In this context, I would like to do three things this morning:
1. The changing nature of money and the fintech revolution
And this is key: money itself is changing. We expect it to become more convenient and user-friendly, perhaps even less serious-looking.
Even cryptocurrencies such as Bitcoin, Ethereum, and Ripple are vying for a spot in the cashless world, constantly reinventing themselves in the hope of offering more stable value, and quicker, cheaper settlement.
2. A case for Central Bank Digital Currencies
Providers of e-money argue that they are less risky than banks, because they do not lend money. Instead, they hold client funds in custodian accounts, and simply settle payments within their networks.
For their part, cryptocurrencies seek to anchor trust in technology. So long as they are transparent—and if you are tech savvy—you might trust their services.
This currency could satisfy public policy goals, such as (i) financial inclusion, and (ii) security and consumer protection; and to provide what the private sector cannot: (iii) privacy in payments.
a) Financial inclusion
This is critical, because cash might no longer be an option here. If the majority of people adopt digital forms of money, the infrastructure for cash would degrade, leaving those in the periphery behind.
Of course, offering a digital currency is not necessarily the only answer. There may be scope for governments to encourage private sector solutions, by providing funding, or improving infrastructure.
b) Security and consumer protection
Without cash, too much power could fall into the hands of a small number of outsized private payment providers. Payments, after all, naturally lean toward monopolies—the more people you serve, the cheaper and more useful the service.
Regulation may not be able to fully redress these downsides. A digital currency could offer advantages, as a backup means of payment. And it could boost competition by offering a low-cost and efficient alternative—as did its grandfather, the old reliable paper note.
The third benefit of digital currency I would like to highlight lies in the privacy domain. Cash, of course, allows for anonymous payments. We reach for cash to protect our privacy for legitimate reasons: to avoid exposure to hacking and customer profiling, for instance.
Consider a simple example. Imagine that people purchasing beer and frozen pizza have higher mortgage defaults than citizens purchasing organic broccoli and spring water. What can you do if you have a craving for beer and pizza but do not want your credit score to drop? Today, you pull out cash. And tomorrow? Would a privately-owned payment system push you to the broccoli aisle?
Would central banks jump to the rescue and offer a fully anonymous digital currency? Certainly not. Doing so would be a bonanza for criminals.
3. Downsides of Bank Digital Currencies
My main point will be that we should face these risks creatively. How might we attenuate them by designing digital currency in new and innovative ways? Technology offers a very wide canvas to do so.
a) Risks to financial integrity
Central banks might design digital currency so that users’ identities would be authenticated through customer due diligence procedures and transactions recorded. But identities would not be disclosed to third parties or governments unless required by law. So when I purchase my pizza and beer, the supermarket, its bank, and marketers would not know who I am. The state might not either, at least by default.
b) Risks to financial stability
But banks are not passive bystanders. They can compete with higher interest rates and better services.
What about the risk of bank runs? It exists. But consider that people run when they believe that cash withdraws are honored on a first-come-first-serve basis—the early bird gets the worm. Digital currency, instead, because it can be distributed much more easily than cash, could reassure even the person left lying on the couch!
In addition, if depositors are running to foreign assets, they will also shun the digital currency. And in many countries, there are already liquid and safe assets to run toward—think of mutual funds that only hold government bonds. So, the jury is still out on whether digital currencies would really upset financial stability.
c) Risks to innovation
What if, instead, central banks entered a partnership with the private sector—banks and other financial institutions—and said: you interface with the customer, you store their wealth, you offer interest, advice, loans. But when it comes time to transact, we take over.
The advantage is clear. Your payment would be immediate, safe, cheap, and potentially semi-anonymous. As you wanted. And central banks would retain a sure footing in payments. In addition, they would offer a more level playing field for competition, and a platform for innovation. Meanwhile your bank, or fellow entrepreneurs, would have ensured a friendly user experience based on the latest technologies.
Putting it another way: the central bank focuses on its comparative advantage—back-end settlement—and financial institutions and start-ups are free to focus on what they do best—client interface and innovation. This is public-private partnership at its best.
In conclusion, the case is based on new and evolving requirements for money, as well as essential public policy objectives. My message is that while the case for digital currency is not universal, we should investigate it further, seriously, carefully, and creatively.
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