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Financial inclusion, stability of payments, efficiency and implementation of monetary policy touted as benefits of central bank digital currencies

By on May 10, 2021 0

Central bank digital currencies, using an electronic record or digital token to represent the virtual form of a country’s fiat money, could offer a range of benefits, according to a research report by the financial management firm Bernstein. .

The report argues that in an environment where more than half of all payments are already made digitally, modernization of the global payments system is inevitable and essential for many reasons, including financial inclusion, stability of payments, l effectiveness and implementation of monetary policy.

“This becomes all the more important as blockchain technology unleashes a new wave of value creation and industries that are powered by their own native digital tokens. In the absence of a central bank digital currency, that can providing easy access ramps to crypto, stablecoins If unregulated, stablecoins present many risks for monetary policy, anti-money laundering / know your customer and protection of consumers, ”says Bernstein.

A stablecoin is a type of cryptocurrency that attempts to provide price stability and is backed by a reserve asset.

“It is no coincidence in our opinion that central banks have only started taking CBDCs [central bank digital currencies] in earnest after Facebook announced its Libra project, which catalyzed an arms race for the CBDCs. According to a survey by the Bank for International Settlements, over the past four years, the percentage of central banks interested in a CBDC project has increased from 65% to 86%. Only the central banks of very small countries are not currently turning to CBDCs according to the survey. “

Speaking at a press conference last week, Christian Hawkesby, deputy governor of the Reserve Bank of New Zealand (RBNZ) and managing director of economy, financial markets and banking, said the RBNZ was among the central banks that actively sought out CBDCs.

“We have a money and treasury department that’s partly dedicated to thinking about things like that. So we’re working on it and we plan to say more over the course of this year,” said Hawkesby.

Meanwhile, in his report, Bernstein asks what can a digital currency do that a fiat currency cannot? He notes that we are in an environment where most consumer-to-business, business-to-business, and bank-to-bank payments are already electronic.

“A digital currency can perform various functions, including:
1) Foster financial inclusion (especially in an environment where consumption of cash is reduced and lack of access to bank account for all) – CBDCs could essentially replace cash in the digital world,
2) Increased efficiency thanks to programmability features (for example, automatic execution of certain transactions under predefined conditions),
3) Better implementation of monetary policy (e.g. possibility of charging negative interest rates, which is not possible with cash),
4) Modernization of the home payment infrastructure that could run on a 24×7 architecture for fiat dollars that are tied to the existing infrastructure, ”says Bernstein.

In a deflationary environment, CBDCs could allow central banks to impose deeply negative interest rates, Bernstein said, adding that this would also require broader policy decisions such as transferring wealth from savers to borrowers.

A second macro consideration, although firmly on the side of politicians rather than central bankers, concerns wealth taxes. A negative interest rate can be viewed, in a sense, as a wealth tax. An environment post-pandemic which is poised to see significantly greater inequalities will likely lead to an increase in wealth tax calls. By limiting the ability to withdraw cash, CBDCs could allow such wealth taxes, even if we note that a negative interest rate is only a wealth tax for investors who hold assets of very short duration – i.e. in cash – then it potentially increases the value actions. “

“But it raises other policy concerns that go far beyond the narrow topic of digital currencies alone. It would take a huge debate about what that does to the relative wealth and power of savers versus creditors. Already had a debate about in Germany, it would probably only intensify if CBDCs were created. Before people get too excited about the technological possibilities, this political debate has to take place, “suggests Bernstein.

When it comes to cryptocurrencies, Bernstein says the launch of CBDCs could make them appear more mature and accepted. But there is also a risk of confrontation.

“For example, if central banks wanted to impose deeply negative rates, then bitcoin would become very useful in protecting capital from such a rate. However, it would be so useful in that it could hamper the implementation of the monetary policy. policy and, therefore, there could be a call for its use to be restricted. “

Then there is geopolitics, with the dominant role of the US dollar since World War II, and the “existential questions” of monetary sovereignty.

The dollar is preeminent in international payments. However, the ability of the United States to ‘militarize’ the dollar, the recovery in demand for gold from central banks like China and Russia over the past decade and a part of the growth in cryptocurrency use indicates demand for alternatives. This could force the G10 [Group of 10] countries, in particular the United States, to anticipate such a decision, for example by China, and to establish their own digital alternative. There could also be a more general concern here about the need to maintain monetary sovereignty in the face of competition from cryptocurrencies or foreign digital currencies, ”says Bernstein.

The report goes on to suggest that while modernizing the global payment infrastructure through CBDCs poses threats to almost all incumbent operators, including payment networks, central banks may ultimately partner with these networks to achieve scale, ubiquity and utility, and to avoid the cost of building a new payment infrastructure. In terms of payment networks, Bernstein talks about tax minimizers Visa and Mastercard, as well as PayPal and Square. In fact, some central banks are already working with payment networks, Visa and Mastercard with a long history of skill. partnership with threats to their business.

“Mastercard recently announced a collaboration with the Central Bank of the Bahamas to instantly convert their digital currency to traditional Bahamian dollars for use in retail payments. Both networks proactively engage with governments on digital currency design considerations. Visa recently published a technical document describing an approach for offline payments on CBDCs. Mastercard too recently launched a CBDC test platform. “

“Interestingly, Visa and Mastercard recently announced capabilities to settle stablecoins on their networks – a suite of capabilities and partnerships, which could be useful if / when CBDCs are widely launched,” Bernstein adds.

The report also suggests that overall, CBDCs are positive for digital wallet providers such as PayPal and Square, which suggests that they will likely position themselves as retail distributors of CBDCs.

“If successful, this will further strengthen their positioning as financial super-apps, with huge implications for revenue and value per user. Being CBDC’s large distribution platforms could be a big deal for the company. user growth, engagement, cross-selling of financial services, and lower legacy payment costs, which dramatically reduce gross margins. On its recent Investor Day, PayPal said that he seeks to engage with governments on CBDCs. “

Despite all the potential, Bernstein says it is possible that most CBDCs may never see the light of day, with central banks pursuing different options.

“Most central banks have not yet decided whether they will launch CBDCs. Central banks may also simply consider improvements, for example on digital identity, universal access, speed, 24-hour availability and 7/7, on the ramps of digital markets to existing fast / real-time payment. It is possible that many central banks will eventually choose to create a better / stricter regulatory framework for stable coins which, when it is better regulated, can help achieve similar policy goals. “

(Note: AE stands for Advanced Economies and EME stands for Emerging Market Economies).

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