Central banking and creating a stable value digital currency
Dialogue of Continents Forum
Reinventing Bretton Woods Committee
Hamburg Institute of International Economics
Paris, 5 September 2018
Ladies and Gentlemen,
I'm most grateful to the organisers for the opportunity to chair this session on the highly relevant topic of central bank issued digital currency. Central banks have been considering to introduce digital currency for some time. Currency is the only central bank money available to the non-bank public and central bank issued digital currency or CBDC could transform the way the non-bank public thinks about currency and uses it. Plans for CBDC are well advanced among several central banks and some are expected to adopt CBDC in the near future. At the same time, other central banks are guarded or outright hostile to the idea. The case for CBDC should naturally rest on whether it supports central banks’ and the public's objectives. It seems strongest for the role of CBDC to preserve effective payments operations.
To clarify, CBDC means here only general purpose CBDC as a substitute for physical notes and coins that are available to the non-bank public including for retail transactions. To further clarify, payments by debit card, PayPal, M-Pesa or AliPay are commercial bank transactions that offer digital payments solutions using bank money but do not involve central bank money.
Central banks generally pursue monetary and financial stability objectives. The maintenance of a reliable and safe payments infrastructure is integral to those objectives. Payments effectiveness for the non-bank public depends on access to means of payments of which currency constitutes a special case. The purpose of issuing currency in central bank legislation though often remains undefined; for example, the Federal Reserve is simply held to maintain growth in monetary aggregates, the European Central Bank only authorises issue of notes, the Riksbank is merely responsible for the provision of notes and coins.
Currency has unique properties including being legal tender, offering finality of settlement of debt, does not involve any counterparty risk, does not require parties to trust one another, access is permission-less and transactions can be anonymous. It represents in relative terms the safest and most liquid means of payment.
However, currency use is in decline. It has diminished considerably as a proportion of money and while in some countries the demand for currency is stable or even increasing, overall currency seems set to disappear. Naturally, levels of currency differ. The average level of currency as a share in broad money was 15.1 percent in 2016 compared with 20.6 percent in 2001. In advanced economies in 2016, the average was 5.3 percent while it was 16.0 percent in emerging markets. In Sweden, currency use is amongst the lowest and diminishing the fastest from 9.6 percent of broad money in 2001 to 2.0 percent in 2016. Prima facie evidence suggests that rising income levels are negatively correlated with currency use. This reflects confidence in bank money but also a shift towards digital payments.
CBDC can make payments more effective. Other benefits including overcoming the interest rate lower bound or greater monetary control seem more mute. Notes and coins are simply not adapted to increasing digitalisation in payments for the non-bank public. CBDC can warrant that access remains universal and permission-less and liquidity is maintained in a digital payments environment. In countries that exhibit a low incidence of bank accounts but high incidence of mobile phones, central banks can foster access to currency using mobile phone technologies. CBDC offers an alternative to banks and non-bank payment providers and counters undue concentration in payments.
Resistance to introduce CBDC seems to refer mostly to fears of digital bank runs and undermine commercial bank operations. Central banks are concerned that CBDC increases the risk of sudden conversion of bank money into central bank money in periods of financial distress that may adversely affect the stability of the banking system. Direct access to CBDC could also reduce supply of bank deposits constraining bank funding if CBDC is seen as a close substitute to bank deposits.
To conclude, CBDC constitutes an effective instrument to facilitate currency dissemination, foster diversification in payments and promote financial inclusion. All are essential to maintain smooth payment operations. The risk of digital bank runs remains speculative and a reduction in bank deposits would also depend on banks’ ability to differentiate bank deposits from CBDC which would be welcome.
Yet, the debate about CBDC needs to focus more on the role and purpose of currency issuance itself. While historically central banks were tasked primarily with ensuring adequate currency circulation, contemporary central bank mandates on currency are vague. It seems difficult to imagine that the official sector does not want to preserve an active stake in non-bank public payments. CBDC would offer the non-bank public the choice to use central bank money. This should strengthen confidence and trust in payments and make the financial system safer overall.