Central bank digital currencies, digital payments, and the future of money

Introduction

The moderator introduces the topic of digital currencies and their potential role for regulators and central banks.

Introducing the Topic

• Stephanie Flanders, head of Bloomberg Economics, moderates a session on digital currencies and their potential role for regulators and central banks.

• Digital currencies are becoming increasingly prevalent in daily life, with more financial transactions being based on them.

• The panel includes Governor Stefan Ingves of the Swedish Central Bank, Giorgi Kadagidze, Governor of the Central Bank of Kenya, Jose Antonio Alvarez, CEO of Santander, and Gary Gorton, Professor of Finance at Yale School of Management.

Key Challenges Facing Central Banks

Gary Gorton discusses two key challenges facing central banks in relation to digital currencies.

Monopoly Over Money Production

• About 100 years ago, every sovereign state decided that only the government should have a monopoly on money production.

• Stable coins are a form of privately produced money that has already gained a foothold.

• It may be too late to do anything about stable coins until the next financial crisis.

Importance of Global Financial Plumbing

• The global financial plumbing is changing as we move towards blockchain technology.

• In 10 years when everything is interoperable, standards for how data is obtained will be completely different.

• Central banks need to be involved in deciding what these standards will be and understanding how data will flow.

Arguments for Central Banks' Involvement in Digital Currencies

The Federal Reserve's arguments for central banks' involvement in digital currencies are discussed.

Access to Sovereign Liability

• If cash disappears as a medium, then the public needs access to a form of sovereign liability.

Private Digital Currencies Subject to Runs

• Private digital currencies are subject to runs and may not be reliable.

• Central bank digital currencies could provide a more stable alternative.

Central Bank Digital Currency

In this section, the speaker explains that currency is a digital form of cash and discusses the benefits of central bank digital currencies (CBDCs) for cross-border transactions and global supply chains.

Benefits of CBDCs

• CBDCs are beneficial for cross-border transactions and global supply chains.

• Stable coins can also be used for these purposes but are vulnerable to runs like private monies were historically.

Role of Central Banks in CBDC Landscape

• The Risk Bank was early in announcing its pilot program for a digital currency in 2016.

• Central banks have a role in regulating and moderating innovation in the private space.

Technological Change and Maintaining Structure

In this section, the speaker discusses how technological change has led to a move away from paper money towards digital forms of currency. They explain why it is important to maintain the structure established between central banks and private banks over 150 years ago.

Importance of Maintaining Structure

• It was obvious to them earlier than other places that they needed to start thinking about these things because people were moving out of cash.

• Moving into a world where nothing will be on paper means we need to agree on what we should have in our hands moving forward.

• If they let go of the structure established between central banks and private banks, it would imply that only private sector money would be available to the general public which is not ideal.

Risks Associated with Private Sector Money

• Producing money nowadays in a small central bank is actually a competitive business.

• If people start using other people's money (OPM), it can create serious problems in the system.

• The exchange rate between central bank money and private sector money needs to be maintained, or else there is a high likelihood of serious problems in the system.

Benefits of CBDCs

• Producing a CBDC speaks in favor of maintaining stability in the system.

Arguments for and against digital currency

In this section, the speakers discuss the arguments for and against digital currency.

Arguments in favor of digital currency

• Digital currency could potentially avoid the problems of a zero lower bound in monetary policy.

• It could open up opportunities for policy innovations such as people's quantitative easing.

• Digital currencies could create alternative payment methods and increase financial inclusion.

Arguments against digital currency

• It would be difficult to convince the general public to move away from cash into a central bank digital currency (CBDC) because it would mean going negative and taxing people.

• People may move out of their own currency due to free capital flows, making it hard to implement CBDC in small open economies where they have their own currency.

Ensuring inclusivity in financial innovation

In this section, the speakers discuss how to ensure that financial innovation is inclusive.

Financial inclusion through CBDC

• Some countries are looking into using CBDCs to increase financial inclusion or enhance payment system efficiency.

Exclusion rates and cultural norms

• High exclusion rates can occur due to cultural norms, which may remain an issue even with CBDC implementation.

CBDC's and Financial Inclusion

This section discusses the issue of unethical learning and how CBDC's are not a silver bullet for all financial problems. The best approach is to deal with problems directly, whether in the context of regular financial inclusion or in the world of CBDC's.

Discussion on CBDC's

• A discussion paper has been issued on CBDC's in Kenya to have a discussion with the population.

• Money needs to be accepted by the population, so it is important to understand why they see this as an appropriate solution for their payment methods.

Hybrid Approach

• Sweden and some other central banks seem to be moving towards a hybrid approach where members of the public do not have a direct claim or account with a central bank.

• The issue of whether members of the public are on the balance sheet of the central bank can be resolved by changing laws if needed.

Concerns

• Financial stability and losing control of monetary policy are concerns for central bankers when it comes to CBDC's.

• Private sector institutions pushing private money may not have these concerns since assets are a local solution to a much bigger problem.

Private vs Public Sector Innovation

This section discusses how innovation can come from either private or public sectors as long as it benefits society as a whole.

Comparative Advantages

• It doesn't matter where innovation comes from as long as it benefits society as a whole.

• Technology has allowed for more diversity in ecosystems, particularly in payments space where banks, central banks, and other places used to dominate but now have more players.

