authority to create hard currency, so coins, which means that that would leave room for the people, the private sector, to create paper money. And you read this against the context of the Ninth Amendment. So the Ninth Amendment gives the people all the rights, they retain all the rights that are not given to the federal government. This is a very broad statement of popular sovereignty. So we the people in the United States are the sovereign, and presumably, this applies to money too.

Skinner: So right from the get-go, we have this tradition of private actors, the people, being able to fill in the gap and create paper money. And this notion of popular monetary sovereignty that we would have private institutions creating money as a check against the state's power to issue money really sticks in our culture over time. And if you look at the history of US monetary experimentation, you see that there's quite a lot of it; some of it successful, some of it not. But the fact remains that we've always had this vibrant culture of allowing the private sector to experiment with the creation of new monetary instruments. And we've never really lived in a world in which the state has a monopoly over issuing money. We've had this version of popular monetary sovereignty.

Skinner: So to cut to the conclusion here about what CBDC would do to monetary sovereignty, I don't think… by no means would it extinguish popular monetary sovereignty. But again, it's a shift, right? So it shifts the balance of these issuance rights from the people to the state. Again, because the express goal of CBDC is to, at least to some degree, shift the way people use money, to shift it from private sector issued demand deposits to the state, right? And psychologically, people are going to perceive CBDC to be safer. And so we are going to see, at least to some extent, a movement from the banking sector to the state, which again correlates to this shift from popular monetary creation to state-backed money creation. So that's monetary sovereignty.

Beckworth: Quick question on that. So from where I sit, it seems like there's been a growing nationalization of money, which is what this first point addresses. And I wonder if CBDC is just an extension of that. So let me give a concrete example. So if you look at the Fed's balance sheet, it used to be that just banks had access to it. Now, money market funds have access to it. And CBDC would be kind of further opening that balance sheet, and so the state would have more and more control over money creation. And this first point is to highlight this transition that would happen under CBDC, and to at least have us recognize that it's happening and to think about it. As you mentioned, part of the motivation for the paper is to have a debate and to consider that there is this growing nationalization of money creation.

Skinner: Right, right. I think that's pretty much exactly it. I mean, one thing I will flag, though, is that CBDC is different in kind in the nationalization of money, and it crosses a Rubicon in my mind. So to the extent that the Fed has been opening up its balance sheet to money market funds, and maybe one day it'll open up its balance sheet to stablecoin issuance, who knows, right? But to my mind, that really reflects the Fed adapting its balance sheet to the adaptations in the financial system and the money markets in the way that it was built to do.

Skinner: However, opening its balance sheet to households or creating a CBDC, rather than adapting its balance sheet within the ambit of the financial system, it's establishing a direct relationship between the Fed and the people, and households. And that, this is part of question of monetary sovereignty and the growing sort of nationalization of money. But also it sort of implies a bigger safety net from the Fed to households that has never existed before, with the exception of a few limited examples. So we talked about people's QE before. Is that going to then float from the realm of the hypothetical and academic to something that's really an expectation, if we think that the Fed's relationship with households is an equipoise to its relationship with banks and money market funds. Because if the Fed is creating emergency facilities for banks and money funds and has the same relationship with households, then is the Fed going to be responsible for that? So I think it's the nationalization of money, but also a much bigger sort of state safety net, just in general.

Beckworth: Okay. Well let's move on to your second point in that bundle of rights. The more secure property rights would be lost or become more malleable. Is that the argument?

Skinner: Yeah, exactly. So in some ways, this point about monetary property is quite related to the point about monetary sovereignty, which is to say, if we go back to these sort of enlightenment era ideas and think about how our culture around money developed from the get-go, there was this very strongly held view that money is a stand-in for value and the value of the things we can exercise self-ownership over; so physical property, intellectual property, the fruits of one's labor. And in line with naturalized traditions around property, those tend to be considered inalienable property rights. And this more or less squares with our intuition about money.

Skinner: If you have cash or currency, you expect that that is an inalienable property, that the state can't really come in and say, well, that your $10 bill is not your $10 bill. Your $10 bill cannot be used to buy toothpaste at CVS anymore. You can only buy mouthwash or something like that. And I have a lot of sort of history of political thought in the paper, but the basic point is that money should and has been thought of as a right that is quite secure, relative to what the state can do to it without widespread democratic assent. But a CBDC is fundamentally different. It's not like private property. It's more like a policy instrument for all the reasons that we've been discussing. And because, by virtue of the fact that it's programmable, it's by definition not an inalienable right.

