Central banks worldwide are accelerating retail CBDC (central bank digital currency) initiatives, with a notable drive on the digital Euro, and the digital pound.
Yet skepticism and resistance are on the rise. Commercial banks fear deposit outflows and costs and see CBDC as an unwelcome intervention in their business model. Meanwhile, public mistrust is intensifying, with concerns over privacy, surveillance, and government
over-reach.
Without a clear and compelling rationale plus effective communication, CBDCs risk being dismissed as a solution in search of a problem—or worse, fuelling conspiracy theories about hidden agendas.
So, let’s cut through the noise.
In an age of instant, low-cost (from the perspective of the consumer) digital retail payments, why do we need a retail CBDC?
Skeptics point to uncertainty around consumer demand and the lack of a clear use case, to argue that CBDCs are a ‘solution in search of a problem.’
However, this sort of debate often conflates two distinct issues: the policy rationale (the fundamental problems a CBDC aims to address) and the use cases (why individuals might actually adopt it).
Proponents cite a diverse range of policy objectives—from promoting innovation and competition to improving resilience and supporting financial inclusion - many of which could be achieved through other means, prompting questions about whether a CBDC is a
natural evolution or merely a sledgehammer to crack a nut.
However, core policy arguments address more fundamental, intrinsically monetary issues stemming from the unique role of public (central bank) money and the delicate balance between public and private money that underpins our monetary systems. This rationale
has been at the core both of the UK’s rationale for the digital pound and the ECB’s push for the digital euro and has gained significant traction within the central banking community internationally.
Yet, these concepts are largely absent from everyday discussions about money and debates on CBDC, and potentially challenging to communicate to a wider audience. Moreover, foundational uncertainties persist, with no clear consensus within central banking
circles, even as CBDC initiatives gather momentum.
Unmasking the power of public money in the monetary system
Although 96% of the UK’s money supply is held as commercial bank deposits (private money created by commercial banks), the ability to move money—whether making payments or switching banks—ultimately rests on central bank money (public money created by the
Bank of England).
Consider digital payments: if I want to transfer money to you and we bank with different institutions, my bank must send central bank reserves to yours. These “reserves”—essentially an existing form of CBDC—are available only to commercial banks, not to
individuals like you or me.
Alternatively, I could pay you in cash—currently the only form of central bank money accessible to the general public. If I withdraw cash and hand it to you, you can deposit it at your bank without any loss of value. To facilitate such withdrawals, banks
themselves need to hold or acquire cash.
This one-for-one convertibility between commercial bank deposits and central bank money is what underpins both the usefulness and trustworthiness of bank deposits as a means of payment, thus their value. It also ensures that deposits at different banks remain
interchangeable without any loss of value, preserving what has come to be referred to as the ‘singleness of money’.
The policy case made for CBDC has focussed on the role of public money in singleness. But beyond singleness, because commercial banks rely on central bank money—whether as reserves for interbank payments or cash to meet customer withdrawals—which only the
central bank can supply, the central bank is able to conduct monetary policy by adjusting the terms on which it makes this money available.
Through this mechanism, they regulate the risk of inflationary money creation by profit-driven private banks and help maintain a low, stable, and predictable overall price level. The importance of this role cannot be overstated: when money rapidly loses
value, as in hyperinflation, trust evaporates, and money’s usefulness as both a store of value and a medium of exchange disintegrates.
However, cash usage has been in long-term decline. In the UK, card payments surpassed cash in 2016/17, and by 2021, cash accounted for just 15% of transactions. As its use continues to shrink—and with the possibility that it could eventually disappear—policy
concerns have emerged over whether interbank settlement in central bank reserves alone can sustain the role of central bank money in preserving monetary unity (singleness) and anchoring price stability.
Moreover, the growing prospect of private stablecoins and/or tokenised bank deposits being used for payments raises new questions. Convertibility across different forms of privately issued digital money—without fragmenting the monetary system—may become
an increasingly complex challenge, where neither cash nor existing interbank settlement mechanisms will serve.
This becomes particularly pertinent as legislative efforts on stablecoins outpace both technical groundwork and public discourse on CBDCs (the Gillmore Centre for Financial Technology provides a detailed assessment in
our input to the Bank of England on stablecoin regulation).
Can Central Banks build public understanding and trust?
