The Economist - USA (2020-07-25)

58 Finance & economics The EconomistJuly 25th 2020

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merica’s federal reserve recog-

nised the disruptive potential of elec-

tronic money long ago. “This is a service

which it is expected will be more and more

availed of as the ease and economy of using

it are understood,” its New York arm de-

clared in a report. The year was 1917, and the

Fed had just started allowing banks to

transfer funds by telegram free of any in-

terest charge. More than a century on, cen-

tral banks are grappling with another tech-

nological revolution: the rise of mobile

payments and the turn away from cash.

Just as in the early 20th century, when

central banks created telegraph transfer

networks, they are now coming to the view

that they must design their own digital-

payment networks in order to retain con-

trol of their monetary systems. One idea

gaining favour is to issue a so-called cen-

tral-bank digital currency (cbdc), which

would exist only as electrons on a comput-

er chip, rather than a coin or bill. Roughly

80% of central banks are doing some kind

of cbdcwork, from research to trials, ac-

cording to one survey. Although still early,

it is a trend that could give rise to tantalis-

ing new possibilities for monetary policy.

Most central bankers were sceptical

about cbdcs at first, but in recent months

their views have turned more positive, ac-

cording to an analysis of their speeches by

the Bank for International Settlements

(bis), a club of central banks (see chart).

Partly, that is because they are now more

familiar with the concept. China has al-

ready put the digital yuan into use on a lim-

ited test basis, and Sweden is close to that

with the e-krona. The coronavirus pan-

demic has added to the urgency as more

people shop online or pay with contactless

cards or phones rather than cash.

The primary motivation for issuing a

cbdcis likely to be defensive. The gradual

demise of cash poses two basic risks. First,

online-payment systems could fail, suffer-

ing outages or hacks. To safeguard the in-

tegrity of their currencies, central banks

hope to offer fail-safe digital alternatives.

The second risk is that private-sector

systems are too successful, with more peo-

ple switching to payment platforms of-

fered by big tech firms such as Facebook or

Tencent. Many central banks began taking

this risk more seriously when Facebook

unveiled its plans for a digital currency in

2019. As Hyun Song Shin, head of research
      at the bis, has put it, a shift towards such

currencies would be like moving the econ-

omy from a town-square market—where

all vendors happily accept cash—to compe-

tition between full-service department

stores. Once popular enough, the depart-

ment stores could stop you from shopping

elsewhere and might also introduce new

fees. Regulators could require private pay-

ment platforms to interconnect, but a well-

designed cbdcwould help ensure that this

happens, by forming a digital bridge be-

tween different systems.

European central bankers are most ex-

ercised by the effects of a privately run digi-

tal currency on competition and the con-

sumer interest. The Fed seems farther away

from considering the idea, in part because

Americans are keener on cash.

cbdcs also give central banks more con-

trol. They could allow for transactions to be

easily tracked, perhaps making them more

alluring to China’s authorities. In the West,

where surveys show that the public cares

more about privacy,cbdcs may need to en-

sure anonymity, without circumventing

anti-money-laundering checks.

Where things get really interesting

from a theoretical perspective are the im-

plications for monetary policy. This is par-

ticularly the case if the new currencies are

“retail” cbdcs, made available for use by

the public. (A less exciting option would be

to issue “wholesale” cbdcs exclusively to

commercial banks, much as they already

get funds from the central bank, albeit un-

derpinned by whizzier technology.)

cbdcs may make it easier to implement

negative interest rates. Unlike old-fash-

ioned cash, digital fiat can be programmed.

For now, rates cannot go too negative, be-

cause savers can always demand cash,

which by definition offers an interest rate

of zero. But if digital cash is programmed to

have a negative interest rate, people would

have fewer fallbacks and central banks

more flexibility.

Central bankers might also be tempted

by the potential for targeted interven-

tions—much to the horror of those already

worried about the clout of unelected mon-

etary officials. Rather than lending to com-

mercial banks, central banks would be able

to top up individual currency accounts.

During a downturn, they could transfer

funds to those with low balances. After a

natural disaster, they could direct support

SHANGHAI

A shift from paper to virtual money will give central banks more power

Digital currencies

Bips and bytes

Gaining currency

Number of central bankers’ speeches

on digital currencies, by sentiment

Source:Bankfor

InternationalSettlements

*Availabletothepublic

†Availableonlytobanks

40

20

0

20

40

2016 17 18 2019

↓ Negative

↑ Positive

Wholesale†

Retail*

Netsentiment

Paper’s past it