Central banks and corporations are racing for digital payment infrastructures. A blog post by the US Federal Reserve argues why a state digital currency (CBDC) would be a better solution.
Has the cash had its day? Surveyprove that in the wake of the corona pandemic, Germans are also increasingly paying digitally. This global trend can be explained by increased hygiene and comfort. Data protectionists are still alarmed, because cashless payments create an unimagined amount of data for corporations such as PayPal , Visa, Google and Facebook . Could privacy be better protected with central bank digital currency (CBDC)?
At least that’s what Rodney Garrett and Michael Lee claim in a blog postfrom November 23rd. The economist from the University of California at Santa Barbara and the researcher from the New York arm of the US Federal Reserve discuss a jointly published paper. The two describe CBDCs as “inexpensive, privacy-protecting electronic means of payment.” On the other hand, they reject Bitcoin and Co. because of high transaction costs.
Private payment platforms and the data monopoly
Garett and Lee first ask about the effects of digital payment infrastructure in private hands . As is usual in economic research, the considerations of the two authors are based on a number of model assumptions. They assume that companies use data to gain a competitive advantage and that consumers choose between different payment models based on the price. As digital payments promise user data, companies would create incentives for their use. As a consequence, according to the model, a data monopoly is forming on the market:
A company that gains small information advantage early on will aggressively price to increase its share of consumer data and monopolize the market in the long run. In such a market, we find that the monopoly controls the vast majority of the data and is able to offer a product that is far superior to its competitors‘ products.
What is beneficial for this company turns out to be a disadvantage for end users. Because only a fraction of the added value that has been generated by their data actually reaches them. With a CBDC, however, the calculation is different.
CBDC: When digital infrastructure meets cash
Digital central bank money goes hand in hand with the same convenience for consumers as private payment platforms. Still, a Garrett and Lee model CBDC offers the same wealth of privacy as traditional paper.
This gives end users another benefit. Because if private providers want to access consumer data, they have to make payment processing cheaper via their own platforms than via a CBDC. It is irrelevant whether consumers actually make use of the digital cash. The mere presence of a CBDC creates incentives for remuneration for disclosing one’s own data.
The reasoning of the two researchers is based on the assumption that central banks are not after profit and therefore have no use for user data. CBDCs could therefore help to save the anonymity of cash into the digital age. This conclusion may be correct for liberal democracies. In the case of China and comparable autocracies, however, state digital currencies in particular open up frightening monitoring and control options.