We have followed the news on central banks looking at the idea of central bank digital currencies here for some time. This would be the kind of changes we watch for if a movement began at central banks to move in the direction of offering central bank digital currencies directly to the general public.
We have been reporting here for a good while that we do not see any indications that such a move is in progress at central banks at this time. In this new speech, Agustin Carstens of the BIS updates us on this. It appears there is not much change at this time. In this text of his speech are some good charts and graphs on the topic that readers may find of interest. Below are a few excerpts from the speech.
Also, for any readers that have been looking at our articles on Money Basics (here and here), this speech may be of interest. It provides a look at where things stand in terms of "The Future of Money and Payments" which is the title of the speech. (I added the underlines below for emphasis)
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. . . . .
"Throughout history, technological innovations have continually reshaped the monetary system,
either by changing the nature of money or the workings of the payment system. These times are no
different. The hype around bitcoin and its cousins has died down somewhat. But innovation continues.
What seems new this time is the sheer volume of innovations and the fact that both components of the
monetary system are targeted at the same time. Historically, changes to payment systems have been
infrequent. Changes to the nature of money have been even rarer. But now, attempts to create new forms
of money or to engineer new ways to pay appear almost weekly.
This afternoon, I will share some thoughts on how technological innovation may affect the
monetary system. I am particularly interested in the implications for central bank money and what socalled central bank digital currencies (CBDCs) would mean – not just for the system, but for all of us as
citizens."
. . . . .
The monetary system: how did we get here?
"Let’s look back at how the monetary system evolved, taking money first. Throughout history, a wide range
of items served as money, including stones, shells and cigarettes. In Ireland, coins – first imported by the Vikings – have been used for more than 1,000 years. In its 76 years, the Central Bank of Ireland has
presided over three different currencies: the pre-decimal Irish pound with its 240 pennies to the pound,
the decimal Irish pound, and the euro.
At its simplest, in economic terms, money is what money does. And what money does – in
whatever form it takes – is to serve as a unit of account, a means of payment, and a store of value. A
common measure of economic value, or a unit of account, makes our lives easier. Imagine how difficult it
would be to compare the price of a pint of stout and a glass of whiskey without money. Go into a pub
near here and the barkeeper might tell you a Guinness costs 6 euros and a Jameson Gold costs 12 euros.
One is clearly dearer than the other. But what if the barter system were still in place? A Guinness might
cost 25 apples and a whiskey 30 oranges. The relative value becomes unclear. Today, the common measure
is usually “the currency”. If there are multiple units of accounts, one tends to prevail over time. As you may
recall, shops in Ireland initially listed prices in both euros and Irish pounds. Still, two decades later, not
many outside this building remember the official conversion rate of IEP 0.787564 to the euro."
The second attribute of money is to serve as a means of payment. I could pay for my pint with
cash, with a credit or debit card and, increasingly, even with my mobile phone. But, as I mentioned earlier,
there is an important distinction between the types of money being transferred. Cash is public money,
issued by the central bank. The others represent private money. That is, liabilities of either a commercial
bank, the phone company, or a big tech firm.
Last but not least, money must be a reliable store of value. This is a lesson I learned the hard way
as a child. When I was eight years old, inflation was high in Mexico. I remember my father giving me a wad
of cash for the school bus. At the end of the day, when I tried to take the bus home, the fare had gone up.
I ended up walking all the way home. Such experiences taught me the dangers of monetary instability and
its inverse, the value of price stability."
. . . .
A future monetary system with CBDCs?
. . . . .
"Banks play an important role as provider of financial services to citizens and businesses. Imagine
that the Central Bank of Ireland and the ECB were to offer deposit accounts to everyone and then issue
debit cards and mobile phone apps for you to make payments with. In such a scenario, the central bank
would be taking on the customer-facing business lines. Presumably, the central bank would need to recruit
new staff to handle this line of business and to handle customer enquiries. Now, I can tell you that central
bank staff are very good, and they would be capable of taking on customer-facing tasks. But that is not
the main issue.
Safety could be an important reason to deposit money in the central bank. In times of uncertainty,
more customers would prefer to have deposit accounts at central banks, and fewer at commercial banks.
A shift of funds from commercial banks to the central bank could be gradual at first. But the trickle could
turn into a flood.
If bank deposits shift to the central bank, lending would need to shift as well. So, in addition to
the deposit business, the central bank would be taking on the lending business. The central bank would
need to meet business owners, interview them about why they need a loan, and decide on how much each
should receive.
We can ask ourselves whether this is the kind of financial system that we would like to have as
the ultimate set-up . . . ."
. . . . .
"There are historical instances of one-tier systems where the central bank did everything. In the
socialist economies before the fall of the Berlin Wall, the central bank was also the commercial bank. But I
do not think we can hold up that system as something that will serve customers better."
. . . . .
"We know from historical experience – especially in emerging market economies, but also
advanced economies – that, during times of financial stress, money moves away from banks that are
perceived as risky towards banks that are perceived as safer. So, money flows from privately owned banks
to publicly owned ones, from domestically owned banks to foreign owned ones, and generally from weakly
capitalised banks to strongly capitalised ones. In such scenarios, imagine that depositors also have the
choice of putting their money in a digital currency of the central bank or in the central bank deposit
account directly. It is not far-fetched to imagine that a premium would open up, where one euro of
deposits in the commercial bank buys less than one euro’s worth of central bank digital currency."
. . . . .
Where do central banks stand?
"The Committee on Payments and Markets Infrastructures (CPMI) at the BIS last year surveyed central banks
to take stock of current work and thinking on CBDCs. More than 60 central banks participated,
representing countries covering 80% of the world population. Graph 2 summarises the results. Seventy
per cent of central banks are working on CBDCs of some kind. Most are looking at both retail and
wholesale varieties.
But only about half of these have moved on to the next stage of actively testing the idea (as
Graph 3 shows). These central banks are examining the benefits, risks and challenges of potential issuance
from a conceptual perspective. Only a couple have moved on to experimenting with the different possible
technologies, in “proofs of concept” or even pilot projects.
If we go one step further and ask central banks whether they plan to issue a CBDC, the picture is
quite telling. As you see in Graph 4, very few central banks think it is likely that they will issue a CBDC in
the short to medium term, be it retail or wholesale. Having looked into the matter, central banks have
decided not to jump in.
Obviously, this is consistent with what I argued earlier, namely that: (a) the introduction of CBDCs
would have a major impact on the financial system; (b) there is not yet a noticeable and widespread fall in
the demand for cash; and (c) central banks do not feel compelled to face a major change in the way they
conduct monetary policy. Also, research and experimentation have so far failed to put forward a convincing
case. In sum, central banks are not seeing today the value of venturing into uncharted territory."
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My added comments: The speech above supports what we have reported here for some time. While I see articles all the time talking about major changes coming from central banks and/or the IMF leading to a new digital currencies and the elimination of cash, the reality as stated in the speech above is that there is no indication at this time that changes like that are on the near term horizon. All kinds of ideas are studied, but central banks are very slow about " venturing into uncharted territory" as Mr. Carstens puts it in his speech.
Added note: With the news that Herman Cain will not be nominated to the Fed, we will keep an eye on this situation. Seeing some indications in the news about who might be a new nominee, but will wait to see what unfolds.
