Readers may remember the Spring and Summer of 2018 as the heady days of the Initial Coin Offering (“ICO”) boom. With money seemingly printed out of thin air, there appeared to be a token for every occasion. Then, as quickly as it had arrived, the boom seemed to evaporate, taking with it the billions of dollars companies had raised.
But this blog post isn’t about the fast and furious world of crypto-trading and investing. It’s about the staid and steady world of central banking, where central bankers carry on controlling money supply and conducting monetary policy. And giving speeches to other central bankers – including a March 22nd speech by Agustin Carstens (General Manager, Bank for International Settlements) to the Central Bank of Ireland. His speech is titled, “The future of money and payments,” and focuses on why the development and use of central bank digital currencies (“CBDC”) has widespread consequences beyond simply being a more convenient way to pay.
Carstens speech didn’t focus on the need for innovation and technological improvement but instead encouraged his audience to explore the policy implications of CBDC usage. According to him, it’s the “CB” not the “D” that’s of real interest. More precisely, the speech is an examination of the consequences that would flow from allowing “ordinary people and businesses to make payments electronically using money issued by the central bank… or… deposit[ing] money directly in the central bank, and us[ing] debit cards issued by the central bank itself.”
Digital Payments vs. CBDCs
It’s worth taking a step back to point out that the digital payments made today are not made using CBDC. Carstens describes these payments as being made using private money. They’re liabilities of commercial banks, telcos, or even large technology companies. Central bank money – for our purposes, cash, is public money and together with payments systems, make up the monetary system. It is helpful to remember this distinction. The coffee you bought this morning with tap of your mobile phone on a terminal wasn’t purchased using public money. Instead, it created a promise by your bank to pay Mr. Coffee Merchant’s bank – a payment that will be settled though the central bank.
If we already have digital payments today, why the buzz around CBDCs? Carstens notes that at least some of this interest stems from the notion that cash use is declining. North Americans may balk at a suggestion that cash use is holding steady worldwide. If you’re a frequent card-tapper, you might assume that cash use is going down in relation to increasing card usage. It may stretch your memory to remember the last time you fished through your pockets for a loonie. However since 2000, on a global basis, the demand for cash has remained consistent, with some countries even seeing an increase.
Regardless of our perceptions in North America, cash is here to stay – at least for the time being, and central banks aren’t feeling pressure to develop a digital substitute – what Carstens calls a “retail CBDC.” He contrasts this substitute from a “wholesale CBDC” – a type of digital currency restricted to a prescribed group of users and used for interbank settlements (or similar types of payments). The Canadian example of a wholesale CBDC can be seen in “Project Jasper,” which was commissioned by Payments Canada, the Bank of Canada, and TMX Group. The project, which ran as a proof-of-concept, was primarily concerned with evaluating “the potential role for distributed ledger technology… in Canadian financial market infrastructures and any material benefits that could result from its adoption.”
CBDCs – What Would Change?
Retail CBDCs are the focus of Carstens’ speech, and he further distinguishes between token-based and account-based currencies. An account-based CBDC would allow consumers to open accounts directly with their central bank, tracking balances in that account (much like we do today with our retail deposit accounts), while token-based currencies would create digital replacements for physical cash.
For consumers, not much would change at point-of-sale. CBDCs would look and feel a lot like the digital payments we use today, although we wouldn’t be able to pay with cash anymore. Along with the disappearance of cash, anonymous payments would likely be much more difficult when a central bank account is involved. And token-based CBDCs would not offer the same anonymity as cash. On the other hand, CBDCs could pay (or charge) interest; with cash that’s simply not an option.
However, these changes seem minor when compared to the overall impact CBDCs would have on the financial system as a whole. Both “public” and “private money” together make up the two tiers of today’s financial system. Account-based CBDCs could effectively eliminate huge aspects of the private tier, shifting the role commercial banks play today as deposit-takers to a country’s central bank. In turn, the central bank would have to offer the products and services that customers have come to expect from their banks: debit and credit cards, online banking access, mobile payments, etc… Moreover, as deposits gravitated to the central bank, it would have to take on additional lending activities to support this new business.
Most would agree that central banks are ill-equipped to take on these roles. Are these activities a good fit within the existing mandate of most central banks? These entities are public institutions, responsible setting monetary policy and ensuring the safety and soundness of financial systems. Commercial banks, on the other hand, are private entities operating in competitive environments. They’re incentivized to innovate, stay efficient, serve their existing customers and attract new ones. They can also take appropriate risks without jeopardizing a country’s entire financial system.
Carstens does concede that token-based CBDCs may not drive the same dramatic shift away from commercials banks. However, he does note that during times of stress, money has historically flowed towards banks that are perceived as safe. In the case of a token-based CBDC, what’s safer a central bank’s digital currency? Would this safety lead to tokens being valued at a premium compared to commercial bank deposits? Would one traditional Canadian dollar held in a commercial bank be worth less than one “central bank” dollar? Would central banks have to get comfortable with a larger balance sheet? How would that balance-sheet increase impact liquidity in key international markets?
Are Central Banks Rolling Out CBDCs?
Carstens mentions that more than 42 of the 60 central banks they’ve surveyed indicated that they were “working on CBDCs of some kind. Most are looking at both retail and wholesale varieties.” However, only half of those banks have moved to the stage of testing the idea and “[o]nly a couple have moved on to experimenting with different possible technologies, in “proofs of concept” or even pilot projects.” Finally, when central bankers were asked whether they have plans to issue CBDCs, an overwhelming majority of the respondents indicated that their likely of doing so in the short term was very unlikely. In the medium-term, a large majority indicated that the likelihood was somewhat-to-very unlikely. As Carstens summarizes: “Having looked into the matter, central banks have decided not to jump in.”
Carstens concludes his speech by reminding his audience that central
banks should be cautious – and that this caution doesn’t stem from a desire to
dismiss innovation for the sake of it. Central banks are critical institutions,
making decisions that are enormously impactful on the safety and soundness of
our financial systems and overall economy. The fundamental changes that CBDCs
would make to those systems means that their development can’t simply proceed
for the sake of novelty or technological progress without understanding the
implications of their widespread use.
 The BIS is often called the “bank for central banks.” It’s an international financial institution that, among other things, “serves central banks in their pursuit of monetary and financial stability…”
 “Jasper Phase III” – Securities Settlement using Distributed Ledger Technology, October, 2018.
 The BIS has expressed doubt that token-based currencies can adequately meet the volume and throughput demands put on a modern payments system.
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