Central banks should not rush into digital currency
State-backed rivals to bitcoin are inevitable but carry risks
Editorial Financial Times, August 18, 2020
The great financial crisis sowed distrust in the global monetary order, spawning bitcoin and myriad copycat cryptocurrencies. But it was not until the middle of 2019 when a Facebook- led consortium threatened to launch Libra, its own stablecoin, that officials really began to fret. The perceived threat to sovereigns’ unrivalled power to control money creation was such that state-backed digital currencies now look inevitable.
Last week, the People’s Bank of China expanded a trial run of a prototype dig- ital renminbi to include its three largest urban clusters — areas that together contain 400m people. The Boston branch of the Federal Reserve on Thursday said it would collaborate with the Massachusetts Institute of Technology on a task force looking into “the opportunities and limitations of possible technologies of digital forms of central bank money”.
They are not alone. With cash close to extinction in Sweden, the Riksbank’s plans for its own digital money are advanced. The Group of Thirty, a collective of current and former central bank chiefs, and private sector bankers, recently published a report on the topic. The Bank for International Set- tlements, the so-called central bankers’ bank, has set up an Innovation Hub in major financial centres to look into digital currencies, alongside other technologies.
There is much to cheer. While the Libra project was deeply flawed, it highlighted an important problem: an inability for people and businesses to make cross-border payments quickly and cheaply. Central banks now not only recognise this, but have invested considerable resources in attempts to solve it. It is welcome, too, that officials have woken up to the threat from the private sector. We do not want to return to a world such as that which
existed during the panic of 1907, when the lack of a US central bank meant the likes of JPMorgan decided which busi- nesses collapsed and which thrived in times of crisis.
But banking on — and with — the state carries risks. Centralised ledgers would contain frightening amounts of data about citizens’ behaviour. While advocates contend that transactions can be anonymised, that would surely lead to central banks presiding over the sort of nefarious financial activity the like of which they have often accused bitcoin. State-backed digital money could also hasten the demise of cash, already hit by the pandemic. Aware of the probable public backlash, central bankers are adamant they would keep on producing physical currency. Yet the costs to print and distribute it make less sense the less it is used.
It could also undermine banks, espe- cially during crises. If people can bank directly with the state, then it would seem foolish to take the risk of parking deposits with a private lender. Mean- while, China’s rapid development of a central bank digital currency has the potential to upset the global monetary order. Beijing has made clear its desire to challenge the dollar’s dominance as the global currency of choice. A digital renminbi would accelerate that aim and bypass rival western-operated cross-border payment networks, such as Swift, which the US has used to enforce sanctions.
Time and effort would be better spent on upgrading existing payment networks rather than pursuing options that, for all their innovation, could cre- ate more problems than they solve. In some states, however, digital currencies now look unavoidable. With Libra no longer an imminent threat, central banks should not rush them out. With so many challenges to consider, it is vital to get it right.
Temas de relações internacionais, de política externa e de diplomacia brasileira, com ênfase em políticas econômicas, viagens, livros e cultura em geral. Um quilombo de resistência intelectual em defesa da racionalidade, da inteligência e das liberdades democráticas. Ver também minha página: www.pralmeida.net (em construção).
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