Reinventing Bretton Woods Committee Conference, Derisiking the transition to a new globalisation, Vienna, 6 December 2023
Dear Conference participants,
I'm delighted to speak to you here in beautiful Vienna. Many thanks to the organiser for inviting me. Professor Feldkircher asked me to answer a number of questions around central bank digital currencies (CBDC) that I will try to address in my short prepared remarks. I have now for about five years been researching CBDC and working on different CBDC projects including among others Jura with the central banks of France and Switzerland, mBridge with the BIS Innovation Hub. Today, most central banks are working on CBDC compared with just a handful when I started. CBDC has triggered a new debate about money, what it does and what it takes to make it successful. That may already have been its biggest contribution.
CBDC for me is a new format of central bank money, a digital token, circulating on a new financial market infrastructure, the blockchain or other distributed ledger technology (DLT) platforms. A CBDC is the same euro, dollar, real or won only in a different format to complement banknotes and reserves and serve digital token-based financial market infrastructures.
Actually, since we are in Vienna, it was Austria that had offered what CBDC is trying to do in international payments. The Austrian silver coin Maria Theresa thaler—issued first in 1741—was among the first international currencies.1 It served as trade currency in the Middle East and Eastern Africa through the 1960s long after it was demonetised in Austria. The coin was used in off-shore and cross-border peer-to-peer transactions providing instant settlement with an outright delivery of principal. It is this approach that is being pursued in CBDC projects Jura and mBridge promising an entirely new architecture in international payments.
The questions I was asked are why do we need a CBDC? What are the motivations for introducing one? What are possible geopolitical considerations? I shall take them in turn.
Why do we need a CBDC?
Central bank money remains at the heart of national payment systems. It is also typically advantageous to offer settlement in central bank money. Central banks ought to adopt a technology-agnostic view to ensure access to central bank money is equitable for eligible parties. It also follows best industry practice where central bank money settlement shall be offered for financial market infrastructures.
I struggle with the notion of need. I prefer the notion of choice. Central bank money should not be unduly biased towards the incumbents. Offering different money formats to address different use cases I think is what CBDC is about.
I'm often being asked if CBDC is a solution looking for a problem. I think it is the wrong question. It implies and risks addressing only problems we know of. As such it is too rearward looking. CBDC is to respond to actual but also very much to future payment needs.
What are the motivations?
Naturally the motivations differ by country. Advanced economies often have different motivations than emerging markets economies. The range of existing payment instruments and systems may also influence actual motivations.
Diversification I think is a central theme. CBDC contributes to providing a more diversified payment system supporting choice, resilience and competition. It may help attract new actors and new instruments, redefine access and thereby extend the utility of payment arrangements.
New functionality is another key motivation. CBDC brings new features and properties to payments including through programmability and traceability that can give rise and support new business models. Token-based mediums are not necessarily meant to serve existing processes but to support new ones. CBDC seems particularly well adapted to address bi-directional trades like payments versus payment, delivery versus payment and delivery versus delivery.
Efficiency gains are a strong motivation. CBDCs aim to simplify, produce greater transparency and speed-up payment processes reducing costs and risks. Those gains are estimated to be particularly pronounced in international payments.
Financial innovation has been an important argument. CBDC has been a catalyst for the financial sector towards the adoption of token-based mediums. The banking sector and more recently asset management industry are slowly catching up. Central banks have been in a rare position of driving financial innovation by raising incentives towards the adoption of new instruments and infrastructures.
Financial inclusion is seen by some central banks as a key motivation. This remains controversial as central banks are normally not equipped to enable financial inclusion and do not maintain relationships with the general public. Where CBDC facilitates the distribution of central bank money, it can help ensure access to a safe and effective payment instrument though robust private sector solutions also exist.
What are possible geopolitical considerations?
Big economies want their currencies to play a big role. The ECB postulated that a digital euro could make the euro more attractive and be used more internationally thus increasing the strategic autonomy of the European Union. Other countries similarly believe that CBDC may increase the competitive advantage of national currencies and lead to a reordering of currency preferences.
CBDC has helped advance the debate about the need to reform the international monetary system. The system, the framework that governs international financial transactions and management of international liquidity—has remained highly dependent on a very narrow set of national currencies in particular the U.S. dollar as principal reserve asset. But the dollar is the currency of the U.S. and is issued strictly to meet national policy objectives. Reliance on the dollar has long been recognised as a problem and has often been associated with the so-called Triffin dilemma. Two possible solutions seem to exist to solve it: An international currency or many national currencies.
The aim to create an international currency is not new of course. An international currency that will be issued with the view of meeting liquidity needs of the international economy seems ideal. In 1978, countries agreed to make the IMF special drawing rights (SDR) to become the "principal reserve asset in the international monetary system".2 Yet, the SDR never became anything significant and related attempts since had failed. The idea of an international currency appears very good in theory but is extremely difficult to implement in practice. The euro at the regional level is a notable exception and rare success.
The possibility to use many national currencies to reduce dependence on individual ones seems more realistic. Projects like Jura and mBridge that aim to promote the use of local currencies in international payments are part of such efforts. If CBDC can help smaller currencies to become more attractive, it may help advance greater diversification in the system.
To conclude, there is considerable scepticism towards new money formats. But we had been there before. When paper money proliferated during the nineteenth century the same alarms were raised. In German, the word "Zettelwirtschaft" is still being used to describe a state of disorder where Zettel refers to paper money.
My view is that CBDCs will be adopted and play an important role in making financial systems work more efficiently and safer. Its new format and functionality may not be relevant universally but there are certain use cases where it will likely prove significantly superior to existing solutions. Central banks may now have an opportunity to shape the digital token as a new money format and thereby lay the foundations for the future of money itself.
Thank you very much for your attention
1For more on the Maria Theresa Thaler and role as an international currency see also Ousmène Mandeng (2019), Digital currencies: New technology and old monetary ideas, LSE Institute of Global Affairs Working Paper
2With the second amendment of the IMF Articles of Agreement effective in 1978, IMF member countries assumed a new obligation under Article VIII, section 7 and Article XXII.