There’s a lot of hype around CBDCs.

But after a closer look at some CBDC pilots, I think we’re NOT going to see a lot of CBDCs except from a few big countries. Here’s why 👇

1. Building one from scratch is hard.

A CBDC is essentially a stablecoin backed by the central bank. Seeing it from that perspective you may think it’s easy.

You can deploy a ERC20 token in half an hour. Now just promise to back it up w/ equivalent amount of fiat assets, and you’re done. How hard can it be?

But remember an official currency issued by a central bank is on a totally different scale. Take a small country like Uruguay. 3.5 million population. If each person makes 2 payment transactions a day, the system needs to handle 7 million transactions per day.

The entire ethereum blockchain can only handle less than 3 million transactions a day right now. It won’t cut it even for a tiny nation state.

If you want a CBDC today, you’d have to roll your own (centralized) system that meets extremely high scaling and security standards. That’s costly and difficult. If you’re US, China, or EU, you may be able to afford it. But for most countries this is a hard sell to the tax payers.

2. The benefit is not obvious.

Imagine if you walk into the office of Uruguay’s central bank governor, trying to talk him into having his own CBDC—

You: “Governor, you should have a digital currency to bring the monetary system into the digital age.”

Governor: “What for? Our payment system works just fine.”

You: “Yeah, but digital currency transactions are cheaper for users.”

Governor: “Cash is cheaper for me to issue though. And old people like using cash. We have a lot of old people.”

You: “Digital is better for cross-border transactions.”

Governor: “Talk to me about cross-border after our bigger neighbors have done their CBDC. Why don’t you ask Argentina and Brazil to issue theirs first?”

3. Central banks don’t have the know-how.

Central bankers are bankers, not technologists. They don’t have the human resources ready to make a CBDC in house.

They can hire people, you say.

Well, have you tried hiring engineers as a non-tech person? It’s a disaster most time. How do you know what kind of talents you need? How do you interview and evaluate them? Not to mention a CBDC expert doesn’t really exist since the space is so new.

4. Working with private vendors is tricky.

You say, why not outsource it to a company that has the know-how?

This is much easier said than done. Central banks used to be only responsible for the cash they issue. They are not responsible for managing transactions or user data. Shifting to the latter is a big leap.

If anything goes wrong, the central bank is liable, not the private vendors. The responsibility misalignment gives CBs less incentive to work with vendors, and they can’t do it on their own either. It’s a tricky situation.

5. There is no international protocol to follow.

If you roll your own CBDC now when not many other countries have done it, and later it proves to be incompatible with the systems of bigger currencies, you’re screwed. Large first-mover disadvantage here.

That means most countries would wait for US, China and EU to set the standard and example for CBDCs before they do anything seriously on their own.

6. You will be cannibalizing domestic banks.

When you allow citizens to have a wallet for CBDC, you are making banks’ checking / savings accounts obsolete.

You could make banks’ life easier by, for example, 1) limit the amount held, transaction number, and spending volume of a digital currency wallet, 2) allow banks to be the providers of these wallets.

But however you slice and dice this, banks’ lives will never be the same. They will lobby, stall, kick and scream. They will remind you that as the central bank, your first mandate is financial stability, not innovation. And they have a point.

All said, I’m not expecting to see a flood of CBDCs anytime soon despite all the hypes around it.