Digital Payments and the Role of Public Sector

In this section, the speaker discusses the impact of digital payments on businesses and the need for public sector involvement in establishing standards for customer protection, data security, and privacy. The speaker also emphasizes the importance of interoperability in cross-border transactions and the need for prudential regulation in the crypto space.

Impact of Digital Payments on Businesses

• Digital payments allow businesses to gather data that enriches a variety of business models.

• The private sector has a duty to establish a level playing field in this diverse ecosystem.

• Standards are needed for customer protection, data security, and privacy.

Role of Public Sector

• The public sector has played a role in establishing standards and providing supervision.

• Interoperability is poor in cross-border transactions, making it necessary for the public sector to facilitate innovation initiatives across different sectors.

• Prudential regulation is required for traditional means of payment as well as crypto assets.

Prudential Regulation in Crypto Space

• Collateral requirements necessitate oversight from someone else to prevent cheating.

• Stable coins require strict oversight due to historical problems with packs failing over time.

Stablecoins and Financial Stability

In this section, the speakers discuss the regulation of stablecoins and their potential impact on financial stability. They also touch on the issue of interoperability between stablecoin issuers and traditional banks.

Stablecoins as Banks

• The Treasury President's working group considers stablecoin issuers to be banks.

• The top five stablecoin prices move together, making it difficult for the market to distinguish between them.

• Eventually, stablecoin issuers may need to be regulated as real banks.

Interoperability with Traditional Banks

• Interoperability with traditional banks is necessary for stablecoins to function as a payment system.

• The Fed has resisted granting a master account to anyone who looks different than a bank.

• If JP Morgan issued a stablecoin, Congress would likely act immediately.

Blockchain and Financial Stability

• Blockchain technology is becoming more scalable, but interoperability with the current system remains an issue.

• Most people understand how revolutionary blockchain is, but it must be interoperable with banks and the payment system to function effectively.

• Without a legal framework, there can be no common understanding of what money is.

The Risks of Stable Coins

In this section, the speakers discuss the risks associated with stable coins and how they are not a technical issue but rather a regulatory one. They also mention that stable coins can be seen as banks or money market funds.

Regulatory Arbitrage

• Stable coins are an unstable coin if the legal framework is not there.

• Stable coins are often just regulatory arbitrage, which is not a good thing.

• If something behaves like a bank, then it should get a banking license.

Consumer Protection

• Consumers need to feel protected and have the right to demand protection.

• Financial crises appear when we ignore specific risks, and consumer protection cannot be thrown out the window.

Legal Framework

• A legal framework is necessary to protect consumers and deal with pertinent issues that central banks worry about.

• Dealing with issues at the beginning will cost less than cleaning up after a crisis occurs.

Likelihood of Stable Coin Car Crash

In this section, the speakers discuss whether there will be a crisis involving stable coins and how imminent it might be. They also mention that fraud could be a big issue in this context.

Likelihood of Car Crash

• There will be a car crash involving stable coins eventually.

• When there is a car crash, it will get more attention.

Fraud Issues

• Fraud could be a big issue in the context of stable coins.

• A mistake might awaken us and require closer oversight.

Shadow Banking and Central Banks

In this section, the speakers discuss the challenges of regulating shadow banking and the role of central banks in addressing these issues.

Challenges in Regulating Shadow Banking

• The Financial Stability Board has taken a long time to address issues related to systemically important institutions.

• There are vested interests that prevent progress in regulating shadow banking.

• It can be difficult for individual private sector institutions to move from one equilibrium to another, making it hard to reach an agreement on standardization.

Role of Central Banks

• Central banks can make an important contribution by setting standards.

• Central banks can bring competitors together to agree on how to do transactions.

• Cross-border payment technical issues have been solved, but standardization remains a challenge for the private sector.

• The ECB's TIPS system could be used for cross-border purposes if an agreement is reached within Europe.

African Subcontinent and Privacy Concerns

In this section, the speakers discuss regional solutions for cross-border transactions in Africa and privacy concerns around central bank digital currencies.

Regional Solutions in Africa

• Regional solutions or cross-border transactions are important for improving trade arrangements in Africa.

• Crises like the one in Ukraine help focus discussions on regional solutions.

Privacy Concerns with Central Bank Digital Currencies

• A potential central bank digital currency would give central banks a lot of information about citizens' transactions, raising concerns about privacy.

• A threshold could be set for anonymous transactions, but the central bank needs credibility to ensure people will use it.

The Role of Central Banks

In this section, the panel discusses the role of central banks and their impact on the economy.

Non-Central Bankers Talking About Belief in Central Banks

• The panel agrees that it is appropriate for a BIS panel to end with a non-central banker talking about belief in central banks.

Currencies with Use-by Dates

• One suggestion made during the discussion was to have currencies with use-by dates, which would encourage people to spend them without necessarily needing confidence in them.

Conclusion and Thanks

This section covers the conclusion of the debate and thanks given by the moderator.

Thank You to Panelists

• Moderator thanks Professor Gary Gorton, Governor Stefan Ingves, Governor Patrick Goregi, and Jose Antonio Alvarez from Santander for an excellent high-level debate.

Continuing Discussion

• Moderator acknowledges that these issues will continue to be discussed but feels that they have a good basis from this debate.