Stay updated on the Global Economy with our free newsletter!
Subscribe to our myFT Daily Digest email to receive daily roundups of the latest Global Economy news.
The Future of Money is a thought-provoking book written by a Cornell professor, senior fellow at Brookings.
As cash becomes less popular, central banks worldwide are exploring the use of retail central bank digital currencies (CBDCs). While CBDCs offer advantages over cash, they also pose challenges for the issuing institutions. The goal is to make CBDCs viable for retail and peer-to-peer payments without overshadowing private digital payment systems. This has led to the idea of programming CBDCs for specific purposes rather than simply mimicking cash.
The concept of “purpose-bound money” is gaining traction. For example, the Monetary Authority of Singapore’s white paper suggests designing CBDCs that are valid within a certain period, at specific retailers, and in pre-determined denominations. This approach can incentivize consumption and make government cash transfers more effective during times of uncertainty.
Without cash, new possibilities arise, such as implementing negative nominal interest rates to stimulate demand in distressing economic periods. The programmable nature of digital money enables automatic fund releases based on predetermined conditions, facilitating contractual arrangements.
These innovations have the potential to enhance economies and societies. However, it’s crucial to consider the downsides and risks associated with any new technology.
Uniquely, cash allows for anonymous transactions and maintains a stable value relative to a country’s fiat currency. Introducing CBDCs with different characteristics opens the possibility of secondary markets for trading them. Individuals inclined to save rather than spend may willingly trade programmable money at a discount.
CBDCs held in digital wallets may be perceived as safer than commercial bank deposits, as central banks are considered fail-proof. However, a significant shift of funds into CBDC wallets could destabilize bank deposits and force central banks to make credit allocation decisions, which are not their primary function.
Fortunately, there are ways to mitigate these risks. Cryptographic tools can restrict CBDC usage by unverified individuals while ensuring privacy for low-value transactions. Capping CBDC digital wallet balances can reduce the risk of deposit flight from banks. Legislative measures can prevent central banks from becoming overly intertwined with government operations.
Nonetheless, these monetary innovations introduce subtle risks. Increased visibility into payment transactions could lead to central banks being viewed as political agents involved in law enforcement and surveillance. Government “helicopter drops” of money into CBDC wallets, which are fiscal operations, may become associated with central banks, blurring the line between monetary and fiscal policy.
In times of financial panic, sustaining caps on CBDC digital wallet balances may prove challenging, potentially causing central banks to replace commercial banks as the primary repositories of an economy’s savings.
Moreover, there is the concern that authoritarian or seemingly benevolent governments could exploit CBDCs to further their social objectives by restricting their use for certain purchases or services.
Central banks already face threats to their independence, credibility, and legitimacy. The expanded functionality of CBDCs exposes them to greater political pressures. These innovations, at the very least, pose risks to the integrity of central bank money.
It would be unfortunate if the digitization of central bank money erodes the trustworthiness that makes it valuable. While central banks may have little choice but to modernize their retail money, they may come to regret the consequences.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