Communicating these issues to the public presents a challenge. But simplifying as some central bankers advocate by calling retail CBDC “a digital version of cash”, only creates confusion and breeds mistrust, as most people already perceive bank deposits
as digital cash, so the distinction is lost on them.
But the problem runs deeper than communication. There are fundamental ambiguities. While cash has historically played a role in maintaining the singleness of money, is a retail CBDC necessarily essential for this purpose in the future?
Interbank settlement in reserves also supports singleness, raising the legitimate question: could the system function without cash (or other retail access to central bank money) entirely?
Countries like Sweden—where only 8% of the population reported recent cash purchases in 2022— may be seen as starting to test this question. This said, while Sweden is a highly digital economy, convertibility into cash remains an option and arguably continues
to shape public conceptualisation of and trust in money.
There may be a case simply that relying on a narrow set of mechanisms to secure something as foundational as monetary singleness and price stability may be too risky. What is more, if public demand for convertibility between bank deposits and retail central
bank money were to vanish, could it be hubristic to take the role of central bank money in wholesale transactions for granted?
Would people actually use a CBDC?
Even with a strong policy case, a CBDC can only fulfil its purpose if people adopt it. Success hinges on trust and widespread use.
Some (often central bankers) argue that people trust cash because it is issued by the central bank. But it seems likely a mix of physicality and personal control that makes cash so trusted. The growing populist backlash against CBDCs—centred on privacy concerns
and mistrust of central banks—underscores this divergence.
Even if central banks assuage public suspicion, the question remains: why would people use a CBDC?
Identifying clear use cases is key. Potentially the failure of current CBDC proposals to significantly differentiate themselves from bank deposits, may raise the risk of adoption failure.
In the UK, relatively strong retail payments landscape would present a challenge for the digital pound. However, the Future of Payments Review
led by Joe Garner for the UK’s Treasury rightly identified two pain points: clunky consumer-to-consumer payments; and perhaps biggest of all, merchant frustration over high card payment costs and lack of alternatives.
A digital pound is not the only solution here, but perhaps these concerns suggest a pathway to adoption. However, a major hurdle remains: most consumers don’t directly bear payment costs—merchants do. Since prices typically remain the same regardless of
the payment method, there’s little direct incentive for users to switch, complicating adoption.
Power, privacy, sovereignty and Pan-European ambitions in a fragmenting world
These difficulties of communicating the issues at stake, combined with some remaining uncertainties about the policy rationale and weak consumer use cases, suggests that the first CBDC projects to advance may be those that resonate with political and public
sentiment.
While singleness of money has featured prominently in the digital euro project, the narrative has increasingly emphasised sovereignty and a unified pan-European digital payment infrastructure. The digital euro is touted as providing a single European digital
means of payment, with guaranteed value as legal tender, and a strategic pivot away from non-European payment service providers (i.e. the US card networks).
This political angle, appealing to European unity and sovereignty, could gain traction where abstract monetary theory fails to engage. Amid rising global tensions and diminishing trust in US-led systems among European policymakers and the public, the digital
euro may be seen as a strategic tool to safeguard financial autonomy and ensure that Europe's payments infrastructure remains resilient in an era of escalating geopolitical uncertainty.
The move to incorporate truly 'cash-like' features into CBDCs—such as enhanced privacy and offline functionality—is also notable and represents a significant concession to public concerns.
While these features may increase competition with cash and even accelerate its decline, they also address heightened public anxieties around privacy and the potential weaponisation of payment infrastructures – anxieties around CBDC are ironic in the context
of widespread reliance on payment systems that are not private and controlled by foreign powers. In a digitalising world where geopolitical tensions can disrupt payment systems, a CBDC with cash-like attributes could carve out a unique niche.
Difficult as it may be, attempting an honest debate, in which we make and test the actual arguments behind CBDC projects, and their validity and viability, is the only way forward.
As part of this effort, the Gillmore Centre for Financial Technology examined the policy rationale, design choices, implementation challenges, and broader implications for the digital pound in our response to the
Bank of England’s consultation.
Continued research, alongside open and inclusive dialogue, will be essential to ensure that CBDCs are developed in a safe and responsible manner, serving the best interests of society. We must progress this work and debate before parliament is faced with
a decision on whether to launch.
This is the latest in the Gillmore Centre Series, in which authors from the
Gillmore Centre of Financial Technology
at Warwick Business School examine new innovations in fintech from an academic perspective. Keep an eye out for more articles from the Gilmore Centre to learn more about new developments in the field.