Saturday, August 27, 2016

Will We Get a Cental Bank (or IMF) Digital Currency that Everyone Can Own?

This is a question we have raised here and followed for some time. When this concept first caught my interest, there was not too much in the public domain on it. Lately, we see more public information coming out from official sources that suggest the idea is being studied. 

Below are links to blog articles covering recently released reports from the IMF and the BOE that indicate that their is interest in potentially developing a central bank digital currency that anyone could own rather than just major financial institutions and also for an expanded role for the SDR in the future. Also below are some excerpts on these two proposals and then some added comments.


IMF to Study SDR Denominated Assets that "Could be Held by Any Parties"

We asked the former head of SDR Operations at IMF what they mean by SDR assets that "could be held by any parties". Here was his direct reply to us: 

"The Managing Director’s reference to “SDR-denominated assets, which could be both issued and held by any parties” clearly refer to private SDRs, that is SDR denominated assets and liabilities created in the private sector.  These would be attractive to cross border transactors wanting to invest in or borrow instruments with more stable exchange value and to those trading commodities such as oil internationally, especially if those commodities are priced in SDRs. The IMF would not be directly involved and would have no control over private SDRs, but their development and proliferation would promote and facilitate the demand for and use of the IMF’s own SDR reserve asset. Thus the IMF is hopefully interested in encouraging the development of private SDRs." ---  Warren Coats

The IMF released more information that used the term M-SDRs to describe this private version of the SDR. Here is how they explain it:

"This note sets out some initial considerations on this matter. The note sketches some key issues bearing on the role of the SDR in each of three concepts: (i) the official SDR, or “O-SDR”, the composite reserve asset issued and administered by the IMF; (ii) SDR-denominated financial market instruments, or “M-SDRs,” which could be both issued and held by any parties; and (iii) the SDR as a unit of account."

Both China and the IMF appear to be interested in an expansion of the role for the SDR, but it is not clear that the US is very enthusiastic about that at this time and the IMF report clearly says that further study is needed which takes time of course. A version of the SDR that all of us could own does not appear to be on the near term horizon.

Bank of England Studying Central Bank Digital Currency Anyone Can Own?

Here is a quote from our BOE article where they make it clear the study underway could include a new digital version of a central bank currency that all of us could own:

"However, things do not end there.  The point about the new technology is not just that it might make exchanging assets more efficient, to a greater or lesser extent.  In principle, it also makes it easier to widen the access to those assets, perhaps dramatically so.  If you create a platform on which the existing participants can more easily exchange central bank money, why not extend the right to others
As I said in the introduction, this certainly isn’t impossible under the current settlement system, known as RTGS (for Real Time Gross Settlement). There are already some non-bank institutions that have access to the Bank of England’s regular facilities8. As my fellow Deputy Governor Minouche Shafik recently explained, the Bank is currently undertaking a review of RTGS and the question of access will be one of the issues involved (Shafik (2016)). 
But it seems likely that a distributed ledger would make that process easier, opening up the balance sheet to a wider variety of financial firms.One might go further, giving access to non-financial firms, or perhaps even individual households. In the limit, a distributed ledger might mean that we could all of us hold such balances.
If so, our accounts would no longer be a claim on commercial banks but, like banknotes (Federal Reserve notes in the US), the liability of the central bank."
My added comments: At first glance these seem like two different proposals with no apparent connection. However, if the BOE proposal for a new Central Bank Digital Currency (CBDC) moves forward and some day becomes a reality, this could be the starting point for a global version of a digital currency based on the SDR used at the IMF. 

This is pure speculation on my part, but not unreasonable speculation given that the technology exists today to make these kinds of things actually feasible. It's important to note that both the BOE study and the IMF study imply that we are in the early stages of research on this whole idea. These new studies just issued raise potential problems and questions that need further research and do not say that any kind of real world system is ready to be implemented. The experts I talk to on this kind of idea also suggest to me that there is nothing on the near term horizon right now. Most seem to agree that it would probably take another major financial crisis to speed up any kind of major change like this.

All the evidence I have suggests that a variety of ideas and proposals are being discussed and studied (we gave some examples here). While we can assume that the SDR is a candidate for some kind of potential role as a global reserve currency in the future, we are likely some distance from a digital version of the SDR that anyone could own. 

There are a number ways we could end up with a digital global reserve currency at some point in the future. It could happen starting with a new Central Bank Digital Currency (in the UK?) and expand from there. It could happen first on a regional basis (in Asia and/or the AU?) and then later on a global basis. It could involve gold or not involve gold (at least initially) depending on the state of public confidence in the monetary system. It's possible that China and Russia might be more proactive in pushing for change than the US and the West. The process tends to move at a pretty slow pace under normal conditions. And as we can see in this article, some are quite skeptical that the public will ever demand that the SDR become the new global reserve currency. Dr. Warren Coats has told me that it is hard to get the political will and consensus needed for major changes like this. 

So, will we get a new Central Bank (or IMF) Digital Currency that everyone can own?

I don't think any final decisions are made at this point in time. Many sources believe we will get some significant news related to the SDR at the G20 conference in China this September (see point #8). Whether there will be more news than has already been announced is an unknown.

BOE Governor Mark Carney said in this speech posted on the BOE web site that he does not think we will see a new Central Bank Digital Currency any time soon as it will take time to fully study the idea. Here is his quote from the speech on that (see pages 8-9)

"In the extreme, a DL for everyone could open the possibility of creating a central bank digital currency. On some levels this is appealing. For example it would mean people have direct access to the ultimate risk-free asset. In its extreme form, it could fundamentally and perhaps abruptly re-shape banking

However, were it to co-exist with the current banking model, it could exacerbate liquidity risk by lowering the frictions involved in running to central bank money. These questions and others are why these topics are being examined as part of the Bank’s research agenda, with the prospect of a central bank digital currency for the UK, in my view, still some way off. We will work to make payments easier, and though cash may no longer be king it once was, its reign will endure for some time."

For those expecting that we are about to see a  "cashless society" soon, I would call your attention to the last sentence of the above quote from Governor Carney.

As we have noted here for some time, without another major financial crisis to motivate central banks and policy makers, all the available evidence right now suggests that any significant changes to the monetary system such as a new global reserve currency or a new central bank digital currency (or both) will most likely be a slow moving process. 

We will continue to follow events here to see what actually does happen over time.

1 comment:

  1. It is nice to see an article dedicated to this important topic. Thank you for sharing.

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