CBDC and monetary sovereignty and privately issued stable coins

R3 CBDC online workshop series, 22 July-19 November 2020

Prepared remarks, 19 November 2020

Dear Workshop Participants,

Many thanks to R3 for having me and for the oportunity to co-moderate this session. I very much look forward to this session on monetary sovereignty and privately issued stable coins. In my work with Accenture, I focus mostly on central bank digital currencies (CBDC) and am closely involved in a number of key CBDC projects including with the Riksbank and Banque de France. I believe though that CBDC will itself encourage and facilitate adoption of digital financial market infrastructures and mediums including stable coins.

This session is part of the policy stream of the R3 CBDC workshop series. We are concerned mostly with the policy considerations for CBDC adoption. Private digital currencies are giving rise to a number of policy concerns. Sovereignty is of course one. Could private currencies undermine one of the principal sovereign privileges of issuing a country’s currency? If so, this could have adverse implications for financial stability and may impair monetary policy effectiveness and constrain the ability to maintain orderly monetary conditions. At the same time, it would foster diversification and competition which could be a good thing and has been debated for decades also in connection with the notion of Hayekian currency competition. New approaches to regulation would have to be found to ensure orderly monetary conditions with the adoption of private currencies. The biggest impact will like be on international payments where private currencies could have a comparative advantage over national currencies. After all the biggest disadvantage of national currencies may be that essentially they are national in scope.

The topic of sovereignty may be surprising to some. For most, using the national currency to conduct payments seems the natural thing to do. Most monetary assets and liabilities are normally denominated in the national currency. There are of course important exceptions e.g. in countries with a high level of currency substitution or dollarization. The possibility that private currencies or settlement mediums compete with national currencies may therefore seems strange. But it could be the new normal when it comes to currencies.

Now how did we get to that debate? I think it started with bitcoin not too long ago in 2017. When bitcoin reached about US$20,000 per bitcoin, suddenly it appeared that alternative mediums could have a major impact. At the time the G20 embarked on a series of investigations what to do about bitcoin and the like. Bitcoin today is again nearing the valuation peaks during 2017. A lot has happened since. The announcement of Facebook that it would sponsor a new currency to be issued by the Libra Association in July of last year elevated the debate to a whole new level. It now seems clear that private digital currencies could eventually become very important settlement mediums and crowd out national currencies.

There is a strong theoretical argument in favour of private currencies. For most economic agents, national currencies may not be optimal as one’s economic and financial sphere may not be congruent with national borders. The optimum currency area theory of the early 1960s seems to offer strong support for private currencies.

The FSB recently released a report acknowledging that stable coins could play a role in improving payments and advance financial inclusion. It seems fair to say that the FSB has now de facto laid the foundation for an integration of private currencies into national and international payment systems.

One quick comment on the notion of stable coin. I find it misleading as the notion of stable is itself misleading being a commitment though no guarantee. A better term I think would be private currencies that fix their value to an external anchor often a national currency or fixed exchange rate coins. Central banks have of course fixed their currencies for decades to gold and other national currencies. This was done to build trust in the currency. Private currencies simply do the same. Eventually they may float against other currencies like many national currencies though by far not all do today.

To conclude and kick off the discussion. Private currencies have of course been around for a long time. In fact, most monies are private being liabilities of the banking system. Private currencies played a very important role in the modernisation of payments in particular with the adoption of paper currencies during the nineteenth century. Bank notes are called bank note because they were issued first by banks.

We now think of central banks as the natural approach to managing currencies and as a basis for other monies. But, central banks have of course come pretty late to currencies and payments. When they came mostly during the nineteenth century, there were considerable controversies as to the idea of a single dominant institution in charge of issuing currency. This was true in particular in Germany around the establishment of the Reichsbank in 1876 and in the U.S. with the adoption of the Federal Reserve System in 1913. Both countries therefore opted at the time for a decentralised approach to central banking.

To give you a bit of a sense of the debate around the Fed during the early twentieth century, the quote from Paul Warburg (1930), one of the key influencers then in terms of setting up a central bank in the U.S., shows that while there was a concern about too much decentralisation a single institution was flat out discarded: “[The] regional bank idea [for a Federal Reserve System] met with approval. There was a strong and united opposition, however, to excessive decentralisation by the creation of too large a number of Federal Reserve banks.” The original Federal Reserve System of 12 regional banks was a decentralised system because the U.S. at the time did not think a single institution would be effective in such a large and heterogenous country. Food for thought for today.