The Politics of Adopting Central Bank Digital Currency

• In Event: International Monetary and Financial Governance

Abstract

As of 2023, more than 130 monetary authorities worldwide have shown interest in adopting a Central Bank Digital Currency (CBDC), a digital form of money backed by the central bank and based on a digital ledger secured by cryptography. CBDC functions like cash but relies on a digital wallet provided by entities such as commercial banks like Chase, online payment platforms like PayPal, or the central bank itself.

State leaders typically cite benefits to domestic financial inclusion and economic development as incentives for adopting CBDC. In contrast, political observers point out that CBDC has the potential to assist geopolitical adversaries of the US in evading financial sanctions and establishing a new cross-border payment network to challenge the dominance of the dollar. Hand-coded data in this research reveals that the development of retail CBDC, which usually serves domestic individual customers, generally lags behind the progress of wholesale CBDC targeting organizational users and cross-border payments.

Applying the Event History Analysis (EHA) model, which treats the duration for states to express interest in CBDC as the dependent variable, the study compares explanatory variables that gauge the extent of financial inclusion on both international and domestic fronts. The results indicate that US financial sanctions significantly expedite states' adoption of CBDC, and there is a marked interest among US geopolitical rivals in forming digital currency alliances. These findings hold implications for broader discussions on international currency competition and the delicate balance between fintech, privacy concerns, and digital surveillance issues within democracy and autocracy.

Author

• Jingding Wang, Syracuse University