Covid is accelerating the transition away from cash and encouraging the development of state-backed digital currencies. In the past two weeks, the People's Bank of China launched a trial run for digital renminbis in three major cities, and the Boston Fed announced a research initiative examining the technicalities of a Central Bank Digital Currency (CBDC) in the United States.
Despite its purported benefits, the shift threatens to fundamentally alter the priorities of central banks, the structure of payment markets, and the regulatory framework required to ensure financial stability. A 2018 paper by SHEILA DOW considers the limitations of CBDCs for this latter aim.
From the piece:
"The development of Central Bank Digital Currencies feeds into a more general debate on the state’s role in the financial sector. Markets price according to evidence of the past, but also according to conventional judgements about that evidence. Since these conventional bases for pricing are vulnerable to discrete changes which spread across markets, there is considerable scope for financial instability. Innovation in payments systems and digital currency assets is just part of an ongoing process of financial innovation outside the current boundaries of regulation.
Governments have placed the full onus for macroeconomic policy on monetary policy, with fiscal policy restricted to reductions in budgetary deficits and the size of the state. Ironically, since fiscal austerity policies held down aggregate demand and elevated expectations of risk attached to real projects, increases in the money supply were accompanied by low inflation. Consequently, monopoly control of the money supply in order to promote monetary stability seems to be beside the point. Rather the focus needs to be on how the financial sector might be regulated in such a way as to generate credit for useful projects and liquidity as a refuge from uncertainty. Central bank digital currencies may pose benefits, but to consider them the core of a generalised policy to avert future crises is to look in the wrong place."
Link to the article.
- "Time and effort would be better spent on upgrading existing payment networks rather than pursuing options that, for all their innovation, could create more problems than they solve." This week's FT editorial urges caution in rolling out CBDCs mid-crisis. Link. And a Philadelphia Fed working paper from June preempts these concerns, warning that the introduction of digital currencies may turn central banks into "deposit monopolists." Link.
- "If banks are no longer willing to act as financial intermediaries, central banks should consider using CBDCs to circumvent the banking system and inject liquidity directly to those who need it the most." Elham Saeidinezhad and Jack Krupinski present an alternative view on digital currency creation as crisis management (stay tuned for Saeidinezhad's forthcoming piece on Phenomenal World). Link.
- In a series of collected essays published by the European Money and Finance Forum at Bocconi University, analyses of CBDC pilots in Uruguay and Sweden. Link.
- From 2017, Ole Bjerg on the "Policy Trilemma of CBDCs." Link.