Four key questions about digital currencies that central banks must answer


The author is the director of the Princeton Bendheim Financial Center and the vice president of the American Finance Association

At some point in the next 5 to 10 years, when each of us becomes the owner of a digital currency backed by sovereignty, we will see the summer of 2021 as a turning point.

The Bank for International Settlements annual report It couldn’t be clearer. Most central banks will soon issue their currency in digital form, so that each of us can use it directly on our mobile phone, and it can be exchanged instantly from a distance—just like email.

In order to welcome the world where we use digital cash in the form of central bank digital currency, monetary authorities are exploring technical solutions and design options. Considering the risks, it is vital that central bank policy makers should not hide behind the veil of technical arrangements. The four options are particularly important and require the opinions of the legislature and the people it serves.

First, anonymity and privacy. Currently, within the limits set by the law, each of us can spend a certain amount of cash without anyone knowing it. Although maintaining this anonymity for CBDC is technically feasible, whether the government and central bank should do so is a fundamental question. There are disputes on both sides, and it is crucial to debate openly and democratically. Our society is already discussing many issues around privacy and the regulation of private technology companies. These conversations can and should tell us how to deal with the privacy surrounding CBDC.

Second, people have real concerns about the organization and form of financial intermediaries. By directly providing citizens with safe and easily accessible digital currency, the central bank can deprive private banks of their deposit base, push up resource costs, increase the frequency and magnitude of runs, and affect the competition between banks and digital platforms. Although these are reasonable concerns of banks and society, each problem can be solved through the design of CBDC itself and the adjustment of liquidity provision methods.

The third is the need to embrace innovation and be prepared for innovation. Our current monetary system is a public-private partnership. Although most of our funds are issued by private banks, the central bank controls the anchor: the unit of account. But as new players such as large technology companies enter the field, the form of currency is changing.

The basic principle of CBDC is to continue to provide public funds for the economy in this new environment. To this end, the central bank must catch up with the wave of innovation initiated and planned by private currency issuers. They also want to ensure that new forms of private currencies, such as stablecoins, are safe and trustworthy. It is also important that future regulations will not hinder the payment innovation movement that is extremely beneficial to everyone.

Finally, society must resolve concerns about currency internationalization. In essence, digital currency is cross-border, which will make countries face increasingly fierce currency competition.This may lead to the establishment of Jean-Pierre Landau, Harold James and myself call it the “digital currency zone”, Where the use of currency is associated with a specific digital network rather than a specific country. Whether this currency competition will fully unfold will depend on whether the future CBDC is available for non-residents and easy to exchange with each other. These choices go far beyond technical issues and will have a profound impact on the structure and operation of the international monetary system.

The central bank’s involvement in digital currency marks an exciting new field in the financial sector. By carefully considering these issues, the government will ensure that citizens around the world benefit from this era of innovation.



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