Central bank digital currencies and the fallacy of immaculate adoption

I recently noticed that the Bank of Jamaica, Jamaica's central bank, has implemented two new marketing strategies to drive adoption of its new central bank digital currency, Jam-Dex. Jam-Dex is one of only four operational central bank digital currencies (CBDCs) in the world, having been introduced to Jamaicans in July 2022.

Now, I have no idea if these efforts will get Jam-Dex to succeed. In 2022, the system processed just J$357 million (or $2 million U.S. dollars.), but that comprised just six months of operations, so that's probably not enough time to judge it. What particularly interests me is how Jamaica's strategy of offering incentives to businesses and consumers serves as advance warning to other central bankers that one of the key tenets of the CBDC intellectual enterprise, what I call the immaculate adoption doctrine, is wrong.

In their white papers on CBDC, central bankers generally assume that the product will be immaculately adopted. The thinking goes like this: "We don't have to worry about devising a marketing plan for our new digital currency, nor think about incentives to promote usage, or the possibility that the product fails. All we've got to do is design it, put it out there, and – presto! – the public will instantly flock to it."

But as I've been saying for a while now the immaculate adoption doctrine is wrong. CBDC will probably just be a middling payments product. Existing options like cash, insured deposits and fintech balances work just fine for most folks, CBDC adding no extra features to the mix. It's just not possible to take a middling payments product and launch it, effortlessly and immaculately, into wide adoption. A big and expensive marketing push from central banks will be required if CBDC is to ever be adopted, Jamaica's Jam-Dex being a good example. And even then there's no guarantee of success.

The immaculate adoption doctrine gets even worse, though. Supremely confident in the success of their product, many central bankers fret that it will be too popular, hurting the banking system by stealing their deposits. To prevent this, they are building flaws into the product, effectively turning a middling product into a crappy one. A crappy product is even less likely to succeed.

Dirk Niepelt and Cyril Monnet recently make this same point with respect to a euro CBDC. In order to protect the business models of European commercial banks, the ECB wants to "trim the digital euro's attractiveness," the authors say, by adding holding limits for consumers and merchants. However, given the fact that European private sector payment options are already quite convenient, Niepelt and Monnet worry that the imposition of these hurdles condemns the ECB's CBDC to death on arrival.

The immaculate adoption doctrine of CBDC needs to be replaced by the it'll-be-a-hard-and-dirty-slog doctrine of CBDC. First, if they are to flourish, CBDCs can't just be carbon copies of existing private payments options. They need to offer something unique. Figuring out what these features are will take years of trial and error. Second, central banks will have to resort to dirty marketing tricks, incentives, bribes, arm twisting – all usually the domain of the private sector – to kickstart their CBDCs. Lastly, central banks need to stop deluding themselves that they can simultaneously launch a decent CBDC while also preserving the banking status quo. Those two things aren't possible! Stop pussy-footing around and admit that the whole effort will involve breaking a few banks.

Given that CBDC will be a hard and dirty slog, and not an immaculate ascendance, central banks need to think deeply about whether they truly want to undergo the pain of issuing a CBDC, which means being sure that society really needs one. Otherwise, they shouldn't get into the game.