Central banks have an opportunity to keep pace with technological change and enable the evolution toward the future of money. With COVID-19 and the risk that banknotes could be infected, digital payment solutions are increasingly top of mind and what citizens want.
A major vulnerability today is that depositors could lose their deposits due to risks taken by commercial banks on their funds. Not all countries offer deposit insurance and therefore are not protecting their citizens. Citizens have no choice but to use a commercial bank for their financial needs. If the commercial bank goes into liquidation, the depositors might not get their funds back.
My concern is that central banks are so worried about protecting the commercial banks that they are not realising that the risk of inaction is greater than innovation on a gradual basis. The real risk is coming from the private companies that are in the process of issuing payment mechanisms that might entice depositors to never again have to use a legacy bank as we currently know them.
A move to a private digital currency or ‘stablecoin’ (currency collateralised by fiat, cryptocurrencies, gold, or an algorithm or combination of financial instruments) could result in less use of fiat currency (currency issued by a central bank). Once this takes place, central banks will lose their ability to affect monetary policy and all their supply and distribution controls of the fiat currency will go out of the window.
In this time of pandemic that we are all facing, we should not have to ask people to stand in a line, without social distancing, to wait to be paid their social grant or pension funds. If an economic crisis requires that the government financially support its citizens in the form of helicopter money (money deposited by the government into the citizens’ accounts), citizens should not have to wait for government-issued cheques to arrive in the post, which then have to be deposited in a bank account when the banks’ working hours permit. Blockchain technology enables these payments to be facilitated electronically in real time, directly into the e-wallet of the citizens. No more waiting or standing in line or walking to a bank or post office to be paid by the government. No one should ever have to visit a brick and mortar branch and wait to be served.
In many countries, the dependence on cash puts undue pressure on citizens who have no option but to risk carrying cash and being robbed. Not to mention a variety of other threats surrounding cash usage such as ATM bombings and hijackings. These threats should motivate central banks to go totally electronic and reduce citizens’ dependency on cash.
CBDC – why not?
Blockchain technology is immutable, auditable, and programmable so it can be adapted to the different needs of financial institutions and citizens in different nations, while still meeting global standards that ensure interoperability between different countries’ CBDC solutions.
Central banks should innovate and level the playing field for their current customers, so commercial banks can compete head-on with the technology companies that have come into this space. To rely on regulation to prevent private coin issuers from operating is not the solution. Big Tech will stop at nothing to ensure that they comply with legislation to offer this service.