What Is CBDC and Why Did Russia Launch One?
Central bank digital currencies (CBDCs) have emerged as a transformative force reshaping the world of currency and finance. Among the nations embarking on this groundbreaking journey is Russia, as it has recently launched its own digital ruble.
What is a CBDC? Why is Russia launching a digital currency now? To gain insights on these questions, we spoke to David Andolfatto, former Senior Vice President at the Federal Reserve Bank of St. Louis and Chair of the Economics Department at the University of Miami Herbert Business School, and Marco Santanché, a former Credit Suisse quant strategist, and the author of the monthly series Quant Evolution.
The transcript below has been abridged and edited for improved clarity. For the full version of the interview, please refer to our video podcast.
Hedder: How do CBDCs differ from traditional currencies and what potential benefits can they offer to the economy and to everyday people?
Andolfatto: The first thing we should understand is that most money today already consists of electronic money. Think of your checking account, for example. I’d liken a CBDC to just having an online checking account with your central bank. The main difference is that bank deposits are liabilities of commercial banks. CBDC is the liability of the government consisting of public money. Transactions using CBDC are free of counterparty risk and in particular, unlike a private bank, a central bank cannot fail. That's one difference that some people believe is important.
Would it make a difference for people at the retail level? I doubt it would. After all, what is the difference between an online checking account with Bank of America versus the Federal Reserve Bank? Now it is true that CBDC accounts would be automatically fully insured. They are, after all, legal tender. But this probably doesn't matter to most people because private bank accounts are already insured up to about a quarter million each. And for most people, I don't think that would be an issue.
There might be some benefits, I think, to the extent that it might serve as a basic public option, the same way the US Postal Service plays in delivery mail. But the net benefits are marginal at the retail level, at least.
Hedder: Is there any particular advantage then from the perspective of implementing monetary policy?
Andolfatto: The way monetary policy works today seems to affect bank lending rates more than bank deposit rates. Now, imagine a world instead where the Fed actually issued interest bearing CBDC, and they could adjust the interest rate on deposits as an instrument of monetary policy. You'd expect deposit rates in the banking sector to be more sensitive to Fed policy, and that might enhance the monetary transmission mechanism.
Hedder: How do institutional players view the introduction of CBDCs? What are some of the new developments among this group specifically?
Santanché: It's hard to predict, but we can consider the adoption by institutional investors of digital assets in general. So starting from there, studies have shown a surge in the trading volume of digital assets, although the majority of the major institutional investors would just hold maybe 1% or so of their assets in digital assets.
Of course cryptocurrencies are not the same as CBDC. We can view CBDC as a digital asset backed by fiat, which is almost like stable coins, but not exactly the same because stable coins are issued by companies that are for-profit and sometimes are not that transparent.
Hedder: It has been reported that a digital ruble might help Russia evade US sanctions. What is your take on that? Why is Russia launching a digital currency right now?
Andolfatto: I can't claim to be an expert, but Russia is probably just following what many central banks are exploring. And researchers at central banks are somewhat intrigued at the possibility of what this type of technology permits them to do.
A CBDC is not really going to help Russia evade sanctions. Russian citizens already have access to digital rubles in the form of bank accounts, just like we do. We have access to US digital currency in our bank accounts. What is the purpose of issuing a digital ruble if it's just going to be restricted to Russian citizens?
Now, it could potentially be used as a way to circumvent sanctions – for example, if Russia wanted to extend the privilege of opening up a CBDC account across its partners around the world. So foreign entities were permitted to open up accounts with the central bank of Russia. You could imagine a scenario where they could basically engage in bilateral or multilateral trade bypassing the dollar system altogether. That's a possibility, but they could already do that right now by just permitting these foreign entities to open up Russian bank accounts. So it's not immediately clear to me what the benefit would be of implementing this system through the central bank itself.
Hedder: Is it possible that the digital ruble could help bolster and strengthen Russia's actual currency?
Santanché: This is a very remote possibility in the sense that not many people actually support digital ruble, even among Russians themselves, due to the fear that this could be a tool for manipulating the economy or maybe monitoring the users.
I don't think it's an easy step to just adopt the digital ruble for trades, and it is unclear what impact it will have on the ruble itself. The most important thing is, first of all, we need to see adoption outside Russia. We need to see the digital ruble being used for actual transactions, for commodities and the likes. There are already discussions with China, and with the partners of Russia. So that could be possible. Eventually, that could go into different markets, but I think it's very remote at the moment.
Hedder: How might the introduction of CBDCs impact the role of the dollar as the world's primary reserve currency?
Andolfatto: My own view is that it's not likely to impact the role of the US dollar as a global reserve currency, if any foreign entity implements a CBDC. Things like trade policy and the willingness to run current account deficits matter much more. Now a related question is, how might the introduction of CBDC by the Fed affect the global demand for the US dollar? There is a potential that if the Fed were to make its CBDC available, say to foreign firms operating in the global supply chain, that might have a measurable impact on the global US dollar demand. It may to some extent displace emerging stable coins like Tether, for example, from taking that business. Generally speaking, there's a role for CBDC possibly to disintermediate large parts of the shadow banking sector.
Santanché: It's an interesting point in the sense that when we talk about central banks issuing decentralized currencies, who are the actual targets and why are they trying to provide an alternative to the fiat currency as we know it? I do think there are some use cases. Using CBDCs for transactions will be the first use case, and then we can think about financial markets and how investors and hedge funds could actually trade using these currencies or trade on the appreciation or the valuation of these currencies.
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