Today, a group of doctoral students published an opinion piece in the Financial Time, arguing that central bank digital currencies (CBDCs) could further politicize the role of central banks, which in turn calls their independence into question.

Their logic is that the larger the central bank’s balance sheet, the more politicized the institution becomes.

They point to the rapid growth in central bank balance sheets that occurred before we even considered a CBDC. Before the 2008 crisis, the assets of the European Central Bank (ECB) and the Federal Reserve were respectively 1.5 billion euros and 0.9 billion dollars. These have multiplied to reach 4.7 billion euros and 4.2 billion dollars before COVID. And they now amount to 7.9 billion euros and 8 billion dollars.

If a CBDC is issued, it will further increase their balance sheet. For example, if a quarter of US bank deposits change, it could rise to $ 4.5 trillion. Morgan stanley recently estimated that if all EU citizens over the age of 15 transferred € 3,000 to a CBDC, this would equate to € 873 million or an 8% change.

The trio of academics from the Swiss Finance Institute argue that central banks, which might previously have been viewed as technocrats, are starting to take on a more political stance. This is due to the growing size of the balance sheet, directly guaranteeing such a large proportion of retail CBDC deposits, combined with the fight against climate change. All the authors are Italian, and they also point out that the former head of the ECB is a politician, Italian Prime Minister Mario Draghi. And former Fed Chairman Janet Yellen is now United States Secretary of the Treasury.

Earlier this year, the same authors published a academic document. In it, they assume that a liability of the CBDC to the public will be offset by additional assets. They explore different scenarios of how central banks might invest these assets, whether in treasury bills or riskier securities.

They conclude that if a CBDC is issued, it will be more difficult to unwind QE in a scenario. If bank deposits are transferred to CBDCs, banks will likely compensate for this by reducing their reserves. But lower reserves mean lower appetite to buy back assets that the central bank is currently accumulating.

The end result could be semi-permanent quantitative easing.

Another problem they warn is the potential for negative interest rates. Earlier this week, the chief economist at the Bank of England pointed out that this is a huge advantage of the CBDCs as a monetary policy tool from the central bank’s perspective.


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