Skinner: So it's really something that is built to and can enhance the administration of government. But it's really far off, I think, from the way that we've been thinking about the security of ownership and the money that we have today. Now again, anything is possible policy wise. Congress once gave FDR power to directly inflate the currency. So certainly, the integrity, the value, the stability of our money today can be fiddled with by an active legislation or so on and so forth. But the point is that we've never before had a monetary instrument that is intentionally something that you can program to make tweaks to policy, and what is that going to mean for the way that we experience the stability of our money on a day-to-day basis.

Beckworth: So like the first point you brought up, this would be crossing the Rubicon. It would be a big significant difference than what we have previously experienced, in cases where the value of money has fluctuated. This would be a significant departure.

Skinner: I think that's right. And I think it's also important to emphasize that the CBDC conversation is in some ways kind of tough, because it's hypothetical in a lot of ways. We don't have a CBDC, and central banks haven't really been very firm about which design preferences they would adopt. And sometimes those preferences have seemed to shift. And it may well be the case that a CBDC could be adopted in some form and everything would be fine and stable and hunky-dory for 20, 30, 40, 50 years. But I do think it's improvident not to try and look at the universe of possibilities against this very long monetary and intellectual history around money, and think about, well what is a CBDC capable of, and recognize that leadership in Congress, in the White House, in the Fed, it shifts and changes. So we need to go in eyes open and think about, what rights do we have today and what rights, as a baseline, would CBDC secure?

Skinner: At a minimum, having a CBDC doesn't guarantee privacy to the same extent we have today. It doesn't guarantee that the private sector will still have this sort of popular culture around monetary issuance, and it can't guarantee that it's not going to be an increasingly fluctuated policy instrument. And I think it's important to balance here to not sound too dystopian or hysterical, but to also recognize that it is a really different bundle of rights that need to be very well understood before it's something we take on.

Beckworth: Alright, so the last point in this bundle of rights is that a CBDC would create a more precarious promise of privacy. So walk us through that.

Skinner: Right, right. So I think we talked about this a little bit already. To the extent that you have a CBDC that could in theory confer a direct stream of information to the Fed, Treasury, and possibly White House, that is different in degree from the demand deposits that you hold today. This is not to say that is definitely how the CBDC will be designed today, but it is a programmable instrument. And so it suggests that if the appetite to modify privacy protections existed at one point in time, it could, in turn, be modified. And we might think, as a society… I happen to think this, not everybody does, but there are probably some sizable population that does, that the private sector is less likely to trample on your privacy than is the state, right? Because the state has the incentives to try and sometimes engage in social engineering, or to sometimes just fine tune its policy preferences. For varying reasons, we might think that that degree of privacy is reduced, when it's a state issued money vis-a-vis or relative to a bank issued electronic currency.

Skinner: So I think, without a doubt, we can say that the protections around privacy are lower. And on an absolute basis, if we're in a world in which 90% of monetary instruments held today in the form of whether they're cash or demand deposits, and most of those things are demand deposits, if we think that now more people are going to be holding CBDC than sort of on an absolute population basis, then our net level of privacy is likely to be at least somewhat reduced. So that's the sort of privacy surveillance piece. But I also want to come back to this question about privacy as understood from who is capturing the value behind our payments transactions. And that's a very different kind of conversation. That's not a conversation about information for the purpose of surveillance, but it's sort of just information for the purpose of being valuable.

Skinner: So we know that the things that we buy are valuable to advertising companies, and right now Google and other major advertising engines are able to capture that value and monetize it, whereas individuals typically are not. And there's an increasing conversation in the economics literature around privacy about, well, how can we make it so that individuals can monetize the value that's thrown off when they're on the internet buying groceries or looking for clothes or diapers or what have you. And the question is, if we move to a world with CBDC, are we going to seed some of that value to the state and encourage rent seeking by the state? Just swapping that out for rent seeking by Google and so on and so forth. And is the state going to be better able to tailor policy without necessarily needing to consult individuals or end run congress? And is there any risk in the state's ability to capture the information behind our shopping and browsing patterns, that we might need to give more thought to?

Beckworth: Okay. Well we are at the end of the show, but Christina, final words you would give to all of the central bankers who are listening, to all of the people on Capitol Hill who are listening to the show? What do you want them to take away from this conversation?

Skinner: I think the big thing to take away is to just slow down. I think CBDC is really interesting, intellectually, but there are clearly a lot of legal and economic issues that need to be much further fleshed out. And so I would just say that there's no great urgency in creating a CBDC, and we can all take our time and make sure that we really understand the butterfly effects of a CBDC before moving forward.

Beckworth: Okay. Our guest today has been Christina Skinner. Her paper is, *Central Bank Digital Currency as New Public Money.* Christina, thank you for coming back on the program.

Skinner: Thanks so much for having me.

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