July 2, 2022
  • July 2, 2022

Now is the time to embrace central bank digital currencies

By on July 20, 2021 0

How should central banks react to digital? This is an urgent matter. Part of the answer is that they and the government must follow the new wild west of private funding. But it also means that they now have to introduce their own digital currencies.

The state must not abandon its role of ensuring the safety and ease of use of money. The idea that it should be a libertarian fantasy. In addition, action is now an urgent need. of the Federal Reserve Board of Governors, innovators are currently creating more than 8,000 cryptocurrencies.

Gorton and Zhang classify these works into two main categories. “Legal cryptocurrency” without support such as Bitcoin. And “stablecoins” are individually backed by government fiat currency. Both have problems in many ways.

Write in FT, Roger Svenson He claimed that fiat money did not meet any of the criteria of available money. Bank for International Settlements (BIS) In the latest annual report, these “cryptocurrencies are speculative assets, not money, and are often used to promote them. Money laundering, ransomware attacks and other financial crimes. Bitcoin, in particular, rarely uses public interest attributes, given its wasted energy footprint. In my opinion, such “currencies” should be illegal.

Stablecoin is different. As Gorton and Zhang argue, money must be available for “no-questions” payments in times of crisis. Historically, there have been practices of banks for this reason: this is why they are supported and regulated by the state. The same concern arises with Stablecoin. The crisis could lead to a “race” similar to that of a money market fund in 2008. Therefore, stablecoins are backed by money from the central bank or the regulated issuer as a bank.

More important than the new “currency” is the entry into Big Tech Payments. This has advantages, but also risks. Current payment systems are expensive, small cash payments are still cheaper than credit and debit cards, and international payments are particularly expensive. In addition, digital payment systems are not accessible to everyone, even in high-income countries. Typically, these new players can make great improvements. However, this development threatens the fragmentation of the payment system, invasion of privacy and even exploitation of consumers.

It’s the job of the central bank (as well as other regulators) to make sure the digital payments revolution works for society as a whole. In my opinion, the central bank’s digital currency could increase liquidity.

This is where the big problem arises. Should the CBDC be used only in wholesale transactions or by retail customers as well? The answer must be the last. It has always been a problem that the benefits of holding secure public funds flow to private banks rather than public institutions (other than cash). Now, This is and should change, For the public good.

Americans don't trust tech giants with their data, American consumers trust institutions to protect their data (1 = no trust, 7 = full trust)

But there are more options. Do retail customers have to have a CBDC account at the central bank, thereby bypassing retail banking altogether? Or do you need a hybrid format where your individual client’s CBDC account is held with a central bank but managed by a private institution? Or does the private sector, where the central bank only handles wholesale payments, have to have a retail CBDC account, as it does today?

A related choice is to choose between a retail CBDC account or in the form of a digital wallet. The first, approved by the BIS, means that the CBDC is not a direct substitute for cash. The additional question concerns the identification system. In this regard, BIS favors systems built with digital identifiers rather than on paper. Other important questions concern the protection of privacy, the role of private payment networks, in particular the promotion of international payments.

Today, bank deposits are the predominant form of currency and cash in circulation as a percentage of bank deposits, 2019

Ultimately, the goal should be a faster, safer and cheaper payment system, accessible to all. It is important that the natural monopoly of money and public goods of payment systems does not turn into a private monopoly of the digital giant. The engagement between the public interest and the private interests of the bank was bad enough. If the same thing happened on Facebook, for example, it would be even worse.

The big question is what does the emergence of the CBDC mean for private banks. Obviously, in a crisis, money could hit the CBDC from other liquid assets, including traditional bank deposits. But you can also say that the ability to have a fully secure CBDC account can be a good thing. The moral hazards caused by public guarantees to private banks could then come to an end, and the financial system would therefore be restructured without it.

Cross-border trade is important to the general public and cross-border retail activity (in billions of dollars)

The technological revolution opens up new possibilities. However, the architecture of the system is not determined. It is imperative that public institutions guarantee a safe and healthy payment system, accessible to all. They must regulate or even eliminate dangerous new players. Above all, it is important to ensure that new technologies promise faster and cheaper payments, support a better monetary system and at the same time improve intermediaries.

You have to make a choice. In the process, old players may disappear and new players may appear. But the basic requirements are the same as usual. In other words, it is a reliable system that people can trust. Central banks will play a leading role in achieving this. They can do this by embracing the potential of new technologies, but prevent chaotic freedom for everyone. BIS provides a good overview of the problem. Now is the time for progress.

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